Pre-Effective Amendment to Registration Statement of a Closed-End Investment Company — Form N-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-2/A Amendment No.1 216 942K
2: EX-25.2(A)(2) Operating Agreement 177 673K
3: EX-25.2(A)(3) Indenture 175 695K
4: EX-25.2(G) Investment Management Agreement 21 87K
5: EX-25.2(H)(1) Placement Agency Agreement for Common Shares 42 142K
6: EX-25.2(H)(2) Placemt Agency Agmt-Pref Shares & Revolving 30 105K
Notes
7: EX-25.2(J)(1) Custodial Agreement 62 308K
8: EX-25.2(J)(2) Sub-Custodial Agreement 8 35K
9: EX-25.2(K) Fund Services Agreement 23 62K
| Page | (sequential) | | | | (alphabetic) | Top |
|---|
| | |
- Alternative Formats (Word, et al.)
- A-1
- A-2
- Access to Additional Information
- Anticipated Capitalization Table
- Anti-Money Laundering Requirements
- Appendix A: Company Targeted Return Analysis
- Appendix B: Additional Hypothetical Returns
- Appendix C: Moody's Collateral Valuation Schedule
- Appendix D: S&P Collateral Valuation Schedule
- Appendix E: Performance Information
- Application of Portfolio Limitations
- Approved Dealers
- Approved Exchanges
- Approved Investment Banking Firms
- Approved Pricing Services
- Approved Third Party Appraisers
- Arbitration
- Asset Mix
- Audit Committee
- Auditors
- Bank Loans
- Benefit Plan Investor Considerations
- Board of Directors and Officers
- Business and Other Connections of Investment Adviser
- Capitalization of the Company
- Certain Terms of the Offering
- Certain U.S. Federal Income Tax Aspects of an Investment in the Company
- Clearance Through DTC/Clearstream
- Codes of Ethics and Voting Policies
- Co-Investment
- Common Shares
- Company could be subject to allegations of lender liability and equitable subordination, which could require the Company to incur expense defending its actions, The
- Company's asset mix will include primarily high risk investments, and the Company could incur losses on some or all of them, The
- Company's Target Asset Mix
- Company will be leveraged, which could create an increased risk of loss to holders of the Common Shares., The
- Custodian
- Customer Identification Program
- Determination of Fund Investments Constituting Eligible Investments
- Determination of the Market Value of Fund Investments
- Distressed Debt
- Effect of Leverage
- Equity Securities
- Executive Summary
- Fiduciary Responsibility Requirements and Prohibited Transactions
- Financial Statements and Exhibits
- Form of Securities; Book Entry
- Fundamental Investment Policies
- Indemnification
- Indemnification and Limitation of Liability
- Index of Defined Terms
- Information Reporting and Backup Withholding
- Insurance Agreement
- Interests of the Investment Manager, the Placement Agent and their affiliates may conflict with the interests of holders of the Common Shares., The
- Introduction
- Investment Committee
- Investment Manager
- Investment Manager Relationship
- Investment Manager's strategies to hedge interest rate risk may not be successful., The
- Investment Manager, The
- Investment Manager will utilize and rely on brokers in conducting certain trades, which may cause the Company to incur transaction costs., The
- Investment Program
- Investments of the Company
- Investment Strategy
- Investor Suitability Standards
- Legal Matters
- Location of Accounts and Records
- Management
- Management Services
- Marketing Arrangements
- Mezzanine Investments and High Yield Debt
- Moody's Industry Classifications
- Notes
- Number of Holders of Securities
- Offering, The
- Other Expenses of Issuance and Distribution
- Overview of the Company
- Performance Record
- Persons Controlled By or Under Common Control
- Plan Assets
- Potential Leveraged Returns for Common Shares
- Preferred Shares
- Privacy Policy of the Company and the Investment Manager
- Projections and Use of Leverage
- Realization of Investments
- Regulated Investment Company
- Risk Factors
- S&P Industry Classifications
- Subscription Procedures
- Subscriptions
- Summary of Material Terms of the Company
- Target Asset Mix
- Taxation of Company as a RIC
- Taxation of Holders
- The Company could be subject to allegations of lender liability and equitable subordination, which could require the Company to incur expense defending its actions
- The Company's asset mix will include primarily high risk investments, and the Company could incur losses on some or all of them
- The Company will be leveraged, which could create an increased risk of loss to holders of the Common Shares
- The interests of the Investment Manager, the Placement Agent and their affiliates may conflict with the interests of holders of the Common Shares
- The Investment Manager
- The Investment Manager's strategies to hedge interest rate risk may not be successful
- The Investment Manager will utilize and rely on brokers in conducting certain trades, which may cause the Company to incur transaction costs
- The offering
- Types of Investments
- Undertakings
- Use of Proceeds
- Various Company Investments could be alleged to be fraudulent conveyances
- Voting Rights
- York
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| 1 | 1st Page - Filing Submission
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| 3 | York
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| 19 | Executive Summary
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| " | Overview of the Company
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| " | Investment Manager
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| 22 | Investment Committee
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| " | Regulated Investment Company
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| 23 | The offering
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| 24 | Investment Strategy
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| 25 | Asset Mix
|
| 26 | Capitalization of the Company
|
| " | Anticipated Capitalization Table
|
| 27 | Use of Proceeds
|
| " | Performance Record
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| 28 | Potential Leveraged Returns for Common Shares
|
| 31 | Projections and Use of Leverage
|
| 32 | Summary of Material Terms of the Company
|
| 46 | Management
|
| " | The Investment Manager
|
| 49 | Investment Manager Relationship
|
| " | Board of Directors and Officers
|
| 51 | Custodian
|
| " | Auditors
|
| " | Audit Committee
|
| " | Indemnification and Limitation of Liability
|
| 53 | Investment Program
|
| " | Introduction
|
| 54 | Types of Investments
|
| " | Mezzanine Investments and High Yield Debt
|
| 55 | Distressed Debt
|
| " | Bank Loans
|
| " | Equity Securities
|
| 56 | Company's Target Asset Mix
|
| 61 | Realization of Investments
|
| " | Co-Investment
|
| 63 | Fundamental Investment Policies
|
| 64 | Codes of Ethics and Voting Policies
|
| 66 | Common Shares
|
| 68 | Preferred Shares
|
| 70 | Voting Rights
|
| 72 | Notes
|
| 75 | Risk Factors
|
| " | The Company will be leveraged, which could create an increased risk of loss to holders of the Common Shares
|
| 80 | The Company's asset mix will include primarily high risk investments, and the Company could incur losses on some or all of them
|
| 87 | The Investment Manager's strategies to hedge interest rate risk may not be successful
|
| 90 | The Company could be subject to allegations of lender liability and equitable subordination, which could require the Company to incur expense defending its actions
|
| " | Various Company Investments could be alleged to be fraudulent conveyances
|
| 92 | The interests of the Investment Manager, the Placement Agent and their affiliates may conflict with the interests of holders of the Common Shares
|
| 93 | The Investment Manager will utilize and rely on brokers in conducting certain trades, which may cause the Company to incur transaction costs
|
| 97 | Certain Terms of the Offering
|
| " | Subscriptions
|
| " | Investor Suitability Standards
|
| 98 | Subscription Procedures
|
| " | Form of Securities; Book Entry
|
| 99 | Anti-Money Laundering Requirements
|
| " | Privacy Policy of the Company and the Investment Manager
|
| 100 | Customer Identification Program
|
| " | Clearance Through DTC/Clearstream
|
| 102 | Arbitration
|
| 103 | Benefit Plan Investor Considerations
|
| " | Fiduciary Responsibility Requirements and Prohibited Transactions
|
| 104 | Plan Assets
|
| 105 | Certain U.S. Federal Income Tax Aspects of an Investment in the Company
|
| 106 | Taxation of Company as a RIC
|
| 108 | Taxation of Holders
|
| 111 | Information Reporting and Backup Withholding
|
| " | Investments of the Company
|
| 113 | Legal Matters
|
| " | Access to Additional Information
|
| 114 | Index of Defined Terms
|
| 117 | Appendix A: Company Targeted Return Analysis
|
| " | A-1
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| 118 | A-2
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| 119 | Target Asset Mix
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| 124 | Appendix B: Additional Hypothetical Returns
|
| " | Effect of Leverage
|
| 125 | Appendix C: Moody's Collateral Valuation Schedule
|
| 135 | Determination of Fund Investments Constituting Eligible Investments
|
| 136 | Application of Portfolio Limitations
|
| 139 | Determination of the Market Value of Fund Investments
|
| 161 | Moody's Industry Classifications
|
| 162 | Approved Dealers
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| 163 | Approved Exchanges
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| 166 | Approved Investment Banking Firms
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| 167 | Approved Pricing Services
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| 168 | Approved Third Party Appraisers
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| 169 | Appendix D: S&P Collateral Valuation Schedule
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| 200 | S&P Industry Classifications
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| 208 | Appendix E: Performance Information
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| 212 | Insurance Agreement
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| 214 | Item 25. Financial Statements and Exhibits
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| " | Item 26. Marketing Arrangements
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| 215 | Item 27. Other Expenses of Issuance and Distribution
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| " | Item 28. Persons Controlled By or Under Common Control
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| " | Item 29. Number of Holders of Securities
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| " | Item 30. Indemnification
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| " | Item 31. Business and Other Connections of Investment Adviser
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| " | Item 32. Location of Accounts and Records
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| " | Item 33. Management Services
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| " | Item 34. Undertakings
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 1
York Enhanced Strategies Fund, LLC
(Exact Name of Registrant as Specified in Charter)
Jeffrey A. Weber
767 Fifth Avenue, 17th Floor
New York, New York 10153
(Address of Principal Executive Offices)
(212) 300-1300
(Registrants Telephone Number, including Area Code)
The Corporation Trust Company
1209 Orange Street
Wilmington, DE 19801
(Name and Address of Agent for Service)
COPY TO:
David M. Mahle
Jones Day
222 East 41st Street
New York, NY 10017
This Registration Statement has been filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. Registrant's securities
are not being registered under the Securities Act of 1933, as amended (the "1933
Act"), and will be issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of, and/or
Regulation D under, the 1933 Act. Investments in Registrant may only be made by
individuals or entities meeting the definition of an "accredited investor" in
Regulation D under the 1933 Act, an "Eligible Investor" as described in this
Registration Statement. This Registration Statement does not constitute an offer
to sell, or the solicitation of an offer to by, Registrant's securities.
Part A - Information Required in a Prospectus
Part B - Information Required in a Statement of Additional Information
The information required to be included in this Registration Statement by Part A
and Part B of Form N-2 is contained in the private placement memorandum, as
supplemented, that follows.
PRIVATE PLACEMENT MEMORANDUM
YORK ENHANCED STRATEGIES FUND, LLC
a Delaware Limited Liability Company
$404,500,000 OF
COMMON SHARES
YORK
ENHANCED STRATEGIES
MANAGEMENT, LLC
MORGAN STANLEY & CO. INCORPORATED
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
PLACEMENT AND STRUCTURING AGENT AND SOLE BOOKRUNNERS
NOVEMBER 2, 2005
THIS PRIVATE PLACEMENT MEMORANDUM IS SUBMITTED TO YOU SOLELY IN CONNECTION WITH
YOUR CONSIDERATION OF AN INVESTMENT IN THE COMMON SHARES OF YORK ENHANCED
STRATEGIES FUND, LLC (THE "COMPANY"). IN ADDITION, NO PERSON OTHER THAN THE
COMPANY, YORK ENHANCED STRATEGIES MANAGEMENT, LLC, MORGAN STANLEY & CO.
INCORPORATED AND MORGAN STANLEY & CO. INTERNATIONAL LIMITED HAS BEEN AUTHORIZED
TO MAKE REPRESENTATIONS, OR GIVE ANY INFORMATION WITH RESPECT TO THE COMMON
SHARES, EXCEPT THE INFORMATION CONTAINED HEREIN, AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN OR OTHERWISE SUPPLIED BY THE COMPANY MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PRIVATE PLACEMENT MEMORANDUM (THIS "MEMORANDUM") IS BEING
FURNISHED TO SELECTED PROSPECTIVE INVESTORS FOR THE PURPOSE OF PROVIDING CERTAIN
INFORMATION ABOUT AN INVESTMENT IN COMMON SHARES (THE "COMMON SHARES") IN YORK
ENHANCED STRATEGIES FUND, LLC (THE "COMPANY") AND MAY NOT BE USED FOR ANY OTHER
PURPOSE. THIS MEMORANDUM MAY NOT BE REPRODUCED OR PROVIDED TO OTHERS WHO ARE NOT
DIRECTLY CONCERNED WITH A PROSPECTIVE INVESTOR'S DECISION REGARDING SUCH
PURCHASE WITHOUT THE PRIOR WRITTEN PERMISSION OF YORK ENHANCED STRATEGIES
MANAGEMENT, LLC ("YORK" OR THE "INVESTMENT MANAGER") AND MORGAN STANLEY & CO.
INCORPORATED AND MORGAN STANLEY & CO. INTERNATIONAL LIMITED (COLLECTIVELY, THE
"PLACEMENT AGENT"). BY ACCEPTING DELIVERY OF THIS MEMORANDUM, EACH PROSPECTIVE
INVESTOR AGREES TO THE FOREGOING AND TO RETURN OR DESTROY THIS MEMORANDUM IF IT
DECIDES NOT TO PURCHASE ANY COMMON SHARES.
THIS MEMORANDUM HAS BEEN PREPARED BY THE COMPANY SOLELY FOR USE IN
CONNECTION WITH THE OFFERING DESCRIBED HEREIN. NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, IS MADE BY THE PLACEMENT AGENT AS TO THE ACCURACY OR
COMPLETENESS OF THE INFORMATION SET FORTH HEREIN, AND NOTHING CONTAINED HEREIN
IS, OR SHALL BE, RELIED UPON AS A PROMISE OR REPRESENTATION AS TO THE PAST OR
THE FUTURE. THE PLACEMENT AGENT HAS NOT INDEPENDENTLY VERIFIED ANY SUCH
INFORMATION AND ASSUMES NO RESPONSIBILITY FOR ITS ACCURACY OR COMPLETENESS.
THE COMMON SHARES HAVE NOT BEEN REGISTERED WITH OR APPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR ANY STATE, LOCAL OR FOREIGN
SECURITIES COMMISSION, AGENCY OR AUTHORITY. THE COMMON SHARES BEING OFFERED
HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THE OFFERING AND SALE OF THE COMMON
SHARES IN THE UNITED STATES WILL BE EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT. THE COMMON SHARES WILL BE SUBJECT TO THE RESTRICTIONS ON
TRANSFER DESCRIBED HEREIN.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF COMMON SHARES IN
ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL. IN
MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED.
THE COMMON SHARES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
i
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE COMPANY IS EXPECTED TO BE REGISTERED AS AN INVESTMENT COMPANY UNDER
THE U.S. INVESTMENT COMPANY ACT OF 1940, AS AMENDED AND THE REGULATIONS
PROMULGATED THEREUNDER (THE "INVESTMENT COMPANY ACT"). THE COMMON SHARES MAY BE
OFFERED OR SOLD ONLY TO INVESTORS THAT ARE (1) "ACCREDITED INVESTORS" AS DEFINED
IN RULE 501(a) UNDER THE SECURITIES ACT, (2) "QUALIFIED CLIENTS" WITHIN THE
MEANING OF RULE 205-3 UNDER THE INVESTMENT ADVISERS ACT OF 1940 (THE "ADVISERS
ACT"), AND (3) "QUALIFIED PURCHASERS" WITHIN THE MEANING OF SECTION 2(a)(51)(A)
OF THE INVESTMENT COMPANY ACT. EACH PURCHASER, AND ANY SUBSEQUENT TRANSFEREE, OF
THE COMMON SHARES WILL BE REQUIRED TO REPRESENT AND AGREE THAT THE PURCHASER IS
ACQUIRING THEM FOR ITS OWN ACCOUNT AND NOT WITH A VIEW TO RESELLING OR
DISTRIBUTING THEM EXCEPT IN ACCORDANCE WITH APPLICABLE LAW.
THE COMMON SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT AND APPLICABLE STATE AND FOREIGN SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM, AND WITH THE PRIOR WRITTEN CONSENT OF THE
COMPANY, WHICH WILL NOT BE WITHHELD UNREASONABLY. INVESTORS SHOULD BE AWARE THAT
THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME.
THE PLACEMENT AGENT OR ITS AFFILIATES MAY INVEST IN THE COMPANY FOR
THEIR OWN RESPECTIVE ACCOUNTS.
IN CONSIDERING ANY INVESTMENT OR OTHER PERFORMANCE INFORMATION
CONTAINED IN THIS MEMORANDUM OR ANY APPENDIX HERETO, PROSPECTIVE INVESTORS
SHOULD BEAR IN MIND THAT PAST PERFORMANCE OF OTHER FUNDS MANAGED BY THE
INVESTMENT MANAGER OR ITS AFFILIATES MAY NOT BE INDICATIVE OF FUTURE RESULTS OF
THE COMPANY AND THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL ACHIEVE
COMPARABLE RESULTS. THE PRIOR INVESTMENT RESULTS AND RETURNS FOR VARIOUS
ENTITIES SET FORTH HEREIN ARE PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY AND MAY
NOT BE INDICATIVE OF THE COMPANY'S INVESTMENT RESULTS. THE NATURE OF, AND RISKS
ASSOCIATED WITH, THE COMPANY'S INVESTMENTS MAY DIFFER SUBSTANTIALLY FROM THOSE
INVESTMENTS AND STRATEGIES UNDERTAKEN HISTORICALLY BY SUCH ENTITIES. IN SOME
INSTANCES, RETURN RATES TARGETED BY OR FOR THE COMPANY AND ITS ASSETS ARE LESS
THAN THE HISTORICAL RESULTS SET FORTH HEREIN. THERE CAN BE NO ASSURANCE THAT THE
ASSETS OF THE COMPANY WILL PERFORM AS WELL AS THE PAST INVESTMENTS MANAGED BY
THE INVESTMENT MANAGER (OR ANY SUCCESSOR IN INTEREST TO SUCH COMPANY) OR THEIR
RESPECTIVE AFFILIATES.
ii
AN INVESTMENT IN THE COMPANY WILL INVOLVE SIGNIFICANT RISKS AS A RESULT
OF, AMONG OTHER THINGS, THE NATURE OF THE COMPANY'S INVESTMENTS. INVESTORS
SHOULD HAVE THE FINANCIAL ABILITY AND WILLINGNESS TO ACCEPT THE RISKS AND LACK
OF LIQUIDITY WHICH ARE CHARACTERISTIC OF THE COMMON SHARES AND SHOULD CONSULT
THEIR FINANCIAL MANAGERS REGARDING THE APPROPRIATENESS OF MAKING INVESTMENTS IN
THE COMMON SHARES. THERE WILL BE NO MARKET FOR THE COMMON SHARES AND THEY WILL
NOT BE TRANSFERABLE WITHOUT THE CONSENT OF THE COMPANY, WHICH WILL NOT BE
UNREASONABLY WITHHELD.
TO ENSURE COMPLIANCE WITH U.S. TREASURY DEPARTMENT CIRCULAR 230,
INVESTORS IN THE COMMON SHARES ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF
U.S. FEDERAL TAX ISSUES IN THIS DOCUMENT IS NOT INTENDED OR WRITTEN TO BE RELIED
UPON, AND CANNOT BE RELIED UPON BY INVESTORS IN COMMON SHARES, FOR THE PURPOSE
OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON INVESTORS IN COMMON SHARES UNDER
THE U.S. INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS WRITTEN IN CONNECTION
WITH THE PROMOTION OR MARKETING OF THE COMMON SHARES AND OTHER MATTERS ADDRESSED
HEREIN BY THE COMPANY, THE INVESTMENT MANAGER AND THE PLACEMENT AGENT; AND (C)
INVESTORS IN COMMON SHARES SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR
CIRCUMSTANCES FROM THEIR OWN INDEPENDENT TAX ADVISORS. U.S. COUNSEL DOES NOT
INTEND TO BE, AND IS NOT, ENGAGED IN THE PROMOTION OR MARKETING OF THE
TRANSACTIONS OR MATTERS DESCRIBED IN THIS DOCUMENT, AND NO INFERENCE TO THE
CONTRARY SHALL BE IMPLIED BY REASON OF THE U.S. TAX DISCUSSION SET FORTH HEREIN.
PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS
MEMORANDUM AS LEGAL, TAX, INVESTMENT OR OTHER ADVICE. EACH INVESTOR SHOULD MAKE
ITS OWN INQUIRIES AND CONSULT ITS OWN ADVISERS AS TO THE COMPANY AND THIS
OFFERING AND AS TO LEGAL, TAX AND OTHER MATTERS CONCERNING AN INVESTMENT IN THE
COMMON SHARES.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING (THE
"OFFERING") TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN AS
CONTAINED IN THIS MEMORANDUM, AND PROSPECTIVE INVESTORS MAY NOT RELY ON ANY SUCH
INFORMATION. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
STATE OR OTHER JURISDICTION AS TO ANY PERSON OR ENTITY TO WHICH IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. THE COMPANY AND ITS AFFILIATES RESERVE THE
RIGHT TO MODIFY ANY OF THE TERMS OF THE OFFERING PROCESS AND THE COMMON SHARES
DESCRIBED HEREIN.
NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY, EACH
INVESTOR AND PROSPECTIVE INVESTOR (AND EACH EMPLOYEE, REPRESENTATIVE, OR OTHER
AGENT OF EACH SUCH INVESTOR AND PROSPECTIVE INVESTOR) MAY DISCLOSE TO ANY AND
ALL PERSONS, WITHOUT LIMITATION OF ANY KIND, THE TAX TREATMENT AND ANY FACTS
THAT MAY BE
iii
RELEVANT TO THE TAX STRUCTURE OF THE TRANSACTIONS CONTEMPLATED BY THIS
MEMORANDUM AND THE AGREEMENTS REFERRED TO HEREIN, PROVIDED, HOWEVER, THAT NO
INVESTOR OR PROSPECTIVE INVESTOR (AND NO EMPLOYEE, REPRESENTATIVE OR OTHER
AGENT THEREOF) SHALL DISCLOSE ANY OTHER INFORMATION THAT IS NOT RELEVANT TO
UNDERSTANDING THE TAX TREATMENT AND TAX STRUCTURE OF SUCH TRANSACTIONS
(INCLUDING THE IDENTITY OF ANY PARTY AND ANY INFORMATION THAT COULD LEAD ANOTHER
TO DETERMINE THE IDENTITY OF ANY PARTY) OR ANY OTHER INFORMATION TO THE EXTENT
THAT SUCH DISCLOSURE COULD REASONABLY RESULT IN A VIOLATION OF ANY FEDERAL OR
STATE SECURITIES LAW.
PROSPECTIVE INVESTORS ARE URGED TO REQUEST ANY ADDITIONAL INFORMATION
THAT THEY MAY CONSIDER NECESSARY OR DESIRABLE IN MAKING AN INFORMED INVESTMENT
DECISION. EACH PROSPECTIVE INVESTOR IS INVITED, PRIOR TO THE CONSUMMATION OF A
SALE OF ANY COMMON SHARES TO SUCH INVESTOR, TO ASK QUESTIONS OF AND RECEIVE
ANSWERS FROM THE INVESTMENT MANAGER OR THE PLACEMENT AGENT CONCERNING THE
COMPANY AND THIS OFFERING AND TO OBTAIN ANY ADDITIONAL INFORMATION TO THE EXTENT
THAT THE COMPANY POSSESSES THE SAME OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, IN ORDER TO VERIFY THE ACCURACY OF THE INFORMATION CONTAINED
IN THIS MEMORANDUM OR OTHERWISE.
THE VALUE OF AN INVESTMENT IN THE COMPANY MAY FLUCTUATE. NO ASSURANCE
CAN BE GIVEN THAT THE COMPANY'S INVESTMENT OBJECTIVE WILL BE ACHIEVED OR THAT
INVESTORS WILL RECEIVE A RETURN OF ALL OR ANY PART OF THEIR CAPITAL.
THE COMPANY IS OPERATED BY PERSONS WHO HAVE CLAIMED AN EXCLUSION FROM
THE DEFINITION OF A COMMODITY POOL OPERATOR UNDER THE COMMODITY EXCHANGE ACT SET
FORTH IN COMMODITY FUTURES TRADING COMMISSION ("CFTC") REGULATION ss. 4.5 AND
THEREFORE SUCH PERSONS ARE NOT SUBJECT TO REGULATION UNDER THE COMMODITY
EXCHANGE ACT ("CE ACT"). THE INVESTMENT MANAGER HAS CLAIMED AN EXCLUSION FROM
THE DEFINITION OF A COMMODITY TRADING ADVISOR UNDER CFTC REGULATION ss. 4.6 AND
THEREFORE IS NOT SUBJECT TO REGULATION UNDER THE CE ACT.
------------------
FOR NEW HAMPSHIRE RESIDENTS ONLY: NEITHER THE FACT THAT A REGISTRATION STATEMENT
OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHARTER 421-B OF THE NEW
HAMPSHIRE REVISED STATUTES (THE "RSA") WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW
HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT
MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN
iv
EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT
THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS
OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION.
IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,
CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS
PARAGRAPH.
------------------
NOTICE TO PROSPECTIVE PURCHASERS IN FLORIDA: THESE SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE FLORIDA SECURITIES ACT IN RELIANCE UPON AN EXEMPTION
THEREFROM, ANY SALE MADE PURSUANT TO SUCH EXEMPTION IS VOIDABLE BY A FLORIDA
PURCHASER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE
BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER OR AN ESCROW AGENT IN
PAYMENT FOR SUCH SECURITIES. HOWEVER, THIS RIGHT IS NOT AVAILABLE TO ANY
PURCHASER WHO IS A BANK, TRUST COMPANY, SAVINGS INSTITUTION, INSURANCE COMPANY,
SECURITIES DEALER, INVESTMENT COMPANY (AS DEFINED IN THE INVESTMENT COMPANY
ACT), PENSION OR PROFIT-SHARING TRUST OR QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT).
------------------
NOTICE TO PROSPECTIVE PURCHASERS IN PENNSYLVANIA: THESE SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE PENNSYLVANIA SECURITIES ACT OF 1972 ("ACT") IN RELIANCE
UPON AN EXEMPTION THEREFROM. ANY SALE MADE PURSUANT TO SUCH EXEMPTION IS
VOIDABLE BY A PENNSYLVANIA PURCHASER WITHIN TWO (2) BUSINESS DAYS FROM THE DATE
OF RECEIPT BY THE COMPANY OF HIS OR HER WRITTEN BINDING CONTRACT OF PURCHASE OR,
IN THE CASE OF A TRANSACTION IN WHICH THERE IS NO WRITTEN BINDING CONTRACT OF
PURCHASE, WITHIN TWO BUSINESS DAYS AFTER HE OR SHE MAKES THE INITIAL PAYMENT FOR
THE SHARES BEING OFFERED. HOWEVER, THIS RIGHT IS NOT AVAILABLE TO ANY PURCHASER
WHO IS AN INSTITUTIONAL INVESTOR, INCLUDING, BUT NOT LIMITED TO, A BANK, TRUST
COMPANY, SECURITIES DEALER, INVESTMENT COMPANY (AS DEFINED IN THE INVESTMENT
COMPANY ACT), OR QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT).
------------------
NOTICE TO RESIDENTS OF AUSTRALIA:
Neither this Memorandum, nor any other disclosure document in relation
to Common Shares has been, or needs to be, lodged with the Australian Securities
& Investments Commission. This Memorandum is not a Product Disclosure Statement
under Part 7.9 of the
v
Australian Corporations Act 2001 (Cth) (the "Corporations Act") and the Company
has not been, and will not be, registered as a managed investment scheme under
the Corporations Act.
An offer of the Common Shares is made in Australia only to "wholesale
clients" as defined by the Corporations Act. No Common Shares will be issued,
arranged to be issued and no recommendations to acquire Common Shares will be
made that would require the giving of a Product Disclosure Statement under
Division 2 of Part 7.9 of the Corporations Act.
------------------
NOTICE TO RESIDENTS OF AUSTRIA:
Any offer relating to these securities does not constitute a public
offer or solicitation in connection with a public offer under the Austrian
regulations on securities. Any offer will be distributed to a limited number of
prospective investors only, and no audited prospectus (as such term is used in
Austria) relating to the offer will be published. There will be no public
trading of the securities being offered in Austria, and they will neither be
listed nor registered with any securities commission or other regulatory
authority in Austria.
------------------
NOTICE TO RESIDENTS OF BELGIUM:
The Common Shares may not be publicly offered, sold, traded or
commercialized in Belgium. The offered Common Shares are offered to a limited
number of Belgian-based institutional investors as defined in article 3,
2(degree) of the Royal Decree of 7 July 1999 on the public nature of financial
transactions, in all cases under circumstances designed to preclude a
distribution which would be other than a private offering. This Memorandum may
not be reproduced or used for any purpose, nor be furnished to any other person
other than those to whom copies have been sent.
------------------
NOTICE TO RESIDENTS OF CANADA:
The offering of Common Shares is made only on a "private placement"
basis, it is not intended that the Company will become a "reporting issuer"
under the securities laws of any province of Canada and that the resale of the
Common Shares in Canada will be subject to restrictions under such securities
laws, including the restrictions described under the heading "Notice to
Residents of Canadian Provinces of Ontario, Quebec and British Columbia"
Securities legislation in certain of the provinces of Canada provides purchasers
with, in addition to any other rights they may have at law, rights of rescission
or damages, or both, where an offering memorandum and any amendment to it
contain a misrepresentation, if such rights are exercised within the time limits
prescribed by the applicable securities legislation. If prospective investors
are resident of Canada, the Company hereby grants to such investors the
applicable statutory and contractual rights summarized under the heading "Notice
to Residents of Canadian Provinces of Ontario, Quebec and British Columbia."
vi
NOTICE TO RESIDENTS OF CANADIAN PROVINCES OF ONTARIO, QUEBEC AND BRITISH
COLUMBIA:
Purchasers' Representations, Covenants and Resale Restrictions
Confirmations of the acceptance of offers to purchase Common Shares
will be sent to purchasers in Canada who have not withdrawn their offers to
purchase prior to the issuance of such confirmations. Each purchaser of Common
Shares in Canada who receives a purchase confirmation, by the purchaser's
receipt thereof, represents to the Company and any dealer from whom such
purchase confirmation is received that such purchaser is a person or company to
which Common Shares may be sold without the benefit of a prospectus qualified
under applicable provincial securities laws. In particular, purchasers: (i) if
resident in Ontario represent to the Fund that the purchaser is an "accredited
investor" as such term is defined in Section 1.1 of Ontario Securities
Commission Rule 45-501 - Exempt Distributions and is purchasing the Common
Shares as principal; or (ii) if resident in British Columbia or Quebec represent
to the Company that the purchaser is an "accredited investor" as such term is
defined in Section 1.1 of Multilateral Instrument 45-103 - Capital Raising
Exemptions and is purchasing the Common Shares as principal. The distribution of
Common Shares in Canada is being made on a private placement basis. Accordingly,
any resale of the Common Shares must be made in accordance with an exemption
from the registration and prospectus requirements of applicable securities laws,
which vary depending on the province. Purchasers of Common Shares are advised to
seek legal advice prior to any resale of Common Shares.
Enforcement of Legal Rights
All of the Company's and Investment Manager's directors and officers
may be located outside Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon the Company,
the Investment Manager or their directors or officers. All or a substantial
portion of the assets of the Company, the Investment Manager and such persons
may be located outside Canada and, as a result, it may not be possible to
satisfy a judgment against the Company or the Investment Manager or such persons
in Canada or to enforce a judgment obtained in Canadian courts against the
Company, the Investment Manager or such persons outside Canada.
Contractual and Statutory Rights of Action
Securities legislation in certain of the Canadian jurisdictions
requires purchasers to be provided with a remedy for rescission or damages, or
both, in addition to and not in derogation from any other right they may have at
law, where an offering memorandum and any amendment to it contains a
misrepresentation.
These remedies must be exercised by the purchaser within the time
limits prescribed by the applicable securities legislation. Purchasers should
refer to the applicable provisions of the securities legislation for the
complete text of these rights or consult with a legal advisor.
vii
The applicable contractual and statutory rights are summarized below.
The summary is subject to the express provisions of the applicable provincial
securities laws and the regulations and rules thereunder and reference is made
thereto for the complete text of such provisions.
ONTARIO
Purchasers in Ontario to whom this Memorandum is delivered and who
purchase Common Shares in reliance on the prospectus exemption provided by
Section 2.3 of Ontario Securities Commission Rule 45-501 - Exempt Distributions
are hereby granted the following rights:
In the event that this Memorandum or any amendment thereto delivered to
a purchaser of Common Shares in Ontario contains an untrue statement of a
material fact or omits to state a material fact that is required to be stated or
that is necessary to make any statement therein not misleading in the light of
the circumstances in which it was made (herein called a "misrepresentation") and
it was a misrepresentation at the time of purchase, the purchaser will be deemed
to have relied upon the misrepresentation and will, subject as hereinafter
provided, have a right of action against the Company for damages, or, while
still the owner of the Common Shares purchased by that purchaser, for
rescission, in which case, if the purchaser elects to exercise the right of
rescission, the purchaser will have no right of action for damages against the
Company, provided that:
a. The right of action for rescission will be exercisable by a purchaser
only if the purchaser gives notice to the Company not later than 180 days after
the date of the transaction that gave rise to the cause of action;
b. The right of action for damages or any other action other than the
right of action for rescission will be exercisable by a purchaser only if the
purchaser gives notice to the Company not later than the earlier of (i) 180 days
after the purchaser had knowledge of the facts giving rise to the cause of
action or (ii) three years after the date of the transaction that gave rise to
the cause of action;
c. The Company will not be liable if it proves that the purchaser
purchased the Common Shares with knowledge of the misrepresentation;
d. In the case of an action for damages, the Company will not be liable
for all or any portion of the damages that it proves does not represent the
depreciation in value of the Common Shares as a result of the misrepresentation
relied upon; and
e. In no case will the amount recoverable in any action exceed the price
at which the Common Shares were sold to purchaser.
The statutory rights discussed above are in addition to and without
derogation from any other right the purchaser may have at law.
viii
QUEBEC AND BRITISH COLUMBIA
Notwithstanding that the Securities Act (Quebec) and the Securities Act
(British Columbia) do not provide or require the Company to provide to
purchasers resident in these jurisdictions any rights of action in circumstances
where this Memorandum or an amendment hereto contains a misrepresentation, the
Company hereby grants to such purchasers the equivalent contractual rights of
action as are set forth above with respect to purchasers resident in Ontario and
British Columbia.
------------------
NOTICE TO RESIDENTS OF DENMARK:
This Memorandum has not been filed with or approved by the Danish
Financial Supervisory Authority or any other regulatory authority in the Kingdom
of Denmark.
The Common Shares have not been offered or sold and may not be offered,
sold or delivered directly or indirectly in Denmark, unless in compliance with
Chapter 6 or Chapter 12 of the Danish Act on Trading in Securities and executive
orders issued pursuant thereto as amended from time to time.
------------------
NOTICE TO RESIDENTS OF FINLAND:
This Memorandum is being distributed to a limited number of
pre-selected professional investors in circumstances where the offer of Common
Shares in connection with this Memorandum does not constitute a public offer as
defined in the Securities Market Act of the Republic of Finland. The Common
Shares may not be offered or sold, directly or indirectly, to any resident of
the Republic of Finland or in the Republic of Finland, except pursuant to
applicable Finnish laws and regulations. Specifically, the Common Shares may not
be offered or sold, directly or indirectly, to any resident of the Republic of
Finland or in the Republic of Finland, other than to professional investors, as
defined in the Investment Funds Act of Finland, and may not be offered or sold,
directly or indirectly, to the public in the Republic of Finland.
------------------
NOTICE TO RESIDENTS OF FRANCE:
This Memorandum has not received the visa of the French Autorite des
marches financiers (the "AMF") and accordingly, may not be used in connection
with any offer to the public to purchase any Common Shares or other securities
in France. The offer to purchase Common Shares or other securities of the
Company will be made in France in accordance with the provisions of Article L.
411-2 of the French Code monetaire et financier (the "French Monetary and
Financial Code") and Decree n(degree)98-880 dated October 1, 1998 relating to
offers to qualified investors (the "Decree"). Purchasers may purchase the Common
Shares or other securities of the Company only if they qualify as qualified
investors acting for their own account ("investisseurs qualifies" as defined in
Article L. 411-2 of the French Monetary and Financial
ix
Code and Article I of the Decree) and may, directly or indirectly, transfer such
Common Shares or securities to the public in France only in accordance with
Articles L. 411-1, L. 411-2, L. 412-1 and L. 621-8 of the French Monetary and
Financial Code.
------------------
NOTICE TO RESIDENTS OF GERMANY:
This Memorandum has not been prepared in accordance with the
requirements for a sales prospectus under the German Investment Act
(Investmentgesetz), the German Securities Prospectus Act
(Wertpapierprospektgesetz), or the German Sales Prospectus Act
(Verkaufsprospektgesetz). Neither the German federal authority for the
supervision of financial services (Bundesanstalt fur
Finanzdienstleistungsaufsicht - BaFin) nor any other German authority has been
notified of the intention to distribute Common Shares in Germany. The Common
Shares may therefore not be distributed in the Federal Republic of Germany by
way of public offering, public advertising or in a similar manner. The Common
Shares are being offered and sold in Germany only to a limited number of
individualized persons, entities and partnerships that are being specifically
addressed. This Memorandum is strictly for private use of the person who has
received it from or on behalf of the Company. It may not be forwarded to other
persons or published in Germany.
------------------
NOTICE TO RESIDENTS OF HONG KONG:
The contents of this Memorandum have not been reviewed by any
regulatory authority in Hong Kong. You are advised to exercise caution in
relation to the offer. If you are in any doubt about any of the contents of this
document, you should obtain independent professional advice.
------------------
NOTICE TO RESIDENTS OF ICELAND:
The placement of the Common Shares in Iceland would not be considered a
public placement in Iceland and further distribution in Iceland of the offering
materials related to this offering of the Common Shares, including this
Memorandum, is prohibited.
------------------
NOTICE TO RESIDENTS OF IRELAND:
The Common Shares are offered in Republic of Ireland only to "qualified
investors" as defined in the Prospectus (Directive 2003/71/EC) Regulations 2005
(the "Regulations"). This Memorandum and information contained herein is
confidential and has been prepared and is intended for use on a confidential
basis solely by those persons in the Republic of Ireland to whom it is sent. It
may not be reproduced, redistributed or passed on to any other person in the
Republic of Ireland or published in whole or in part for any purpose. It does
not constitute a prospectus within the meaning or for the purposes of the
Prospectus (Directive 2003/71/EC)
x
Regulations 2005 of the Republic of Ireland. Accordingly, this Memorandum has
not been approved by the Irish Financial Services Regulatory Authority or the
Irish Stock Exchange Limited. Recipients in the Republic of Ireland must inform
themselves about any applicable restrictions including the applicability of the
Regulations and, by their acceptance of each such offer, warrant and represent
to the Company and the Placement Agent that they are persons to whom each such
offer may be made pursuant to such provisions.
------------------
NOTICE TO RESIDENTS OF ISRAEL:
No action has been or will be taken in Israel that would permit a
public offering of the Common Shares or a distribution of this Memorandum to the
public in Israel. The Company will obtain warranties from each offeree that it
is purchasing the Common Shares for investment purposes only and not for
purposes of resale.
------------------
NOTICE TO RESIDENTS OF JERSEY:
The Common Shares have not been offered or sold and are not being
offered or sold to persons in the Bailiwick of Jersey, Channel Islands except
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business, and the Common Shares have not been offered or sold and are not being
offered or sold in circumstances which have resulted or would result in an offer
to the public within the meaning of the Control of Borrowing (Jersey)Order 1958
as amended. To this end this Memorandum is for the intended recipient only and
may not in any way be forwarded to any other person in the Bailiwick of Jersey.
------------------
NOTICE TO RESIDENTS OF LUXEMBOURG:
The Common Shares may not be offered or sold to the public in a public
offering in the Grand Duchy of Luxembourg, directly or indirectly, and neither
this Memorandum, nor any other circular, prospectus, form of application,
advertisement or other material may be distributed, or otherwise made available
in, or from or published in, the Grand Duchy of Luxembourg, except in
circumstances where the Luxembourg legal requirements for a public offer of
securities have been met first.
------------------
NOTICE TO RESIDENTS OF THE NETHERLANDS:
The Common Shares may only be offered, sold, transferred or assigned,
as part of their initial distribution or at any time thereafter, in the
Netherlands, to natural persons or entities who or which trade or invest in
investment objects in the conduct of a profession or business within the meaning
of section 1 of the Exemption Regulation of October 9th, 1990, issued pursuant
to section 14 of the Act on the Supervision of Investment Institutions (ASII:
"Wet toezicht beleggingsinstellingen" of June 27th, 1990) which includes banks,
brokers, securities institutions,
xi
insurance companies, pension funds, investment institutions, other institutional
investors and other parties, including treasury departments of commercial
nterprises and finance companies which are regularly active in the financial
markets in a professional manner. The interest may not otherwise be offered,
directly or indirectly, in the Netherlands.
------------------
NOTICE TO RESIDENTS OF SOUTH KOREA:
The Common Shares have not been registered under the Indirect Investment Asset
Management Business Act nor the Securities and Exchange Act of Korea and none of
the Common Shares may be offered, sold or delivered, directly or indirectly , or
offered or sold to any person for re-offering or resale, directly or indirectly,
in Korea or to any resident of Korea except pursuant to applicable laws and
regulations of Korea.
------------------
NOTICE TO RESIDENTS OF SWITZERLAND:
This Company has no authorization for the distribution of Common Shares
in Switzerland. The Common Shares may therefore not be distributed in
Switzerland by way of public offering, public advertising or in a similar
manner. The Common Shares are being offered and sold in Switzerland only to
institutional investors with professional treasury functions, such as banks and
securities dealers, fund management companies, insurance companies, pension
funds, public-legal entities, as well as industry and commercial enterprises. In
addition, no more than 20 other investors may specifically be addressed. This
Memorandum is strictly for the private use for the person who has received it
from or on behalf of the Company. It may not be forwarded to other persons or
published in Switzerland.
------------------
NOTICE TO RESIDENTS OF THE UNITED KINGDOM:
The Company has not been authorized, or otherwise recognized or
approved by, the United Kingdom Financial Services Authority and cannot be
promoted in the United Kingdom to the general public. The promotion of the
Common Shares in the United Kingdom and the issue or distribution of this
Memorandum (a) if made by a person who is not an authorized person under the
Financial Services and Markets Act 2000 ("FSMA") to carry on designated
investment business in the United Kingdom, is being made, or directed at, only
to the following persons: (i) persons who are "investment professionals" as
defined in article 19(5) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001, as amended (the "Financial Promotion Order")
and (ii) persons falling within any of the categories of persons described in
article 49(2)(a) to (d) of the Financial Promotion Order and any other person to
whom it may otherwise lawfully be made in accordance with the Financial
Protection Order and (b) if made by a person who is an authorized person under
the FSMA, is being made, or directed at, only to the following persons: (i)
persons falling within one of the categories of "investment professionals" as
defined in article 14(5) of the Financial Services and Markets Act 2000
(Promotion of Collective Investment Schemes) (Exemptions) Order 2001 ("Promotion
of CIS Order") and (ii) persons
xii
falling within any categories of persons described in article 22(2)(a) to (d) of
the Promotion of CIS Order and to any other person to whom it may otherwise
lawfully be made in accordance with the provisions of CIS Order or Section 3.11
of The Conduct of Business Sourcebook of the United Kingdom Financial Services
Authority's Handbook of Rules and Guidance, persons satisfying the criteria
above being referred to as "relevant persons" or a "relevant person." The Common
Shares are available only to relevant persons and this communication must not be
acted upon by anyone who is not a relevant person.
The rules made by the Financial Services Authority under FSMA for the
protection of private customers do not apply to the offering of Common Shares
and the Financial Services Compensation Scheme established under section 213 of
FSMA will not be available in respect of any investment made in the Company.
Except as described above, any invitation or inducement to engage in
investment activity (within the meaning of Section 21 of FSMA) in connection
with, or relating to, the sale or purchase of any Common Shares, may only be
communicated or caused to be communicated in circumstances in which Section
21(1) of the FSMA does not apply. It is the responsibility of all persons under
whose control or into whose possession this document comes to inform themselves
about and to ensure observance of all applicable provisions of FSMA in respect
of anything done in relation to the Common Shares in, from or otherwise
involving, the United Kingdom.
xiii
TABLE OF CONTENTS
PAGE
EXECUTIVE SUMMARY..............................................................1
Overview of the Company...............................................1
The Offering..........................................................5
Investment Strategy...................................................7
Capitalization of the Company.........................................8
Use of Proceeds.......................................................9
Performance Record....................................................9
Potential Leveraged Returns for Common Shares........................10
Projections and Use of Leverage......................................13
SUMMARY OF MATERIAL TERMS OF THE COMPANY......................................14
MANAGEMENT....................................................................28
The Investment Manager...............................................28
Investment Manager Relationship......................................31
Board of Directors and Officers......................................31
Investment Committee.................................................32
Custodian............................................................33
Auditors 33
Audit Committee......................................................33
Indemnification and Limitation of Liability..........................33
INVESTMENT PROGRAM............................................................35
Introduction.........................................................35
Types of Investments.................................................36
Investment Strategy..................................................38
Process 41
Realization of Investments...........................................43
Co-Investment........................................................43
Fundamental Investment Policies......................................45
Codes of Ethics and Voting Policies..................................46
CAPITALIZATION OF THE COMPANY.................................................48
Capitalization of the Company........................................48
Common Shares........................................................48
Preferred Shares.....................................................50
Notes ............................................................54
RISK FACTORS..................................................................57
CERTAIN TERMS OF THE OFFERING.................................................79
Subscriptions........................................................79
Investor Suitability Standards.......................................79
Subscription Procedures..............................................80
Form of Securities; Book Entry.......................................81
Anti-Money Laundering Requirements...................................81
Privacy Policy of the Company and the Investment Manager.............81
Customer Identification Program......................................82
Clearance Through DTC/Clearstream....................................82
Arbitration..........................................................84
BENEFIT PLAN INVESTOR CONSIDERATIONS..........................................85
Fiduciary Responsibility Requirements and Prohibited Transactions....85
Plan Assets..........................................................86
CERTAIN U.S. FEDERAL INCOME TAX ASPECTS OF AN INVESTMENT IN THE COMPANY.......87
Taxation of Company as a RIC.........................................88
Taxation of Holders..................................................90
Information Reporting and Backup Withholding.........................93
Investments of the Company...........................................93
LEGAL MATTERS.................................................................95
ACCESS TO ADDITIONAL INFORMATION..............................................95
INDEX OF DEFINED TERMS.........................................................1
APPENDIX A: COMPANY TARGETED RETURN ANALYSIS................................A-1
APPENDIX B: ADDITIONAL HYPOTHETICAL RETURNS.................................B-1
APPENDIX C: MOODY'S COLLATERAL VALUATION SCHEDULE...........................C-1
APPENDIX D: S&P COLLATERAL VALUATION SCHEDULE...............................D-1
APPENDIX E: PERFORMANCE INFORMATION.........................................E-1
EXECUTIVE SUMMARY
This Executive Summary does not purport to be complete and is qualified
in its entirety by reference to the detailed information appearing elsewhere in
this Memorandum and related documents referred to herein. See "Risk Factors"
beginning on page 57 in this Memorandum for a discussion of certain factors that
should be considered in connection with an investment in the Common Shares. In
addition, the information contained in this Memorandum is summary in nature and
is qualified in its entirety by reference to the Company's other documents
referred to herein. For convenience of reference, an index of terms defined in
this Memorandum appears at the back of this Memorandum.
OVERVIEW OF THE COMPANY
Investment Objective
York Enhanced Strategies Fund, LLC, a Delaware limited liability
company (the "Company" or the "Fund"), has been formed to focus primarily on
credit oriented investments in both the United States and Europe, while also
selectively targeting equity opportunities. The Company will have the benefit of
locked-in term financing, allowing the Investment Manager to focus on creating
value through long-term investments in addition to short-term opportunities. The
structural characteristics of the Company enable it to invest in less liquid
investments, such as mezzanine financing, bank loans, equity securities, rescue
financing and bridge financing transactions. The Fund's objective is to realize
compelling risk-adjusted returns that are uncorrelated to price changes in the
public markets.
The Company seeks to achieve high risk-adjusted total returns while
attempting to minimize losses. It is the intention of the Company that the
Company, when fully invested, will hold a portfolio comprised of Mezzanine
Investments, as hereinafter defined, and High Yield Debt, as hereinafter defined
(approximately 30%), Distressed Debt, as hereinafter defined (approximately
30%), Bank Loans, as hereinafter defined (approximately 20%), and Equity
Securities, as hereinafter defined (approximately 20%) (each category of
investments, an "Asset Group"). The Company's actual investment in any such
Asset Group may vary significantly from time to time based on certain factors,
including, without limitation, the commencement of investment activities,
available investment opportunities, market conditions and the performance of the
Company's investments. The Company may also structure, negotiate and originate
loans and other investment transactions and may engage in various transactions
in short sales, futures, forward contracts, swaps and other derivatives and
instruments to manage or hedge interest rate, currency exchange, industry,
equity and other risks. The terms of the Indenture limit the Company's ability
to make certain investments. The investments of the Company are referred to as
the "Company Investments."
Investment Manager
York Enhanced Strategies Management, LLC, a New York limited liability
company ("York" or the "Investment Manager"), will serve as the Investment
Manager of the Company and in that capacity will manage the day-to-day
activities of the Company, subject to the ongoing oversight of the Board of
Directors. The Investment Manager's responsibilities are set forth in an
agreement between the Company and the Investment Manager (the "Investment
1
Management Agreement"). The Investment Manager is a registered investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"). This registration with the Securities and Exchange Commission (the "SEC")
does not imply that the SEC has endorsed York's qualifications to provide
advisory services to the Company as described in this Memorandum.
York is a member of the York Capital Management family of investment
funds and associated advisors (collectively, "York Capital"). York Capital was
established in 1991 and has a multi-strategy, event-driven investment style.
York Capital had approximately $6.8 billion in assets under management as of
October 31, 2005 and focuses primarily on four areas of investment
opportunities: event equities, credit, value equities and risk arbitrage. York
Capital employs approximately 21 investment professionals with approximately 44
total employees and has offices in New York and London.
York Capital utilizes an investment process based on fundamental
analysis of industries and businesses. York Capital's approach to event-driven
investing is opportunistic, and it builds portfolios in response to market
conditions. York Capital utilizes an all-season investment style, where its
strategy relies not on the cycle in any particular industry, but rather on the
ever-present existence of corporate change.
York Enhanced Strategies Feeder Fund, a Delaware statutory trust, and
York Enhanced Strategies Feeder Fund (Cayman) Ltd., a Cayman Islands exempted
company (together, the "Feeder Funds") will be established as entities whose
sole investment will be Common Shares of the Fund. Shares of these Feeder Funds
may be offered and sold to investors outside the United States.
2
The historical performance of York Capital's hedge fund strategies is
included below:
[Enlarge/Download Table]
---------------------------------------------- ------------------ -------------------- -----------------------
COMPOUNDED ANNUAL
RETURN FROM
FUND INCEPTION THROUGH ASSETS UNDER
INCEPTION OCTOBER 31, MANAGEMENT AS OF
2005(1)(2)(3)(4) OCTOBER 31, 2005(5)
---------------------------------------------- ------------------ -------------------- -----------------------
YORK CAPITAL MANAGEMENT, L.P. October 1991 17.4% $3.1 billion
o a diversified event-driven strategy
---------------------------------------------- ------------------ -------------------- -----------------------
YORK SELECT, L.P. January 1996 22.2% $1.3 billion
o a concentrated "select"
event-driven strategy
---------------------------------------------- ------------------ -------------------- -----------------------
YORK CREDIT OPPORTUNITIES FUND, L.P. February 2001 24.9% $500 million
o a strategy focusing on
opportunities across the
distressed debt and credit spectrum
---------------------------------------------- ------------------ -------------------- -----------------------
YORK GLOBAL VALUE PARTNERS, L.P. July 2002 24.4% $800 million
o a value-oriented strategy
---------------------------------------------- ------------------ -------------------- -----------------------
YORK EUROPEAN OPPORTUNITIES FUND, L.P. January 2004 20.1% $1.1 billion
o a European event-driven and
value-oriented strategy
---------------------------------------------- ------------------ -------------------- -----------------------
NOTE:
(1) Returns reflect performance of all domestic funds offered to outside
investors since York Capital's inception. Respective performance of
offshore and feeder funds in the same investment strategy and
managed accounts are not shown above. Performance figures are net
after all expenses, management fees and incentive allocations for an
investment in each fund's Class A interests, if applicable, and
include all income from interest, dividends and other distributions
on the securities held by the fund. Actual investor results may vary
depending upon different fee arrangements, the class of shares
involved, liquidity considerations and the timing of investment.
Returns for each fund may not be indicative of actual returns for
investments in the Company for any individual investor. PAST
PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. Actual returns
for the Company may be greater or less than the returns shown above.
(2) For annual return information with respect to the offshore and
feeder funds, please see Appendix E.
(3) The "Compounded Annual Return" represents the cumulative compounded
monthly returns expressed on an annualized basis for each fund set
forth above.
(4) With respect to the performance of York Capital Management, L.P.,
York Select, L.P., York Credit Opportunities Fund, L.P., York Global
Value Partners, L.P. and York European Opportunities Fund, L.P., the
returns for the period from inception through October 31, 2005
include the actual results of such funds from inception through
September 30, 2005, and an estimate of such funds' performance from
October 1, 2005 through October 31, 2005.
(5) Assets under management figures are estimated approximations and
include assets under management for the offshore and feeder funds.
3
Investment Committee
The Company's board of directors (the "Board of Directors") will set
broad policies for the Company. The Investment Manager will manage the
day-to-day activities of the Company, subject to the ongoing oversight of the
Board of Directors. The Board of Directors will initially be comprised of
Jeffrey A. Weber, the President of York Capital, and three independent
directors, Robert E. Joyal, Newton P.S. Merrill and Robert I. Choi. Mr. Weber
will not receive compensation as a Director of the Company.
The Investment Committee of York (the "Investment Committee") will
initially be comprised of James G. Dinan, the Chief Executive Officer of York
Capital, Daniel A. Schwartz, the Chief Investment Officer of York Capital, and
Alan H. Cohen, a Senior Managing Director of York Capital. The number of members
of the Investment Committee is subject to increase or decrease in the sole
discretion of the Investment Manager. Other investment professionals of York
Capital may participate in Investment Committee meetings on a regular basis. The
Investment Committee will review and discuss the purchase and sale of all
Company Investments. Any purchase or sale of any Company Investment must be
approved in advance by one member of the Investment Committee.
The members of the management team at York Capital bring an average of
15 years of experience to the Company, with extensive expertise in credit
products, event equities, value equities and risk arbitrage investment
strategies. York Capital has been managing investments for over 13 years, with
an event-driven investment style, a focus on capital preservation, and a
consistent record of performance.
The members of the Investment Committee have long-term working
relationships with leading investment professionals in the financial community,
investment bankers, restructuring professionals, bankruptcy and other attorneys,
senior lenders, high yield bond specialists, research analysts, accountants,
senior company management teams, and other financial and operating
professionals, which are expected to facilitate both deal flow and due
diligence. York Capital's strong relationships with other investors and Wall
Street banks creates access to valuable investment opportunities and this
extensive network has been a valuable source of transactions and information in
the past and are expected to continue to provide future opportunities. In
addition, the members of the Investment Committee have relationships with other
investors, including insurance companies, bond funds, mezzanine funds and other
funds which invest in assets similar to those to be acquired as Company
Investments.
Regulated Investment Company
The Company will elect to be treated as a regulated investment company
("RIC") for U.S. federal income tax purposes. The Company therefore should not
be taxed on its income to the extent that it distributes such income as
deductible dividends each year and satisfies other applicable income tax
requirements. Further, the portion of the Company's income attributable to
investments financed through borrowings should not be taxable to U.S. tax-exempt
investors as unrelated business taxable income. Additionally, as shareholders of
a corporation for U.S. federal income tax purposes, non-U.S. investors should
generally not be treated for U.S. federal income tax purposes as being engaged
in a trade or business in the U.S. solely as a result of investing in the
Company, regardless of whether the Company conducts any loan origination
4
activities. See "Certain U.S. Federal Income Tax Aspects of an Investment in the
Company." The Company is expected to be registered as a nondiversified,
closed-end management investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act"). As such, the assets of the
Company will not be treated as assets of investors subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
THE OFFERING
This Memorandum relates to the offering of subscriptions for Common
Shares in an amount equal to $404.5 million. At the closing of this Offering
(the "Closing"), which will occur on or about November 17, 2005 (the "Closing
Date"), the Company will have $809.0 million in total available capital ("Total
Available Capital"). This will consist of $404.5 million in capital commitments
("Common Capital Commitments") in the form of subscription agreements (the
"Common Subscription Agreements") with respect to the Common Shares, $268.5
million in aggregate commitments to purchase the Company's Senior Revolving
Notes due 2013 (the "Notes," and such commitment, the "Notes Commitment") under
an indenture (the "Indenture") and $136.0 million in capital commitments ("Term
Preferred Capital Commitments," and together with the Common Capital
Commitments, the "Capital Commitments") with respect to the purchase of the
Company's Series A-1 Floating Rate Term Preferred Shares (the "Term Preferred
Shares"). Prior to the Closing Date, any of the overall number of Common Shares
or Term Preferred Shares, or the principal amount of Notes, to be offered by the
Company may be increased or decreased, subject to, among other things, the
requirements of applicable law.
The Company will be highly leveraged. Under the provisions of the
Investment Company Act, the Company may issue debt so long as the applicable
"asset coverage" ratio as that term is used in Section 18(h) of the Investment
Company Act (the "Asset Coverage Ratio") of the Company is at least 300%, and
may issue debt and preferred shares so long as the Asset Coverage Ratio of the
Company is at least 200%. In addition, as permitted by the Investment Company
Act, the Company may make certain limited temporary borrowings from time to time
that would be excluded from the calculations of the Asset Coverage Ratios. The
net effect of the Asset Coverage Ratio will be an increase in the percentage of
debt of the Total Available Capital. As a result, the Company will be highly
leveraged at any given time. Accordingly, the use of leverage creates an
opportunity for increased returns for the holders of the Common Shares, but also
creates increased risk of loss. The use of leverage magnifies the potential
gains and losses from an investment and increases the risk of loss of capital.
See "Risk Factors - The Company will be leveraged, which could create a
increased risk of loss to holders of the Common Shares."
The "300% Asset Coverage Ratio" means the ratio which the value of the
total assets of the Company, less all liabilities and debt other than the
outstanding Notes, bears to the aggregate amount of outstanding Notes. The "200%
Asset Coverage Ratio" means the ratio which the value of the total assets of the
Company, less all liabilities and debt other than the outstanding Notes and the
Preferred Shares, bears to the aggregate amount of outstanding Notes and the
aggregate of the liquidation preference of the Preferred Shares. For purposes of
the "200% Asset Coverage Ratio," the involuntary liquidation preference of the
Preferred Shares is the amount such shares would be entitled to upon involuntary
liquidation of the Company in preference to any security junior to the Preferred
Shares.
5
Each Common Subscription Agreement will obligate the investor to
purchase a specified dollar amount of Common Shares on or prior to June 30, 2007
(such period, the "Subscription Period"). The Company will draw down the Common
Capital Commitments on multiple dates (each, a "Drawdown Date") and will use its
reasonable best efforts to fully draw the Common Capital Commitments no later
than approximately nine months after the Closing, but in no event later than
June 30, 2007. On the initial Drawdown Date, the Company will issue shares at
$1,000 per Common Share in an amount corresponding to the percentage of the
Common Capital Commitments specified by the Company in the drawdown notice. On
each subsequent Drawdown Date, the Company will issue Common Shares at the net
asset value (the "NAV") per share as calculated within 48 hours (exclusive of
Sundays and holidays) prior to issuance in an amount equal to the percentage of
the Common Capital Commitments specified by the Company in the drawdown notice.
The Common Shares offered hereby will not be registered under the
Securities Act in reliance upon the exemption from registration thereunder
provided by Section 4(2) and Regulation D promulgated thereunder. Each purchaser
of Common Shares will be required to represent that it is (1) an "accredited
investor" within the meaning of Rule 501(a) of the Securities Act, (2) a
"qualified client" within the meaning of Rule 205-3 of the Advisers Act, (3) a
"qualified purchaser" as defined in Section 2(a)(51)(A) of the Investment
Company Act, and (4) acquiring the Common Shares for its own account for
investment and not for resale or distribution. Investors meeting the foregoing
requirements are referred to herein as "Qualified Investors." The Common Shares
may be transferred only to other Qualified Investors and only with the prior
written consent of the Company, which will not be withheld unreasonably.
The aggregate organizational and other offering expenses of the
Company, including fees payable to the Placement Agent in respect of the
placement of the Notes, Term Preferred Shares and Common Shares, will be
approximately 2.4% of Total Available Capital. These fees and expenses will
reduce the amounts available for investment. Organizational and offering
expenses, other than Placement Agent fees, will be expensed during the Company's
first fiscal year. Placement Agent fees will be amortized.
Further, the Placement Agent may pay a portion of the placement agency
fees described above to its sales personnel and to selected brokers and dealers
(together, the "Intermediaries") in connection with the distribution of the
Common Shares. The prospect of receiving such compensation may provide such
Intermediaries with an incentive to favor sales of Common Shares over other
investments with respect to which such persons do not receive additional
compensation, or lower levels of additional compensation. Prospective investors
may wish to take such payment arrangements into account when considering and
evaluating a subscription for the Common Shares.
INVESTMENT STRATEGY
The Company will be an actively managed, nondiversified closed-end
registered management investment company that will pursue investment
opportunities in Mezzanine Investments and High Yield Debt, Distressed Debt,
Bank Loans and Equity Securities of all kinds, certain of which are expected to
include contractual provisions and equity participations intended to increase
overall returns. It has been the experience of the Investment Manager that
investments in some of these asset classes have not been correlated directly to
the results of
6
either the stock market or the bond market. The Company may also
structure, negotiate and originate loans and other investment transactions and
may engage in various transactions in short sales, futures, forward contracts,
swaps and other derivatives and instruments to manage or hedge interest rate,
currency exchange, industry, equity and other risks.
One of York Capital's objectives has been, and an objective of the
Investment Committee will be, to obtain high risk-adjusted total returns while
preserving capital. The Investment Manager will focus some of the Company's
investment activities on securities and other investments that are not rated or,
if rated, are primarily rated (publicly or privately) below investment-grade.
The Investment Committee will employ a high degree of flexibility in making
Company Investments as they relate to (i) senior or subordinated debt, (ii)
different classes of equity interests, (iii) the relationship and relative size
of the Company's debt and equity securities, and (iv) current versus deferred
return securities. The Investment Manager anticipates that over the term of the
Company, Company Investments will be allocated approximately as follows:
[Download Table]
Asset Mix
-----------
Mezzanine Investments and High Yield Debt 30%
Distressed Debt 30%
Bank Loans 20%
Equity Securities 20%
While the "Asset Mix" in the table above represents one possible configuration
of the Company's portfolio, the actual portfolio composition may differ.
The Investment Committee intends to utilize the same macroeconomic and
industry analysis together with a bottom-up investment strategy that has proven
successful for York Capital in the past. York Capital determines if the
marketplace is appropriately discounting the effect of a corporate event,
considering the risk and reward, relative value compared to absolute value, and
the likelihood that certain events will occur. The Investment Committee will
seek investments in companies which it believes to have compelling risk-adjusted
returns. The Company Investments will be managed using a comprehensive,
risk-based investment valuation analysis and York's due diligence process. In
addition, the Company may obtain the contractual right to participate in, advise
or influence the management of its portfolio investments.
The Company will seek to invest its assets so as to qualify for U.S.
federal income tax treatment as a RIC and to satisfy other applicable
requirements. See "Certain U.S. Federal Income Tax Aspects of an Investment in
the Company--Taxation of Company as a RIC." Accordingly, this will require,
among other things, that at the end of each quarter, subject to certain
exceptions, (1) no more than 20% of the value of the Company's consolidated
gross assets are invested in the securities of any single issuer or affiliated
issuers, and (2) no more than 50% of the value of the Company's consolidated
gross assets are invested in the securities of issuers representing, in the case
of any single issuer, more than 5% of the Company's consolidated gross assets,
or more than 10% of that issuer's voting securities. The Investment Manager
expects to have greater diversification than is required when fully invested as
a result of both the investment strategy and advance rate constraints.
7
The Company expects to liquidate a portion of its investments by the
eighth anniversary of the Closing in an amount sufficient to pay off the Notes
and the liquidation preference of the Preferred Shares unless extended for up to
two one-year periods. The Company also expects to liquidate the remaining
investments and redeem the Common Shares by the tenth anniversary of the Closing
(the "Investment Period") in an amount sufficient to redeem the Common Shares
unless extended for up to two separate one-year periods. Any such extension is
subject to the approval of the holders of the applicable securities, and, in the
case of the Notes and the Term Preferred Shares, the Credit Enhancer.
Accordingly, absent extension, investors in the Notes and the Term Preferred
Shares may be paid two years before holders of the Common Shares.
CAPITALIZATION OF THE COMPANY
The Company will draw the Capital Commitments in stages commencing at
the Closing and will use its reasonable best efforts to fully draw the Capital
Commitments no later than approximately nine months after the closing of its
offering of the Common Shares (the "Ramp-Up Period") and prior to the expiration
of the Subscription Period. The holders of the Notes (the "Noteholders") will
commit to purchase up to $268.5 million aggregate principal amount of Notes. The
Notes will become available to be issued by the Company in increasing amounts as
the Capital Commitments are drawn.
o The following table sets forth one possible capitalization scenario for
the Company after the Closing, without deduction for organizational and
offering costs and expenses, until all debt and equity is fully funded
(although the actual capitalization of the Company at any point in time
after the Closing is likely to differ due to market conditions and other
factors):
[Enlarge/Download Table]
ANTICIPATED CAPITALIZATION TABLE
----------------------------------
------------------------------------------------------------------------------------------------------------------------
COMMON NOTES TERM AGGREGATE TOTAL
SHARES PREFERRED ($ MILLIONS)
SHARES
------------------------------------------------------------------------------------------------------------------------
Closing 50% 0% 0% $202.3
------------------------------------------------------------------------------------------------------------------------
End of Month 3 25% 25% 25% $404.5
------------------------------------------------------------------------------------------------------------------------
End of Month 6 25% 25% 25% $606.7
------------------------------------------------------------------------------------------------------------------------
End of Month 9 0% 50% 50% $809.0
------------------------------------------------------------------------------------------------------------------------
8
USE OF PROCEEDS
The net proceeds from the sale of the Common Shares, as well as the net
proceeds from the sale of the Notes and the Term Preferred Shares, will be used
to purchase Company Investments, substantially all of which will initially be
included in the collateral for the Notes (the "Collateral"), and to pay certain
fees and expenses of the Company incurred in connection with the offerings of
the Notes, the Term Preferred Shares and the Common Shares and its other
capital-raising activities, its operations and otherwise in connection with its
business.
PERFORMANCE RECORD
The following chart sets forth the annual investment performance of
domestic* funds managed by York Capital from October 1991 through October 2005.
[Enlarge/Download Table]
==================================================================================================================================
York Capital York York Credit York Global York European
FUND Management, L.P. Select, Opportunities Fund, Value Partners, Opportunities Fund, S&P 500*** CSFB HY INDEX***
L.P. L.P. L.P. L.P.
==================================================================================================================================
DOMICILE Onshore Onshore Onshore Onshore Onshore
==================================================================================================================================
INCEPTION 10/1/1991 1/1/1996 2/1/2001 7/1/2002 1/1/2004
==================================================================================================================================
1991** 7.37% 8.96% 4.90%
1992 36.38% 7.63% 16.66%
1993 33.84% 10.08% 18.91%
1994 6.21% 1.32% -0.98%
1995 28.37% 37.56% 17.39%
1996 13.51% 24.76% 22.96% 12.42%
1997 30.53% 43.06% 33.38% 12.63%
1998 4.98% 5.66% 28.58% 0.58%
1999 26.30% 67.28% 21.04% 3.29%
2000 13.80% 18.30% -9.10% -5.21%
2001 5.03% 10.95% 34.13% -11.88% 5.81%
2002 -7.12% -6.49% -2.81% 7.27% -22.11% 3.10%
2003 33.27% 37.49% 51.82% 47.02% 28.68% 27.94%
2004 20.38% 32.20% 38.18% 22.88% 26.78% 10.87% 11.95%
10/31/2005**** 2.76% 1.85% 5.11% 6.88% 11.14% 1.05% 0.94%
==================================================================================================================================
* See Appendix E for performance of offshore and feeder funds of York Capital
Management, L.P., York Select, L.P., York Credit Opportunities Fund, L.P., York
Global Value Partners, L.P., and the York European Opportunities Fund, L.P.
** S&P 500 Index returns and CSFB HY Index returns are presented for a period
from October 1, 1991 through December 31, 1991.
*** Source: Standard & Poor's, with respect to the data relating to the S&P 500
index, and CS First Boston, as reported on Bloomberg LP, with respect to the
data relating to the CSFB HY Index.
**** With respect to the performance of York Capital Management, L.P., York
Select, L.P., York Credit Opportunities Fund, L.P., York Global Value Partners,
L.P. and York European Opportunities Fund, L.P., the returns for the period from
January 1, 2005 through October 31, 2005 include the actual results of such
funds from January 1, 2005 through September 30, 2005, and an estimate of such
funds' performance from October 1, 2005 through October 31, 2005.
NOTE: Performance figures are net after all expenses, management fees and
incentive allocations for an investment in each fund's Class A interests, if
applicable, and include all income from interest, dividends and other
distributions on the securities held by the fund. Actual investor results may
vary depending upon different fee arrangements, the class of shares involved,
liquidity considerations and timing of investments. The S&P 500 Index and the
CSFB HY Index are unmanaged indices. Comparisons made between an unmanaged index
and York Capital may be of limited value. Both the S&P 500 Index and the CSFB HY
Index were selected due to the diverse characteristics of the asset classes
expected to be held by the Company. The S&P 500 Index reflects reinvestment of
dividends. This data is intended to depict portfolio performance, and is not
indicative of the returns that might be expected by a purchaser of Common
Shares. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
9
The following chart sets forth the approximate assets under management of each
of the York Capital fund strategies, as well as their related managed accounts,
including both the domestic and offshore fund of each strategy, as of each
year-end indicated and as of October 31, 2005.
[Enlarge/Download Table]
(All figures in $ millions and rounded)
==================================================================================================================================
York Capital York York Credit York Global York European TOTAL
FUND Management, L.P. Select, L.P. Opportunities Fund, Value Partners, Opportunities Fund,
(1) (2) L.P. (3) L.P. (4) L.P. (5)
==================================================================================================================================
INCEPTION 10/1/1991 1/1/1996 2/1/2001 7/1/2002 1/1/2004
==================================================================================================================================
1991 $3 $3
1992 $10 $10
1993 $30 $30
1994 $70 $70
1995 $150 $150
1996 $250 $4 $260
1997 $340 $10 $350
1998 $440 $10 $450
1999 $600 $10 $610
2000 $930 $20 $950
2001 $1,400 $90 $50 $1,500
2002 $1,100 $180 $140 $10 $1,400
2003 $1,600 $460 $200 $50 $10 $2,300
2004 $3,000 $1,100 $360 $460 $10 $4,900
10/31/2005 $3,100 $1,300 $500 $800 $1,100 $6,800
(6)
==================================================================================================================================
(1) Includes York Investment Limited.
(2) Includes York Select Unit Trust.
(3) Includes York Credit Opportunities Unit Trust.
(4) Includes York Global Value Unit Trust.
(5) Includes York European Opportunities Unit Trust.
(6) Figures as of October 31, 2005 are estimated.
POTENTIAL LEVERAGED RETURNS FOR COMMON SHARES
The Investment Manager believes that by using the macroeconomic and
industry analysis together with bottom-up investment strategy that the
Investment Manager has followed previously in each of the Asset Groups in the
past, the Company can generate attractive returns for investors in the Common
Shares. Under the provisions of the Investment Company Act, the Company may
issue debt in compliance with the 300% Asset Coverage Ratio, and may issue debt
and preferred shares in compliance with the 200% Asset Coverage Ratio. Certain
limited temporary borrowings above these leverage limits are also permitted. As
shown in the table below, assuming the asset returns specified in such table and
other assumptions described in Appendix A hereto, the Company may be able to
generate average annual leveraged returns of 14-20%, net of estimated fees,
expenses and the Carried Interest (described below in "Summary of Material Terms
of the Company").
There can be no assurance that the Company will achieve these or any
other particular level of returns. The use of leverage magnifies the potential
gains and losses from an investment and increases the possibility that investors
could lose all or part of their invested capital. In addition, the Investment
Manager believes that the current environment offers leverage rates that are
unsustainably low and accordingly may not persist for the life of the Company.
10
"Hypothetical Projected Return Under Target Asset Mix" set forth in the table
below is calculated net of estimated fees, expenses and the Carried Interest.
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------------
Hypothetical Net Returns to Common Shares at Assumed Collateral Return Rate (1)
----------------------------------------------------------------------------------------------------------------------
Assumed Return Rates
% of Assets Case A Case B
----------------------------------------------------------------------------------------------------------------------
Mezzanine Investments and 30% 8% IRR 10% IRR
High Yield Debt
----------------------------------------------------------------------------------------------------------------------
Distressed Debt 30% 15% IRR 20% IRR
----------------------------------------------------------------------------------------------------------------------
Bank Loans 20% 7% IRR 10% IRR
----------------------------------------------------------------------------------------------------------------------
Equity Securities 20% 18% IRR 25% IRR
----------------------------------------------------------------------------------------------------------------------
Hypothetical Projected Leveraged Returns Under Target 14% 20%
Asset Mix(2)
----------------------------------------------------------------------------------------------------------------------
(1) There can be no assurance that these returns or any other particular level
of return will be achieved.
(2) Calculated net of estimated fees, expenses, interest, dividends on the
Preferred Shares and the Carried Interest payable to the Investment
Manager.
There can be no assurance that these returns or any other particular
level of return will be achieved. Assumed investment returns may not be
indicative of actual returns. There are two hypothetical scenarios contemplated
for estimated returns. Case A is a lower return scenario, while Case B is a
higher return scenario. Actual returns may be greater or less than the returns
shown above. Investors should note that certain assumptions have been made in
order to calculate the expected returns. Many of those assumptions are detailed
herein. No representation is made that any hypothetical return will be achieved,
that all factors relevant to any such return have been considered, that all
assumptions made in calculating any such return have been stated, that any
assumptions that have been made reflect the Placement Agent's or York's best
estimate of future conditions, or that any stated or unstated assumptions will
turn out to be correct. Changes to any assumptions or consideration of different
or additional factors may have a material impact on any hypothetical return.
Future events are difficult or impossible to predict, will differ from those
assumed and often depend on factors that are beyond the Placement Agent's and
York's control. Any hypothetical returns, projections, forecasts and estimates,
including hypothetical projected returns and estimates of future performance,
are forward-looking statements, and are preliminary in nature. Prospective
investors are cautioned not to rely on the hypothetical projected returns
presented above in making a decision on whether or not to purchase securities of
the Company.
Hypothetical or simulated results have certain inherent limitations.
Unlike an actual performance record, simulated results do not represent actual
investment activities. Also, because investments have not actually been made,
the hypothetical results may have under- or over-compensated for the impact, if
any, of certain market factors such as the lack of liquidity. No representation
is made that the Company will earn profits or incur losses similar to those
shown above or that York's investment strategies will perform as set forth above
under certain or any market conditions. PAST PERFORMANCE IS NOT INDICATIVE OF
FUTURE RESULTS.
11
The following assumptions are for illustrative and modeling purposes
only. No representation is made that the assumptions to or outcomes from the
modeling necessarily reflect historical performance of similar investment
securities. The analysis assumes:
o Two investment return profiles provided by York given as Case
A and Case B above and forward LIBOR curve for the 10-year
life of the transaction.
o That the Notes bears interest at a rate of LIBOR plus 40 basis
points. Any defaulted interest earns compound interest at the
same rate. In addition a commitment fee of 20 basis points per
annum will be paid in respect of Note Commitments that have
not been drawn down.
o A dividend yield of LIBOR plus 30 basis points on the Term
Preferred Shares, plus an additional payment of 30 basis
points on the Term Preferred Shares to the Credit Enhancer as
an insurance premium. In addition, an unissued share fee of 10
basis points each will be paid to the holders of the Term
Preferred Shares and the Credit Enhancer, respectively. Any
unpaid dividends (or payments to the Credit Enhancer) will be
compounded at the same rate.
o Expenses are paid quarterly and are assumed to be 20 basis
points per annum on the anticipated value of the total
collateral. The analysis assumes certain upfront legal and
other expenses.
o A 10 month investment deployment period.
o The Company will fully draw the capital commitments within
nine months in stages commencing at the Closing as set forth
in the Anticipated Capitalization Table on page A-6.
o The Company will distribute all of its net income and net
capital gains each period and may distribute capital at any
time, subject to restrictions set forth in the terms of the
Indenture and Term Preferred Shares.
o That the Company will pay Management Fees to the Investment
Manager of approximately 1% per annum as described on page 19.
o That the Investment Manager will be entitled to the Carried
Interest as described on page 20.
o That the cash collected during each period earns a return
equal to the average return on assets, if such return is
positive, otherwise cash collected during each period earns a
zero return.
o Quarterly coupon payments for High Yield (bearing 8% interest
per annum) and Bank Loans (bearing interest at a rate of LIBOR
plus 250 basis points per annum).
12
o The number of reinvestment cycles is 10 for High Yield, 2 for
Distressed Debt, 6 for Bank Loans, and 40 for Equities.
Capital gains on equity are assumed to be distributed
uniformly throughout the year in which they are generated.
o All internal rates of return are computed using 365 days in a
year and assume that the initial cash outflow takes place at
the Closing.
o That the maturity of the Notes and redemption of the Term
Preferred Shares are extended until the end of the
transaction, and that the holders of the Notes and the Term
Preferred Shares do not accelerate if the interest or dividend
yield remains unpaid in any period.
See Appendix A for a description of the hypothetical return
calculations and certain additional assumptions employed in making those
calculations. Actual results may be higher or lower than these hypothetical
returns. Also see Appendix B for additional information regarding the
hypothetical returns.
PROJECTIONS AND USE OF LEVERAGE
Any hypothetical returns, projections, forecasts and estimates in this
Memorandum, including estimates of returns or performance, are forward-looking
statements, are based upon certain assumptions and are preliminary in nature.
Future events are difficult or impossible to predict, may differ from those
assumed and often depend on factors that are beyond the Company's and the
Investment Manager's control. Some important factors which could cause actual
results to differ materially from those in any forward-looking statements
include changes in interest rates or expected interest rates; changes in
domestic and foreign business, market, financial and legal conditions;
differences in the actual allocation of the Company Investments among Asset
Groups from those assumed herein; changes in the degree of leverage actually
used by the Company from time to time; the degree to which the Company
Investments are hedged and the effectiveness of such hedges; and the terms of
borrowing agreements. In addition, the degree of risk will be increased as a
result of leveraging of the Company Investments. Other risk factors are
described under "Risk Factors" and elsewhere in this Memorandum. Other events
that were not taken into account, such as events similar to the terrorist
attacks of September 11, 2001, and their repercussions, may occur and may
significantly affect the projections, forecasts and estimates contained herein.
Investors may not recoup all or any of their investment in the Common Shares.
Any assumptions should not be construed to be indicative of the actual
composition of the portfolio, of the actual range, magnitude or timing of
changes in the market value of the Company Investments, of the actual amount and
timing of the expenses and liabilities of the Company or of the actual level of
interest rates. In addition, certain assumptions, including those relating to
the timing of receipt and application of cash flows, have been made to simplify
the presentation and actual results will differ, and may differ significantly,
from those presented. As a result, there can be no assurance that estimated
returns or projections can be realized or that actual returns or results will
not be materially lower than those estimated herein. Such estimated returns and
projections should be viewed as hypothetical and do not represent the actual
returns that may be achieved by an investor. Investors should conduct their own
analysis, using such assumptions as they deem appropriate, and should fully
consider other available information, including the information described under
"Risk Factors" herein in making an investment decision.
The Company will be a leveraged investment vehicle. As a result, the
risk of loss of capital will be greater than for an unleveraged fund investing
in similar assets. Leverage could result in investment returns being lower than
would be the case without the use of leverage. See "Risk Factors--The Company
will be leveraged, which would create an increased risk of loss to holders of
the Common Shares."
13
SUMMARY OF MATERIAL TERMS OF THE COMPANY
The following is a summary of the terms of the Company. This summary
does not purport to be complete and is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Memorandum and related
documents referred to herein.
The Company............................ York Enhanced Strategies Fund,
LLC, a Delaware limited liability
company, which is expected to be
registered as a nondiversified
closed-end management investment
company under the Investment
Company Act.
Investment Objective and
Strategies............................. The Company has been formed to
focus primarily on credit oriented
investments in both the United
States and Europe, while also
selectively targeting equity
opportunities. The Company will
have the benefit of locked-in
term financing, allowing the
Investment Manager to focus on
creating value through long-term
investments in addition to
short-term opportunities. The
structural characteristics of the
Company enable it to invest in
less liquid investments, such as
mezzanine financing, bank loans,
equity securities, rescue
financing and bridge financing
transactions. The Fund's
objective is to realize compelling
risk-adjusted returns that are
uncorrelated to price changes in
the public markets.
The Company seeks to achieve high
risk-adjusted total returns while
attempting to minimize losses. It
is the intention of the Company
that the Company, when fully
invested, will hold a portfolio
comprised of Mezzanine Investments
and High Yield Debt (approximately
30%), Distressed Debt
(approximately 30%), Bank Loans
(approximately 20%), and Equity
Securities (approximately 20%)
(each category of investments, an
"Asset Group"). The Company's
actual investment in any such
Asset Group may vary significantly
from time to time based on certain
factors, including, without
limitation, the commencement of
investment activities, available
investment opportunities, market
conditions and the performance of
the Company's investments. The
Company may also structure,
negotiate and originate loans and
other investment transactions and
may engage in various transactions
in short sales, futures, forward
contracts, swaps and other
derivatives and instruments to
manage or hedge interest rate,
currency exchange, industry,
equity and other risks. The terms
of the Indenture limit the
Company's ability to make certain
investments. The investments of
the Company are referred to as the
"Company Investments."
14
The Investment Manager................. York Enhanced Strategies
Management, LLC, a New York
limited liability company, will
serve as the Investment Manager
of the Company and in that
capacity will manage the
day-to-day activities of the
Company, subject to the ongoing
oversight of the Board of
Directors. The Investment
Manager's responsibilities will be
set forth in an agreement between
the Company and the Investment
Manager (the "Investment
Management Agreement"). The
Investment Manager is a registered
investment adviser under the
Advisers Act. This registration
with the SEC does not imply that
the SEC has endorsed York's
qualifications to provide advisory
services to the Company as
described in this Memorandum.
Investment Committee................... The Investment Committee of York
will initially be comprised of
three members: James G. Dinan,
the Chief Executive Officer of
York Capital, Daniel A. Schwartz,
the Chief Investment Officer of
York Capital, and Alan H. Cohen,
a Senior Managing Director of York
Capital. The number of members of
the Investment Committee is
subject to increase or decrease in
the sole discretion of the
Investment Manager. The
Investment Committee will review
and discuss the purchase and sale
of all Company Investments. Any
purchase or sale of any Company
Investment must be approved in
advance by one member of the
Investment Committee.
Key Personnel Provisions............... The Investment Management
Agreement will provide, among
other things, that upon the death,
incapacity or departure from the
Investment Manager of both James
G. Dinan and Daniel A. Schwartz,
the Investment Manager will
promptly notify the holders of the
Common Shares, the holders of the
Term Preferred Shares and the
Noteholders that the Investment
Manager may be replaced by a
designee agreed upon by the
holders of a majority of the
then-outstanding Common Shares and
Preferred Shares voting together
as a single class and the holders
of a majority of the aggregate
outstanding principal amount of
Notes.
Board of Directors.................. The Board of Directors will set
broad policies for the Company.
The Company's Board of Directors
will consist of four persons, at
least three of whom will be
independent for purposes of the
Investment Company Act. The
holders of the Term Preferred
Shares and the Series A-2
Preferred Share (collectively,
the "Preferred Shares") voting
separately as a class will be
entitled to elect at least two of
the Company's directors. The
remaining Directors of the
15
Company will be subject to
election by holders of the then
outstanding Common Shares and
Preferred Shares voting together
as a single class. The Board of
Directors will initially be
comprised of Jeffrey A. Weber, the
President of York Capital, and
three independent directors,
Robert E. Joyal, Newton P.S.
Merrill and Robert I. Choi. Each
member of the Board of Directors
will be referred to herein as a
"Director." See "Capitalization
of the Company--Common Shares" and
"--Preferred Shares."
Placement Agent........................ Morgan Stanley & Co. Incorporated
("MS"), and Morgan Stanley & Co.
International, Limited ("MSIL,"
and together with MS,
"Morgan Stanley" or the "Placement
Agent") will act as placement
agent, or distributor, as the case
may be, in connection with the
offer and sale of certain of the
Common Shares in the United
States. In addition, MSIL acting
through its Fixed Income division
will act as Placement Agent in
connection with the offer and
sale of the Common Shares outside
the United States and acting
through its Private Wealth
Management division will have the
right to distribute the Common
Shares outside the United States,
in each case, by offering and
marketing Common Shares of the
Company or by offering and
marketing shares of York Enhanced
Strategies Feeder Fund (the
"Delaware Feeder Fund"), a
Delaware statutory trust, and
shares of York Enhanced Strategies
Feeder Fund (Cayman) Ltd., a
Cayman Islands company (the
"Cayman Feeder Fund"). As
distributor of shares, the Private
Wealth Management division of MSIL
may purchase shares based on the
commitment of certain investors to
purchase such shares from the
Private Wealth Management division
of MSIL in connection with the
Closing and any subsequent
Drawdowns of such shares by the
Company, the Delaware Feeder Fund
and the Cayman Feeder Fund. MS
and MSIL will act as placement
agent, or distributor, as the case
may be, for the Term Preferred
Shares and the Notes.
Capital Commitments.................... The Company is anticipating
approximately $404.5 million of
Common investors, of which $25
million will come from affiliates
of the Investment Manager. The
Company may modify or withdraw
this Offering at any time prior to
the acceptance of subscriptions
for Common Shares.
Minimum Commitment..................... The minimum subscription amount is
$10 million and is subject to
waiver in the Investment Manager's
discretion for selected investors.
16
Investor Credentials................... The Company and the Placement
Agent reserve the right to reject
any prospective investor for any
reason. In addition, the Company
and the Investment Manager may, in
their discretion, allocate the
amount of Common Shares to
potential investors.
Each purchaser of Common Shares
will be required to represent that
it is (1) an "accredited investor"
within the meaning of Rule 501(a)
of the Securities Act, (2) a
"qualified client" within the
meaning of Rule 205-3 of the
Advisers Act, (3) a "qualified
purchaser" as defined in Section
2(a)(51)(A) of the Investment
Company Act and (4) acquiring the
Common Shares for its own account
for investment and not for resale
or distribution.
Investors meeting the foregoing
requirements are referred to
herein as "Qualified Investors."
The Common Shares may be
transferred only to other
Qualified Investors and only with
the prior written consent of
the Company, which will not be
withheld unreasonably.
Drawdowns.............................. Each Common Subscription Agreement
obligates the investor to purchase
a specified dollar amount of
Common Shares on or prior to the
end of the Subscription Period.
The Company will draw down the
Common Capital Commitments on
multiple Drawdown Dates and will
use its reasonable best efforts to
fully draw the Common Capital
Commitments no later than
approximately nine months after
the Closing, but in no event later
than June 30, 2007. On the
initial Drawdown Date, the Company
will issue shares at $1,000 per
Common Share in an amount
corresponding to the percentage of
the Common Capital Commitments
specified by the Company in the
drawdown notice. On each
subsequent Drawdown Date, the
Company will issue Common Shares
at the NAV per share as calculated
within 48 hours (exclusive of
Sundays and holidays) prior to
issuance in an amount equal to the
percentage of the Common Capital
Commitments specified by the
Company in the drawdown notice.
Unfunded Capital Commitments may
be called by the Company at any
time during the Subscription
Period in any amount on not less
than 15 days' prior written
notice. Investors who fail to pay
a capital call within 10 days
after receiving a second notice
from the Company may be required
to pay interest equal to the rate
published by the Wall Street
Journal as the "prime rate" plus
6.0% and may be subject to having
their Common Shares purchased by
17
other investors or repurchased,
retired and canceled by the
Company at a discount to the NAV
of such Common Shares, the price
of which will in no event be less
than 66 2/3% of the NAV of such
Common Shares, subject to the sole
discretion of a majority of
Independent Directors. In such
event, the Company may offer an
opportunity to the other holders
of Capital Commitments to purchase
the Common Shares that would have
been issued to the investor that
failed to pay the capital call,
such opportunity to be offered on
a pro rata basis, or take certain
other actions permitted under the
Operating Agreement (as defined
herein).
It is anticipated that
Common Shares equal to 50% of the
Common Capital Commitments will be
issued on the initial Drawdown
Date and that the balance of the
Common Shares will be issued over
two additional Drawdown Dates
during the Subscription Period.
The Company may hold the initial
Drawdown Date at any time after
subscriptions for Common Shares
exceed $202.25 million. The
Company expects to draw down 25%
of the total Common Capital
Commitments on each subsequent
drawdown.
The Company intends to close the
Offering on or about November 17,
2005, and to hold the initial
Drawdown Date on the same day, but
retains the right to close the
Offering and hold the initial
Drawdown Date on a later date in
its sole discretion. The Company
may modify or withdraw this
Offering at any time prior to the
acceptance of subscriptions for
Common Shares.
Leverage and Asset Coverage............ The Company will be highly
leveraged. Under the provisions
of the Investment Company Act, the
Company may issue debt in
compliance with the 300% Asset
Coverage Ratio, and may issue debt
and preferred shares in compliance
with the 200% Asset Coverage
Ratio. Certain limited temporary
borrowings above these leverage
limits are also permitted. A
summary of the terms of the Notes
and the Preferred Shares are
available to prospective investors
on request.
Term and Termination of
the Company............................ The Company expects to liquidate a
portion of its investments by the
eighth anniversary of the Closing
in an amount sufficient to pay off
the Notes and the liquidation
preference of the Preferred Shares
unless extended for up to
18
two one-year periods. The
Company also expects to liquidate
the remaining investments and
redeem the Common Shares by the
tenth anniversary of the Closing
(the "Investment Period") in an
amount sufficient to redeem the
Common Shares unless extended for
up to two separate one-year
periods. Any such extension is
subject to the approval of the
holders of the applicable
securities and, in the case of the
Term Preferred Shares and the
Notes, the Credit Enhancer.
Accordingly, absent extension,
investors in the Notes and the
Term Preferred Shares may be paid
two years before holders of the
Common Shares.
Asset Valuation........................ The NAV of the Company will be
calculated as of the last business
day of each fiscal quarter, in
connection with each issuance of
Common Shares by the Company, as
of each distribution declaration
date (after giving effect to the
relevant distribution), as of the
date on which the Company
terminates, and on such other
dates as determined by the
Investment Manager or the Board of
Directors, in accordance with the
valuation policies and guidelines
approved from time to time by the
Board of Directors (each, a
"Valuation Date").
Distributions.......................... After making any payments required
to be made to the holders of the
Notes and to the holders of the
Preferred Shares, the Company will
distribute substantially all of
its remaining net realized income
each year to the holders of the
Common Shares and may distribute
capital at any time, subject to
restrictions set forth in the
Indenture, the Statement of
Preferences for the Term Preferred
Shares (the "Statement") and the
insurance and indemnity agreement
to be entered into between the
Company and Ambac Assurance
Corporation (the "Insurance
Agreement").
Management Fee......................... The Company will pay the
Investment Manager a management
fee (the "Management Fee"), which
will generally be payable on a
quarterly basis in arrears. During
the period commencing on the
Closing Date and ending on
December 31, 2006 (the "Initial
Draw Period"), the Management Fee
will be equal to 1.0% per annum of
the sum of (i) the aggregate
Common Capital Commitments,
regardless of whether the Company
has drawn down such commitments,
(ii) the aggregate Term Preferred
Capital Commitments, regardless of
whether the Company has drawn down
such commitments, and (iii) the
aggregate Notes Commitments,
regardless of whether the Company
has drawn down or repaid such
commitments (the sum of
19
(i) through (iii) being referred
to as the "Committed Capital").
After the Initial Draw Period, the
Management Fee will be equal to
1.0% per annum of the NAV of the
Company using the applicable
quarter-end NAV (without reduction
for any dividends accrued on the
Common Shares or the Carried
Interest, as defined below).
Carried Interest....................... In addition to the Management Fee,
the Company will pay to the
Investment Manager the following:
(1) 100% of the amount by which
the cumulative distributions and
amounts distributable to the
holders of the Common Shares
(excluding any distribution
relating to the original capital
payment made for the Common
Shares) exceed a 2% quarterly
weighted average return on
undistributed capital attributable
to the Common Shares until the
Investment Manager has received
from the Company an amount equal
to 20% of the aggregate cumulative
distributions of net income and
gain to the holders of the Common
Shares as well as amounts paid to
the Investment Manager under this
provision. This 2% quarterly
weighted average return on
undistributed capital shall be
cumulative (but not compounded) up
to an aggregate of 8% per year.
(2) After the payment described in
clause (1) above has been made,
with respect to additional
distributions and amounts
distributable to holders of the
Common Shares, an amount (payable
at the same time as any
distributions to the holders of
the Common Shares) such that after
receipt thereof the Investment
Manager will have received from
the Company an amount equal to
20%, and the holders of the Common
Shares will have received an
amount equal to 80%, of the
incremental aggregate
distributions of net income and
gain to the holders of the Common
Shares and the Series A-2
Preferred Share as described
below.
Such amounts paid to the
Investment Manager are referred to
herein as the "Carried Interest."
The Carried Interest is
anticipated to be paid as cash
dividends on one share of Series
A-2 Preferred Share to be held by
the Investment Manager, which will
be redeemable by the Company at
its liquidation preference in the
event the Investment Management
Agreement is terminated.
20
Placement and Organizational Fees and
Expenses............................... The aggregate organizational and
other offering expenses of the
Company, including fees payable to
the Placement Agent in respect of
the placement of the Notes, Term
Preferred Shares and Common Shares
payable as of the Closing are
expected to be approximately 2.4%
of Total Available Capital.
These fees and expenses will
reduce the amounts available for
investment. Organizational and
offering expenses, other than fees
of the Placement Agent, will be
expensed during the Company's
first fiscal year. The fees of
the Placement Agent will be
amortized.
Origination Fees....................... Origination, management, finders,
breakup and similar fees payable
with respect to Company
Investments will be payable to the
Company. The Company will monitor
such fees with a view to
maintaining its status as a RIC,
one of the requirements of which
is that no more than 10% of the
Company's gross income in any year
consist of income that is not
related to investments.
Expenses............................... Among other things, the Company
will be responsible for paying the
fees of the Investment Manager and
the Placement Agent and any other
placement agents; organizational
and offering fees and expenses
relating to the Common Shares, the
Term Preferred Shares and the
Notes; marketing and travel
expenses; the Carried Interest;
dividends on the Preferred Shares
(including the Series A-2
Preferred Share); unissued share
fees on the Term Preferred Shares;
due diligence and negotiation
expenses; research expenses; fees
and expenses of custodians,
trustees, collateral agents, note
agent, administrators, transfer
and distribution agents; brokerage
fees and commissions, dealer
spreads, and other expenses
incurred in the making of Company
Investments; legal fees and
expenses of the Company and the
Investment Manager incurred in
connection with matters relating
to or for the Company; fees and
expenses of the Directors;
insurance, including periodic
premiums and certain fees payable
under the insurance policy to be
entered into for the benefit of
the holders of the Term Preferred
Shares; filings and registrations;
proxy expenses; expenses of
communications to investors;
compliance expenses; audit
expenses; interest (including
interest accrued on the Notes);
commitment fees; taxes; portfolio
transaction expenses; costs of
responding to regulatory inquiries
and reporting to regulatory
authorities; costs and expenses of
preparing and maintaining the
books and records of the Company;
indemnification expenses;
litigation and other extraordinary
fees and expenses; and such other
fees and expenses as are approved
21
by the Directors as being
reasonably related to the
organization, offering,
capitalization, operation or
administration of the Company and
any portfolio investments.
Expenses associated with
investments by multiple York
Capital entities will be shared
proportionately by the
participating funds. Expenses
associated with the general
overhead of the Investment Manager
will not be covered by the
Company, except to the extent paid
for with soft dollar arrangements.
See "Risk Factors--The Investment
Manager will utilize and rely on
brokers in conducting certain
trades, which may cause the
Company to incur transaction
costs."
Reports................................ Investors in Common Shares will
receive quarterly reports with
unaudited financial statements and
annual reports with audited
financial statements.
Transfer and Withdrawal................ The Common Shares may be
transferred only to other
Qualified Investors and only with
the prior written consent of the
Company, which will not be
withheld unreasonably.
No investor may withdraw any or
all of its Capital Commitment.
The minimum number of shares
required to be transferred in any
subsequent resale or other
transfer of shares is 1,000.
Governance............................. Holders of the Common Shares and
the Preferred Shares will have
one vote per share on all matters
requiring shareholder approval and
will have class voting rights to
the extent required by the
Investment Company Act. A vote of
75% of the shares eligible to be
voted thereon will be necessary to
amend the Operating Agreement of
the Fund (the "Operating
Agreement") in certain respects,
such as to terminate the Company
prior to the end of the Investment
Period. On certain other matters,
the required vote will be the
affirmative vote of a majority of
the outstanding Common Shares and
Preferred Shares except that where
a separate vote of one or more
classes or series is required on
any matter, the affirmative vote
of a majority of the outstanding
shares of such class or series,
will be sufficient. A "majority
of outstanding voting shares"
means the lesser of (A) 67% or
more of such shares present at a
meeting if the holders of 50% or
more of such shares are present in
person or represented by a proxy
and entitled to vote on such
matter or (B) more than 50% of the
shares entitled to vote on such
matter. In addition, in certain
circumstances, the Board may take
action without shareholder
approval.
22
Limitation on Liability................ The Company's Operating Agreement
will provide that, except as
otherwise provided by law, none of
the Directors or the officers of
the Company shall be liable,
responsible or accountable in
damages or otherwise to the
Company or any member of the
Company ("Member") for any loss,
liability, damage, settlement,
costs or other expense (including
reasonable attorneys' fees)
incurred by reason of any act or
omission or any alleged act or
omission performed or omitted by
such person in connection with the
establishment, management or
operations of the Company or the
management of the Company
Investments (including in
connection with serving on
creditors' committees and boards
of directors for companies in the
Company Investments portfolio)
unless such act or failure to act
arises out of the bad faith,
willful misfeasance, gross
negligence or reckless disregard
of such person's duty to the
Company (such conduct, "Disabling
Conduct"). The Company will agree
to exculpate the Investment
Manager and the Placement Agent
and their respective affiliates,
officers, directors, members,
managers, employees, stockholders,
assigns, representatives or agents
from liability under certain
circumstances. Nothing contained
in the Operating Agreement will be
deemed to be a waiver of any
rights an investor may have under
Federal or state securities or
other laws.
Indemnification........................ To the fullest extent permitted by
law, the Company will indemnify
the Directors and officers of the
Company with respect to any act or
omission described in the above
paragraph as long as (i) such
person's activities do not
constitute Disabling Conduct and
(ii) there has been a
determination (a) by a final
decision on the merits by a court
or other body of competent
jurisdiction before whom the issue
of entitlement to indemnification
was brought that such indemnitee
is entitled to indemnification or,
(b) in the absence of such a
decision, by (1) a majority vote
of a quorum of those Directors who
are not "interested persons" (as
defined in Section 2(a)(19) of the
Investment Company Act) of the
Indemnified Person or parties to
the proceeding, that the
indemnitee is entitled to
indemnification, or (2) if such
quorum is not obtainable (or even
if obtainable, if such majority so
directs), independent legal
counsel that concludes that the
Indemnified Person should be
entitled to indemnification. The
Company will agree to indemnify
the Investment Manager and the
Placement Agent and their
23
respective affiliates, officers,
directors, members, managers,
employees, stockholders, assigns,
representatives or agents for
certain losses under certain
circumstances. A successful claim
for indemnification could reduce
the Company's assets available for
distribution to the holders of the
Common Shares.
Transactions with
Related Parties........................ Under current SEC regulations, the
Company is prohibited from
co-investing with any unregistered
fund or account managed now or in
the future by the Investment
Manager or any of its affiliates
(the "Unregistered Funds") in
certain private placements in
which the Investment Manager
negotiates non-pricing terms.
The Company and the Investment
Manager intend to apply to the SEC
for an exemption from such
regulations. The Company believes
it will be able to obtain such
relief. If such relief is not
obtained, the Investment Manager
will seek to implement policies
that would allow the Company to
co-invest with the Unregistered
Funds in private placements to the
maximum extent possible in
accordance with the Investment
Company Act, current SEC
interpretations and other
applicable requirements. In such
event, the Investment Manager may
be required to allocate some
covered investments solely to the
Company and others solely to the
Unregistered Funds. Although the
Company does not anticipate that
this would have a material adverse
effect on the Company, it could
have an adverse effect on the
speed at which the Company is able
to invest its assets and on the
performance of the Company.
The Investment Manager and its
affiliates may spend substantial
time on other business activities,
including investment management
and advisory activities for
entities with the same or
overlapping investment objectives,
investing for their own account
with the Company or any investor
in the Company, financial advisory
services (including services for
entities in which the Company
invests), and acting as directors,
officers, creditor committee
members or in similar capacities.
Subject to the requirements of the
Investment Company Act, the
Investment Manager and its
affiliates and associates intend
to engage in such activities and
may receive compensation from
third parties for their services.
Subject to the same requirements,
such compensation may be payable
by entities in which the Company
invests in connection with actual
or contemplated investments and
the Investment Manager may
24
receive fees and other
compensation in connection with
structuring Company Investments
which may be shared with such
other entities.
Conflicts.............................. The Company may experience
conflicts of interest arising out
of the overall investment activity
of the Investment Manager and its
affiliates. See "Risk Factors--
The interests of the Investment
Manager, the Placement Agent and
their affiliates may conflict with
the interests of holders of the
Common Shares."
Regulated Investment Company........... The Company will elect to be
treated as a regulated investment
company ("RIC") for U.S. federal
income tax purposes. The Company
therefore should not be taxed on
its income to the extent that it
distributes such income as
deductible dividends each year and
satisfies other applicable income
tax requirements. Further, the
portion of the Company's income
attributable to investments
financed through borrowings should
not be taxable to U.S. tax-exempt
investors as unrelated business
taxable income. Additionally, as
shareholders of a corporation for
U.S. federal income tax purposes,
non-U.S. investors should
generally not be treated for U.S.
federal income tax purposes as
being engaged in a trade or
business in the U.S. solely as a
result of investing in the
Company, regardless of whether the
Company conducts any loan
origination activities. See
"Certain U.S. Federal Income Tax
Aspects of an Investment in the
Company."
Insurance Agreement.................... The Company will enter into the
Insurance Agreement, which will
provide, among other things, for
certain covenants, as well as
other obligations and restrictions
imposed on the Company by the
Credit Enhancer. In connection
with the Insurance Agreement, the
Company will pay insurance
premiums to the Credit Enhancer
equal to 30 basis points per annum
on the outstanding Term Preferred
Shares as well as unissued share
fees of 10 basis points per annum
on unissued Term Preferred Shares.
Tax Considerations..................... See "Certain U.S. Federal Income
Tax Aspects of an Investment in
the Company."
ERISA.................................. The Company is expected to be
registered as a nondiversified,
closed-end management investment
company under the Investment
Company Act. As such, the assets
of the Company will not be treated
as assets of investors subject to
the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"). See "Benefit Plan
Investor Considerations."
25
Risk Factors and Special An investment in the Company
Considerations......................... involves risks and special
considerations, which are
discussed under the heading
"Risk Factors."
Custodian.............................. JP Morgan Chase & Co., National
Association, will serve as
custodian for the Company, and in
such capacity, will maintain
certain financial and accounting
books and records pursuant to an
agreement with the Company. In
addition, Goldman, Sachs & Co.
will serve as a sub-custodian for
certain Short Sale Transactions
for the Company.
Auditors............................... PricewaterhouseCoopers LLP will
serve as the independent auditors
of the Company.
Counsel................................ Jones Day serves or has served as
counsel to the Company and the
Placement Agent. Arnold & Porter
LLP serves or has served as
counsel to the Investment Manager
and certain of its affiliates. No
attorney-client relationship
exists between either Jones Day or
Arnold & Porter LLP and any
investor solely as a result of
such investor's investment in the
Company. Each potential investor
should consult its own legal, tax
and other advisors in connection
with an investment in the Company.
Book Entry; Form of Security........... The Common Shares will initially
be issued in the form of a Global
Security to be deposited with JP
Morgan Chase Bank, National
Association, as custodian for DTC
and Clearstream Banking
Luxembourg, S.A., a corporation
organized under the laws of the
Grand Duchy of Luxembourg
("Clearstream") or its nominee.
Any holder may request a physical
security be issued to it.
Holders that are not "qualified
institutional buyers," as that
term is defined in Rule 144A(a)
promulgated under the Securities
Act, will not be permitted to hold
their Common Shares through a
Global Security and will instead
be required to hold physical
securities representing their
Common Shares. Interests in the
Common Shares may not be
transferred through
DTC/Clearstream or its nominee in
a transaction unless the proposed
transferee is a "qualified
institutional buyer" and the
aggregate price of the Common
Shares proposed to be purchased
and sold in such transaction is
equal to or greater than $1.0
million. If the proposed
transferee is not such a
"qualified institutional buyer,"
or if the aggregate price of the
Common Shares proposed to be
purchased and sold in such
transaction is less
26
than $1.0 million, the transferee
will receive physical certificates
representing the transferred
Common Shares.
Feeder Funds........................... The Placement Agent may raise
additional funds for investment
from investors outside the United
States by offering and selling
shares of the Feeder Funds.
27
MANAGEMENT
THE INVESTMENT MANAGER
York is a New York limited liability company which was formed on April
15, 2005. It serves as the Investment Manager for the Company. Its controlling
principals are James G. Dinan and Daniel A. Schwartz, who directly or indirectly
control York as well as York Capital and its affiliates. York may, and intends
to, delegate or assign certain of its administrative duties with respect to the
Company to its affiliate, JGD Management Corp., or any other affiliate of York
or its principals, subject to the supervision of York, and pay all or a portion
of its Management Fees to such delegate or assignee in connection therewith.
Key members of the management team at York Capital include the
following individuals:
JAMES G. DINAN. Mr. Dinan founded York Capital in September 1991 and is
the Chief Executive Officer of York Capital and a managing member of the
managing partner of York Capital. From 1985 to 1991, Mr. Dinan worked at
Kellner, DiLeo & Co., where he became a general partner and was responsible for
investing in risk arbitrage and special situation investments, including
distressed securities, high yield bonds and short selling. From 1981 to 1983,
Mr. Dinan was a member of the Investment Banking Group of Donaldson, Lufkin &
Jenrette, where he was involved in a broad range of corporate finance and merger
and acquisition activities. Mr. Dinan received a B.S. in Economics, summa cum
laude, from the Wharton School of the University of Pennsylvania and an M.B.A.
from the Harvard Business School.
DANIEL A. SCHWARTZ. Mr. Schwartz joined York Capital in March 1993 and
is a Senior Managing Director of York Capital, the Chief Investment Officer of
York Capital, and a managing member of the managing partner of York Capital.
From July 1990 to March 1993, he was an Associate at Morgan Stanley & Co., Inc.,
spending two years in the Investment Banking Division, and then was a member of
the Global Equity Derivatives Department. Mr. Schwartz received a B.A., magna
cum laude, from Yeshiva University and an M.S. in Industrial Engineering from
Columbia University.
JEFFREY A. WEBER. Mr. Weber joined York Capital in October 2004 and is
the President of York Capital and a member of the managing partner of York
Capital. From 1992 to 2004, he managed William A.M. Burden & Co., L.P., most
recently as its President and Chief Executive Officer. From 1990 to 1992, he was
an Associate at Chemical Venture Partners, the venture capital and leveraged
buyout arm of Chemical Bank. From 1986 to 1988, Mr. Weber was a member of the
Corporate Finance Department of Drexel Burnham Lambert Incorporated. Mr. Weber
currently serves on the Board of Directors of iStar Financial Inc. Mr. Weber
received a B.A. in History of Ideas, cum laude, from Williams College and an
M.B.A. from the Harvard Business School.
ALAN H. COHEN. Mr. Cohen joined York Capital in March 1998 and is a
Senior Managing Director and a member of the managing partner of York Capital.
From 1996 to 1998, he was Vice President and an Analyst for Franklin Mutual
Advisers. From 1994 to 1996, he was Director of High Yield Trading at Smith
Barney. From 1991 to 1994, Mr. Cohen traded high yield and distressed bonds at
Donaldson, Lufkin & Jenrette. From 1986 to 1991, he analyzed and traded high
yield bonds at Goldman Sachs & Co. Mr. Cohen received a B.S. in Economics
28
from the Massachusetts Institute of Technology and an M.B.A. from the Harvard
Business School.
CHRISTOPHE AURAND. Mr. Aurand joined York Capital in July 2001 and is a
Managing Director of York Capital and the Chief Executive Officer of York
Capital Management UK Advisors Limited (York Capital's UK subsidiary). Prior to
joining York Capital, he worked as a Senior Fund Manager for Taiyo Life Gamma
Asset Management, and worked as an Options Trader in Tokyo for Credit Commercial
de France. Mr. Aurand studied International Finance and Financial Markets at
Ecole Superieure de Commerce de Reims in Reims, France, and received an M.B.A.
with Honors from the Wharton School of the University of Pennsylvania.
ERIC J. EDIDIN. Mr. Edidin joined York Capital in June 2001 and is a
Managing Director. Prior to joining York Capital, he worked at Etrana as a Vice
President and Founding Team Member. Prior to that, he worked at The Blackstone
Group as an Associate in the private investment bank's Restructuring Advisory
Team, and at Morgan Stanley Dean Witter Capital Partners as an Associate in
Global Investments. Mr. Edidin received a B.B.A. in Business Administration with
highest distinction from the University of Michigan and an M.B.A. from the
Harvard Business School.
WILLIAM C. VRATTOS. Mr. Vrattos joined York Capital in January 2002 and
is a Managing Director. Prior to joining York Capital, he worked at Georgica
Advisors as a Portfolio Manager specializing in media and communications
equities and distressed securities. Before that, he worked at Morgan Stanley as
an investment banker. Mr. Vrattos received a B.A. in English, cum laude, from
Dartmouth College and an M.B.A. from the Harvard Business School.
MICHAEL Y. WEINBERGER. Mr. Weinberger joined York Capital in July 2000
and is a Managing Director. Prior to joining York Capital, he worked at Lehman
Brothers as an investment banker. He received a B.S. in Finance, summa cum
laude, from the Wharton School of the University of Pennsylvania and an M.B.A.
from the Harvard Business School with High Distinction.
DANIEL M. DAUBER. Mr. Dauber joined York in May 1997 and is a Managing
Director. Prior to joining York Capital, he worked at Goldman Sachs & Co. as an
investment banker and equity research analyst. Mr. Dauber received a B.A. in
Economics from Columbia University.
JEANNE L. MANISCHEWITZ. Ms. Manischewitz joined York Capital in March
2005 and is a Senior Vice President of York Capital. Previously, she was a
Senior Credit Analyst and Trader at Moore Capital Advisors LLC. Prior thereto,
she was a Distressed Credit Analyst at Halcyon Partnerships and, prior to that,
she was investment banker at Salomon Smith Barney. Ms. Manischewitz received a
B.A. in Philosophy from Princeton University.
ALEXANDER M. KLABIN. Mr. Klabin joined York Capital in August 2003 and
is a Vice President. Prior to joining York Capital, he was a Distressed Debt
Research Analyst and private equity professional at Quadrangle Group LLC. Prior
to Quadrangle, he was an investment banker in the Mergers & Acquisitions
Department at Goldman, Sachs & Co. Mr. Klabin received a B.A. in English
Literature from Princeton University.
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DOUGLAS N. SILVERMAN. Mr. Silverman joined York Capital in May 2002
and is a Senior Vice President, focusing on equity and distressed debt
investments. Prior to joining York Capital, Mr. Silverman worked as an
investment banker in the Global Leveraged Finance Group at Merrill Lynch.
Mr. Silverman received his B.A. in Economics, cum laude, from Princeton
University.
JEREMY BLANK. Mr. Blank joined York Capital in March 2005 and is a
Vice President. Previously, Mr. Blank was a Vice President and a Senior
Distressed Debt Trader at Morgan Stanley. Prior to that, Mr. Blank worked as a
Distressed Credit Analyst and as an investment banker at Morgan Stanley.
Mr. Blank received a B.S. in Finance and an A.A. in Bible from Yeshiva
University.
ADAM J. SEMLER. Mr. Semler joined York Capital in November 1995 and is
the Chief Financial Officer and member of the managing partner of York Capital.
From November 1994 to October 1995, he was a Senior Accountant for Granite
Capital International Group. For two years prior thereto, he worked as a Senior
Accountant at Goldstein, Golub, Kessler & Co., where he specialized in the
financial services area. Mr. Semler received a B.B.A. from Emory University and
is a Certified Public Accountant.
BROOKE S. PARISH. Mr. Parish joined York Capital in May 2003 and is a
Managing Director. Prior thereto he worked at Lazard Asset Management in New
York. Previously, Mr. Parish helped form an alternative investment firm in San
Francisco. He also spent seven years with Bessemer Trust where he managed the
alternative asset management group in New York. Mr. Parish received a B.A. in
History from Hobart College.
MARTIN M. GOLDBERG. Mr. Goldberg joined York Capital in October 2003
and is a Senior Vice President. Prior thereto, he was a Vice President,
Corporate and Investment Banking Division at Deutsche Bank. Previously, he
worked at Debevoise & Plimpton as a corporate lawyer specializing in the
Investment Management Group. Mr. Goldberg received a B.A. in Political Science,
summa cum laude, from Yeshiva University and a J.D., cum laude, from New York
University School of Law.
LAWRENCE F. JONES. Mr. Jones joined York Capital in January 2005 and
is a Senior Vice President at York Capital, focusing on marketing and client
service. Prior to joining York Capital, Mr. Jones was a Client Portfolio
Manager at Lord, Abbett & Co. Previously, he worked at Lazard Asset Management,
as a Global Fixed Income Portfolio Manager and as a Senior Vice President,
Global Equities. Mr. Jones received his B.S. in Economics from Lehigh
University and his M.B.A. from New York University, Leonard N. Stern School of
Business.
MARK D. SCHEIN. Mr. Schein joined York Capital in January 2005 and is
a Senior Vice President and Chief Compliance Officer at York Capital. Prior to
joining York Capital, he spent three years at U.S. Trust Company and Schwab
Capital Markets where he was Director of Broker-Dealer Compliance and Director
of Anti-Money Laundering, respectively. Previously, he worked for six years as
an Assistant District Attorney in Bronx County and five years as a trial counsel
in the New York Stock Exchange's Enforcement Division. Mr. Schein received his
B.A. in Economics and American Studies from Williams College and a J.D. from
Vanderbilt Law School.
30
EDWARD R. ZATORSKI. Mr. Zatorski joined York Capital in January 1996
and is a Managing Director and head of trading. From November 1994 to December
1995, he was an equity sales trader for Oakes, Fitzwilliams, L.P., an investment
banking firm. For ten years prior thereto, he worked as an equity sales trader
for Miller Tabak Hirsch & Co. Mr. Zatorski received a B.S. in Accounting from
St. Francis College.
INVESTMENT MANAGER RELATIONSHIP
Under the Investment Company Act, holders of a majority of the voting
securities of the Company outstanding at the time can direct the Company at any
time to terminate the Investment Manager on 60 days' notice.
In addition, in order to protect the Company against risks associated
with the loss of key personnel, the Investment Management Agreement will
incorporate the following key personnel provisions. Upon the death, incapacity
or departure from the Investment Manager of both James G. Dinan and Daniel A.
Schwartz, the Investment Manager will promptly notify the holders of the Common
Shares, the holders of the Term Preferred Shares and holders of the Notes in
such event. Upon the occurrence of such an event, the Investment Manager may be
replaced if the consent to do so has been obtained from any of the following
three groups: (i) the holders of a majority of the then-outstanding Common
Shares and Preferred Shares, voting together as a single class, and (ii) the
holders of a majority of the aggregate amount of indebtedness then outstanding
under the Indenture.
After the first two years, the Investment Management Agreement will
terminate unless its continuance is specifically approved at least annually by
both (i) the vote of a majority of the Board of Directors or the vote of a
majority of the outstanding voting securities of the Company at the time
outstanding and entitled to vote, and (ii) the vote of a majority of the
Directors who are not parties to the Investment Management Agreement or
interested persons of any party to the Investment Management Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Investment Management Agreement may also be terminated by the Company at any
time upon giving the Investment Manager 60 days' notice, provided that such
termination by the Company must be directed or approved by a majority of the
Directors in office at the time or by the holders of a majority of the voting
securities of the Company at the time outstanding and entitled to vote. The
Investment Management Agreement may also be terminated by the Investment Manager
on 60 days' written notice. The Investment Management Agreement will also
immediately terminate in the event of its assignment. As used in this paragraph,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meanings of such terms as in the Investment
Company Act.
BOARD OF DIRECTORS AND OFFICERS
The Board of Directors will set broad policies for the Company, and the
Investment Manager will manage the day-to-day operations of the Company, subject
to the oversight of the Board of Directors. The Board of Directors will
initially consist of four persons, at least three of whom will be independent
for purposes of the Investment Company Act. If the Company has preferred shares
outstanding, the holders of such preferred shares voting separately as a class
will be entitled to elect at least two of the Company's Directors. The remaining
Directors of the
31
Company will be subject to election by holders of Common Shares and Preferred
Shares voting together as a single class.
Each Director (other than any Director who is an "affiliated person" of
the Investment Manager) will receive the following amounts for serving as a
Director: (i) $50,000 per year, (ii) $10,000 per physical meeting of the Board
of Directors and (iii) $2,500 per telephonic meeting of the Board of Directors.
In addition, the Chair of each the Board of Directors and the Audit Committee
will be paid an additional $5,000 per year. The Company also pays each Director
(whether or not such person is an "affiliated person" of the Company or the
Investment Manager) for all reasonable out-of-pocket expenses incurred by the
Director in attending each meeting.
The Board of Directors will initially be comprised of Jeffrey A. Weber,
the President of York Capital, and three independent Directors, Robert E. Joyal,
Newton P.S. Merrill and Robert I. Choi:
JEFFREY A. WEBER. See Mr. Weber's biography set forth in "--The
Investment Manager."
ROBERT E. JOYAL. Mr. Joyal is currently retired. From 2004 to 2005, he
was a director of First Israel Turnaround Enterprise. From 2003 to 2005, he was
a trustee of MassMutual Select Funds, MML Series Investment Fund, MassMutual
Corporate Investors and MassMutual Participation Investors and a director of
Pemco Aviation Group, an aircraft overhaul company. From 2001 to 2005, he was a
director of FIMI Opporunity Fund. From 2001 to 2003, he was president of Babson
Capital Management. From 1999 to 2003, he was president of MassMutual Corporate
Investors and MassMutual Participation Investors. From 1997 to 2005, he was a
director of First Israel Mezzanine Investors. From 1996 to 2005, he was a
director of Antares Capital Corp.
NEWTON P.S. MERRILL. Mr. Merrill is currently retired. From 1994 to
2003, he was a Senior Executive Vice President of The Bank of New York in the
Banking Division. In addition, Mr. Merrill currently serves on the Board of
Directors of BNY Hamilton Funds, which are mutual funds affiliated with The Bank
of New York.
ROBERT I. CHOI. Mr. Choi is currently the managing partner of The
Heritage Group, a family company. From 1997 to 2004, Mr. Choi was a managing
director for Orion Capital Partners, a fund of funds and a hedge fund.
Mr. Weber will not receive compensation as a Director of the Company.
INVESTMENT COMMITTEE
The Investment Committee will initially be comprised of James G. Dinan,
the Chief Executive Officer of York Capital, Daniel A. Schwartz, the Chief
Investment Officer of York Capital, and Alan H. Cohen, a Senior Managing
Director of York Capital. The number of members of the Investment Committee is
subject to increase or decrease in the sole and absolute discretion of the
Investment Manager. Other investment professionals of York Capital may
participate in Investment Committee meetings on a regular basis. The Investment
Committee
32
will review and discuss the purchase and sale of all Company Investments. Any
purchase or sale of any Company Investment must be approved in advance by one
member of the Investment Committee.
The members of the management team at York Capital bring an average of
15 years of experience to the Company, with extensive expertise in credit
products, event equities, value equities and risk arbitrage investment
strategies. York Capital has been managing investments for over 13 years, with
an event-driven investment style, a focus on capital preservation, and a
consistent record of performance.
The members of the Investment Committee have long-term working
relationships with leading investment professionals in the financial community,
investment bankers, restructuring professionals, bankruptcy and other attorneys,
senior lenders, high yield bond specialists, research analysts, accountants,
senior company management teams, and other financial and operating
professionals, which are expected to facilitate both deal flow and due
diligence. York Capital's strong relationships with other investors and Wall
Street banks creates access to valuable investment opportunities and this
extensive network has been a valuable source of transactions and information in
the past and are expected to continue to provide future opportunities. In
addition, the members of the Investment Committee have relationships with other
investors, including insurance companies, bond funds, mezzanine funds and other
funds which invest in assets similar to those to be acquired as Company
Investments.
CUSTODIAN
JP Morgan Chase Bank, National Association, with a place of business at
600 Travis Street, 50th Floor, Houston, Texas 77002, Attn: York Enhanced
Strategies Fund, LLC, will serve as custodian for the Company (the "Custodian"),
and in such capacity, will maintain certain financial and accounting books and
records pursuant to agreements with the Company. Goldman, Sachs & Co. will serve
as a sub-custodian with respect to certain short sale transactions.
AUDITORS
PricewaterhouseCoopers LLP, with a place of business at 125 High
Street, Boston, Massachusetts 02110, will serve as the independent auditors of
the Company.
AUDIT COMMITTEE
The Company will establish an Audit Committee, comprised of all of the
independent Directors. The Audit Committee is charged with providing informed,
vigilant and effective oversight of the Company's financial reporting processes
and the internal controls that protect the integrity of the reporting process.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Operating Agreement will also provide that, to the fullest extent
permitted by law, that none of the Directors or officers of the Company (the
"Indemnified Persons") shall be liable, responsible or accountable in damages or
otherwise to the Company or any Member for any loss,
33
liability, damage, settlement, costs, or other expense (including reasonable
attorneys' fees) incurred by reason of any act or omission or any alleged act or
omission performed or omitted by such person, in connection with the
establishment, management or operations of the Company or the Company
Investments (including in connection with serving on creditors' committees and
boards of directors for companies in the Company Investments portfolio) unless
such act or failure to act arises out of Disabling Conduct. The Company will
agree to exculpate the Investment Manager and the Placement Agent and their
respective affiliates, officers, directors, members, managers, employees,
stockholders, assigns, representatives or agents from liability under certain
circumstances. Nothing contained in the Operating Agreement will be deemed to be
a waiver of any rights an investor may have under Federal or state securities or
other laws.
The Operating Agreement will also provide that the Company will
indemnify the Indemnified Persons with respect to any act or omission described
above as long as (i) such person's activities do not constitute Disabling
Conduct and (ii) there has been a determination (a) by a final decision on the
merits by a court or other body of competent jurisdiction before whom the issue
of entitlement to indemnification was brought that such indemnitee is entitled
to indemnification or, (b) in the absence of such a decision, by (1) a majority
vote of a quorum of those Directors who are not "interested persons" (as defined
in Section 2(a)(19) of the Investment Company Act) of the Indemnified Person
(the "Disinterested Non-Party Directors"), that the indemnitee is entitled to
indemnification, or (2) if such quorum is not obtainable (or even if obtainable,
if such majority so directs), upon receipt by the Company of a written opinion
of independent legal counsel that concludes that the Indemnified Person should
be entitled to indemnification.
All determinations to make advance payments in connection with the
expense of defending any proceeding shall be authorized and made as follows. The
Company shall make advance payments in connection with the expenses of defending
any action with respect to which indemnification might be sought if the Company
receives a written affirmation by the Indemnified Person of the Indemnified
Person's good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to reimburse the Company
if a final decision on the merits by a court or other body of competent
jurisdiction before whom the issue of entitlement to indemnification is
subsequently brought determines that such Indemnified Person is not entitled to
such indemnification. In addition, at least one of the following conditions must
be met: (i) the Indemnified Person shall provide adequate security for the
undertaking, (ii) the Company shall be insured against losses arising by reason
of any lawful advances, or (iii) a majority of a quorum of the Disinterested
Non-Party Directors, or if a majority vote of such quorum so directs,
independent legal counsel in a written opinion, shall have concluded, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is substantial reason to believe that the Indemnified Person
ultimately will be found entitled to indemnification. The rights accruing to any
indemnitee under these provisions shall not exclude any other right which any
person may have or in the future acquire under the Operating Agreement, any
statute, agreement, vote of the shareholders of the Company or Directors who are
"disinterested persons" (as defined in Section 2(a)(19) of the Investment
Company Act) or any other right to which he or she may be lawfully entitled.
Subject to any limitations provided by the Investment Company Act and
the Operating Agreement, the Company shall have the power and authority to
indemnify and provide for the
34
advance payment of expenses to directors, officers, employees, agents and other
persons providing services to the Company or serving in any capacity at the
request of the Company, provided that such indemnification has been approved by
a majority of the Directors or, with respect to agreements to which the
Investment Manager is not a party, by the Investment Manager.
A successful claim for indemnification could reduce the Company's
assets available for distribution to the Company's security holders.
INVESTMENT PROGRAM
INTRODUCTION
The Company will be an actively managed, nondiversified closed-end
registered management investment company that will pursue investment
opportunities in Mezzanine Investments and High Yield Debt, Distressed Debt,
Bank Loans and Equity Securities of all kinds, certain of which are expected to
include contractual provisions and equity participations intended to increase
overall returns. It has been the experience of the Investment Manager that
investments in some of these asset classes have not been correlated directly to
the results of either the stock market or the bond market. The Company may also
structure, negotiate, and originate loans and other investment transactions and
may engage in various transactions in short sales, futures, forward contracts,
swaps and other derivatives and instruments to manage or hedge interest rate,
currency exchange, industry, equity and other risks.
One of York Capital's objectives has been, and an objective of the
Investment Committee will be, to obtain high risk-adjusted total returns while
preserving capital. The Investment Manager will focus some of the Company's
investment activities on securities and other investments that are not rated or,
if rated, are primarily rated (publicly or privately) below investment-grade.
The Investment Committee will employ a high degree of flexibility in making
Company Investments as they relate to (i) senior or subordinated debt, (ii)
different classes of equity interests, (iii) the relationship and relative size
of the Company's debt and equity securities, and (iv) current versus deferred
return securities.
The Investment Committee intends to utilize the same macroeconomic and
industry analysis together with a bottom-up investment strategy that has proven
successful for York Capital in the past. York Capital determines if the
marketplace is appropriately discounting the effect of a corporate event,
considering the risk and reward, relative value compared to absolute value, and
the likelihood that certain events will occur. The Investment Committee will
seek investments in companies which it believes to have compelling risk-adjusted
returns. The Company Investments will be managed using a comprehensive,
risk-based investment valuation analysis and York's due diligence process. In
addition, the Company may obtain the contractual right to participate in, advise
or influence the management of its portfolio investments.
This strategy is built upon an investment philosophy that enables York
Capital to use numerous relationships, industry trends, credit event analyses,
liquidity analyses and fundamental analyses to look for an event that either has
altered or will alter the status quo for the company or sector being analyzed.
York Capital's goal is to determine the appropriate entry and exit strategies to
unlock value in the market. York Capital's approach to event-driven
35
investing is opportunistic, and it builds portfolios in response to market
conditions. York Capital utilizes an all-season investment style, where its
strategy relies not on the cycle in any particular industry, but rather on the
ever-present existence of corporate change.
York Capital employs disciplined risk management techniques in an
attempt to minimize losses by managing position sizes to allocate capital
according to risk/reward profiles and liquidity objectives. In addition, York
Capital takes advantage of high diversification and the use of moderate
leverage. Historically, York Capital's returns have been generally uncorrelated
with the major market indices. York Capital is opportunistic in its hedging of
systematic risk.
The Company will seek to invest its assets so as to qualify for U.S.
federal income tax treatment as a RIC and to satisfy other applicable
requirements. See "Certain U.S. Federal Income Tax Aspects of an Investment in
the Company--Taxation of Company as a RIC." Accordingly, this will require,
among other things, that at the end of each quarter, subject to certain
exceptions, (1) no more than 20% of the value of the Company's consolidated
gross assets are invested in the securities of any single issuer or affiliated
issuers, and (2) no more than 50% of the value of the Company's consolidated
gross assets are invested in the securities of issuers representing, in the case
of any single issuer, more than 5% of the Company's consolidated gross assets,
or more than 10% of that issuer's voting securities. The Investment Manager
expects to have greater diversification than is required when fully invested as
a result of both the investment strategy and advance rate constraints.
TYPES OF INVESTMENTS
The Investment Manager plans to diversify by issuer, industry and Asset
Group to manage risk and minimize exposure to investment losses within the
guidelines described in Appendix C and Appendix D. It is the intention of the
Company that, when fully invested, the Company will hold a portfolio comprised
of Mezzanine Investments and High Yield Debt (approximately 30%), Distressed
Debt (approximately 30%), Bank Loans (approximately 20%), and Equity Securities
(approximately 20%) of all kinds, each of which is described below. The
Company's actual investment in any such Asset Group may vary significantly from
time to time based on certain factors including, without limitation, the
commencement of investment activities, available investment opportunities,
market conditions and the performance of the Company's investments.
Mezzanine Investments and High Yield Debt. "Mezzanine Investments"
consist of (i) debt securities of an issuer (including convertible debt
securities) that (A) are subordinated to other debt of such issuer and (B) may
be issued with equity participation features such as convertibility, senior
equity securities, common stock or warrants or (ii) preferred stock that is
issued in connection with leveraged transactions, such as management buyouts,
acquisitions, refinancings, recapitalizations and later stage growth capital
financings. "High Yield Debt" generally consists of debt securities (including
convertible debt securities) that are generally rated below "Baa3" by Moody's or
"BBB-" by S&P or Fitch and, in each case, (a) have been issued pursuant to a
public registration, Rule 144A, or as a private placement, and (b) are not cash
equivalents, bank loans, or mezzanine investments. However, it may also include
debt rated above such levels that has fallen in price.
36
Distressed Debt. "Distressed Debt" consists of debt securities and bank
loans that are, in the Investment Manager's reasonable business judgment,
impaired in fundamental ways due to credit, liquidity, interest rate or other
issues, that may not be performing or may be in default, and that are generally
trading at a substantial discount to par. Distressed securities are securities
of companies that are experiencing financial or operating difficulties and that
are in the process of emerging from such problems through debt restructuring,
Chapter 11 reorganization or liquidation. The issuers of distressed securities
may be involved in various stages of bankruptcy. The difficulties of the issuers
may have resulted from poor operating results, catastrophic events or excessive
leverage.
Bank Loans. "Bank Loans" consists of loans and participations therein
originated by banks and other financial institutions. Bank Loans can include
loans of a type generally incurred by borrowers in connection with highly
leveraged transactions, often to finance internal growth, acquisitions, mergers
or stock purchases, or for other reasons. As a result of the additional debt
incurred by the borrower in the course of the transaction, the borrower's
creditworthiness is often judged by the rating agencies to be below investment
grade. Bank loans are typically at the senior level of the capital structure,
and are often secured by specific collateral. Bank loans include assignments of
and participations in performing senior debt obligations that are generally
acquired through primary bank syndications and in the secondary market. The bank
loans to be acquired by the Company in this Asset Group are likely to be unrated
or rated below investment grade.
Equity Securities. "Equity Securities" of the type in which the
Investment Manager intends to invest generally consist of common stock of large,
medium- and small-capitalization companies. Equity securities consists of
investments in companies that, in the Investment Manager's reasonable business
judgment, may soon make an announcement of a strategic nature that could have a
material effect on the company's stock price. Such anticipated strategic
announcements could include, for example, a company with a vacancy in top
management announcing a new management appointment, or, a company that has
disclosed it is evaluating strategic alternatives regarding its operations or
subsidiaries, such as an acquisition or disposition, an initial public offering,
or a spin-off of such operation or subsidiary.
From time to time the Investment Manager may believe that it has
identified a dramatically undervalued situation with the potential for
substantial long term gains. If the Investment Manager believes that events in
the medium to long term may cause investors to recognize the value of the
company, thereby causing the true value of the company's assets to be recognized
in the stock price, the Investment Manager may purchase securities of the
company. Examples of such situations could include industry consolidations. As a
result of structural, regulatory or other dramatic change, many industries
undergo periods of rapid consolidation. The Investment Manager evaluates such
industry consolidation trends and may purchase or sell securities in companies
that may be part of such consolidation, especially if the underlying economic
fundamentals of such companies or industries are particularly attractive.
In addition, in certain situations when the Investment Manager believes
a company's securities are particularly overvalued and/or may be the subject of
negative news in the near term, the Company may sell the securities of the
company short in expectation of covering a short sale at a purchase price lower
than that received in the short sale. The profit realized, if any, will be the
price differential between the price received from the short sale, and the cost
of
37
the securities purchased to cover the short sale. The Company may also use short
sales as a hedging technique to enhance the risk profile of the portfolio.
Selling securities short involves selling securities the Company does
not own. In order to make delivery to the purchaser, the Company must borrow
securities from a third party lender. The Company subsequently returns the
borrowed securities to the lender by delivering to the lender the securities it
receives in the transaction or by purchasing securities on the open market. The
Company must generally pledge cash with the lender equal to the market price of
the borrowed securities. This deposit may be increased or decreased in
accordance with changes in the market price of the borrowed securities. During
the period in which the securities are borrowed, the lender typically retains
the right to receive interest and dividends accruing to the securities. In
exchange, in addition to lending the securities, the lender generally pays the
Company a fee for the use of the Company's cash. This fee is based on prevailing
interest rates, the availability of the particular security for borrowing and
other market factors.
It is the intention of the Company that the Company Investments, when
fully funded, will be allocated approximately as set forth in the table below.
The value and composition of the Company Investments, however, will vary over
time and be affected by, among other things, the availability and prices of
desired assets and changing market conditions which, in the opinion of the
Investment Manager, warrant a different distribution of the Company Investments.
[Download Table]
COMPANY'S TARGET ASSET MIX
Mezzanine Investments and High Yield Debt 30%
Distressed Debt 30%
Bank Loans 20%
Equity Securities 20%
The "Company's Target Asset Mix" table above represents one possible
mix of assets. The actual portfolio composition may differ. As described above
in greater detail, the Company's actual investment in any such mix of assets may
vary significantly from time to time based on certain factors. See "--Investment
Strategy."
The Company's ability to achieve and maintain its target asset mix will
depend, among other things, upon the availability and prices of desired assets.
There can be no assurance that the Company will be successful in establishing or
maintaining any particular asset mix or that its strategy with respect to asset
mix will not change. Additionally, the Company's ability to make certain types
of investments will be subject to limitations set forth in the Indenture.
INVESTMENT STRATEGY
The Investment Manager recognizes that there is considerable pressure
to make decisions that are short-term oriented due to the short-term nature of
capital commitments and the focus of many investors on short-term performance.
The Investment Manager seeks to achieve superior risk-adjusted returns by
pursuing both longer- and shorter-term investment opportunities in high-
38
quality companies whose publicly traded securities trade at what is believed by
the Investment Manager to be a substantial discount to intrinsic value.
The Investment Manager believes that market outperformance can be
achieved by fundamental analysis combined with an understanding of how corporate
events impact a company's valuation. By using the same strategy they have
employed for 13 years, the members of the Investment Committee will seek
investment opportunities in such areas as:
o companies with pending or anticipated corporate events that are
likely to trigger the market's revaluation of a company;
o companies with unique or highly value-added products or services,
with or without continuing management;
o out-of-favor companies with visible potential operating cash flows
and/or liquidation values;
o businesses that are understandable, but may have complex legal,
operational and financial issues;
o companies with competitive positions in well-defined market
segments or niches;
o fundamentally sound operating companies with sustainable margins
that may have poorly conceived capital structures;
o companies with experienced, effective management teams with
demonstrated track records of success; and/or
o companies with strong financial and managerial controls and
efficient, cost-effective production techniques.
York Capital employs disciplined risk management techniques in an
attempt to minimize losses. York Capital manages position sizes to allocate
capital according to risk and reward profiles and liquidity objectives. York
Capital historically uses high diversification and moderate leverage in its
asset mixes.
Exploitation of Investment Opportunities. The Investment Manager will
seek investment opportunities:
o where the Investment Manager estimates that the post-restructuring
values of special situation investments exceed the current market
values of those securities;
o where the Investment Manager can make significant investments
in companies on a basis that may lead to its influencing,
directly or indirectly, the restructuring of those companies;
and/or
o where the Investment Manager identifies inefficiencies in the
marketplace.
39
Flexibility in Making Investments. An element of the Investment
Manager's strategy is a willingness to be flexible in making investments. The
Investment Manager will have the flexibility to shift the Company Investments
among all Asset Groups, thereby allowing it to invest in the opportunities
available in the market that it deems most attractive and to manage the total
amount of leverage of the Company.
Performance Consistency. The long-term goal of the Investment Manager
is to achieve consistent returns on the Company Investments. Each of the
Investment Manager's and York Capital's key objective is capital preservation.
Historically, York Capital's returns have been generally uncorrelated with the
major market indices.
Long-Term Investment Orientation. It is expected that the Company
generally will hold certain long-term investments in its portfolio for a period
of years. The proper timing of investment realizations may be critical to the
success of the Company. The Investment Manager will regularly review the
Company's investments and related market conditions in an attempt to optimize
investment returns. While the Investment Manager will have a long-term outlook,
some investments may be liquidated in the short term, and the Investment Manager
will have the flexibility to make such decisions.
Investment Analysis. The fundamental, bottom-up analysis which the
members of the Investment Committee will apply with respect to each Company
Investment, which may include the following key considerations:
o Quality of management/sponsor--experience, track record,
incentives;
o Industry outlook/barriers to entry;
o Existence of a corporate event;
o Competitive immunity/cost of production;
o Vulnerability to recession or commodity cycles;
o Visibility of cash flow/extent of free cash flow;
o Financial flexibility (liquidity, separable and saleable assets)
and debt capacity;
o Statistical/ratio analysis (including liquidation value and
industry comparison);
o Contingent liabilities (e.g., environmental, litigation);
o Strength of financial covenants (e.g., event risk protection);
o Reference checks--industry experts, customers, suppliers,
competitors; and
o Absolute and relative valuation.
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Timing Analysis. The Investment Manager believes that one of the key
factors in achieving superior returns is timing. The Investment Manager will
consider each of the following factors with respect to each Company Investment:
o Purchase strategy (analysis of when and how to obtain a position);
o Exit strategy (analysis of likely exit strategies and timing to
exit a position under best and worst case scenarios);
o Anticipated timing of events such as a restructuring, divestiture
of material assets or divisions, improved operating
environment/turnaround, addition of a key customer and
cost-cutting plans; and
o Target holding periods; and
o Investment Process.
PROCESS
The Investment Manager believes that it is unique in its approach to
sourcing and analyzing investments. York Capital's investment approach couples
fundamental, research-driven financial analysis with an experienced view of
market trends, trading strategies and risk mitigation. While York Capital is
adept at short-term trading, York Capital's successful credit and value equities
strategies are also focused on longer-term value-oriented investing. For
example, York Capital's credit group is experienced in taking large and
relatively illiquid positions and exerting effective control in situations York
Capital finds particularly attractive. York Capital's equities strategy is also
highly effective in identifying quality companies undergoing meaningful
corporate events and predicting how the market will react to those developments
over various time horizons.
York follows a rigorous investment process before entering into any
investment.
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IDEA GENERATION > IDEA ANALYSIS > IDEA REFINEMENT > TRADE EXECUTION > EXIT
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o Track financial o Liquidity Analysis o Identify catalysts/ o Analyze flows/ o Do not wait for
events trade timing volume last dollar of
o Other credit events gain
o Leverage (covenant analysis) o Identify risk/ o Adjust position to
relationships reward of each manage risk o Reevaluate if
o Valuation level of capital position not
o Industry conferences structure performing as
o Debt capacity expected
o Read trade journals o Relative vs.
and industry o Industry analysis absolute value
newsletters
o Scenario analysis/
o Look at bond runs, decision tree
question why bond
trade at new and o Speak with management
distressed levels competitors,
customers, and
consultants
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Due Diligence Process. The Investment Manager identifies potential
investments through fundamental valuation and through its extensive contacts.
The Investment Manager's investment process may include a quantitative and
qualitative assessment of an issuer's business, an evaluation of management, an
analysis of business strategy and industry trends, an in-depth examination of
financial results and projections and an assessment of the likely corporate
events that may increase the market value of the company. The Investment
Manager's due diligence process includes, in many instances, meeting with senior
management, tours of plant facilities and discussions with key industry
participants and analysts. The Investment Manager's planned due diligence
process may include, but is not limited to:
o Assessment of the outlook for the industry based on discussions
with industry participants, industry analysts, suppliers to and
customers of the industry and relevant trade group
representatives;
o Discussions with issuer management as to the business outlook,
competitive position within the industry and flexibility of
capital structure relative to business objectives;
o Analysis of fundamental asset values and enterprise value of
the issuer (absolute value as well as values based on
valuation comparisons to other industry participants) to
assess the degree to which the investment under consideration
has above average downside protection;
o Review of the issuer's core competencies and competitive
advantages and formation of a judgment as to the sustainability of
each;
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o Review of any tax, environmental, legal or regulatory
contingencies that could negatively impact the issuer's value or
ability to continue as a going concern; and
o Review of the issuer's capitalization, its financial flexibility
and debt amortization requirements, including an analysis of the
terms and covenants of the issuer's outstanding debt and equity
securities.
o After making Company Investments, the Investment Manager believes
that monitoring of financial performance and market developments
is critical to successful investment management. Such monitoring
will permit the Investment Manager to make investment decisions
quickly, should it be required to do so. Accordingly, the
Investment Manager will:
o Hold internal meetings as needed to highlight investment
developments; analyze market and financial information from
the issuers, news services and brokers to stay abreast of
developments with respect to each investment; and monitor new
opportunities presented in the market;
o Review, generally on a weekly basis, potential and existing
investments in relation to targeted "buy" and "sell"
opportunities; and
o Review progress on portfolio objectives, and prioritize attendance
at industry conferences, seminars and meetings.
Trading. A key element in maximizing investment returns is buying and
selling investments at the best available prices. The Investment Manager has
established relationships with a network of broker-dealers in the debt and
equity markets. These relationships provide the Investment Manager access to the
trading dynamics of existing or potential investments and assist in effectively
executing transactions. These relationships may also lead to the early
identification of potential investment opportunities.
REALIZATION OF INVESTMENTS
In addition to payments of principal and interest on Company
Investments, the primary ways in which the Company will realize returns are
expected to include:
o Sale of Company Investments in the secondary marketplace,
including securities obtained in restructurings;
o Sale of Company Investments back to the issuing company; and
o Exchange of Company Investments for new securities which are
subsequently sold by the Company.
CO-INVESTMENT
The Investment Manager believes that, in certain circumstances, it may
be in the best interests of the Company to be able to co-invest with other
Unregistered Funds in order to be
43
able to participate in a wider range of transactions. Currently, SEC regulations
and interpretations permit registered investment companies, such as the Company,
to co-invest with unregistered funds, such as the Unregistered Funds, that are
affiliated with the Investment Manager in publicly traded securities and in
private placements where (i) the Investment Manager negotiates only the price,
interest rate and similar price-related terms of the securities and not matters
such as covenants, collateral or management rights and (ii) each relevant
account acquires and sells the securities at the same time in pro rata amounts
(subject to exceptions approved by compliance personnel after considering the
reasons for the requested exception). The Investment Manager and the Company
plan to invest in privately placed securities, loans and other assets in which
the Investment Manager and its affiliates do not participate in the negotiation
of terms other than pricing pursuant to the terms and conditions described in
certain no-action letters issued by the SEC Staff. These terms and conditions
include the following:
The process is subject to review by an allocation committee.
The portfolio manager of an investment company is required to review
the company's investment objectives and restrictions, cash position and
other objective criteria and determine whether a purchase or a sale is
appropriate for that investment company, and not to engage in an
aggregated transaction on behalf of an investment company unless
consistent with the investment manager's best execution and other
duties to the investment company, and produce allocation statements for
each aggregated transaction before or at the time that the order is
placed that describes how the investment or proceeds will be allocated
among participants. If available amounts of the security are
insufficient to fill a purchase or sale of all participating accounts,
the orders will be filled as a pro rata portion of the allocation
statements. An order may be filled on a basis different from that
specified in the allocation statement or pro rata only if all
participants receive fair treatment, and the reason for the deviation
is recorded promptly and approved by a member of the allocation
committee at or prior to settlement. No fund or account participating
in an aggregated transaction may be favored over any other fund or
account, and each will participate at the same unit price. Transaction
costs and expenses, and any fees received, must be shared by the
participating funds and accounts on a pro rata basis according to the
amount of their participation.
However, current SEC regulations and interpretations do not permit
co-investment in private placements where the Investment Manager negotiates
non-pricing terms such as covenants, collateral and management rights. The
Company, the Investment Manager and its related companies intend to apply for an
exemption from these regulations. There are no assurances that the SEC will
grant the request. Before an exemptive order is obtained, it is expected that
the Company may choose to invest in privately placed securities, loans and other
assets in which the Investment Manager or its affiliates participate in
negotiation of terms, but not along-side other funds or accounts managed by the
Investment Manager or its affiliates. This will result in allocation of
different private investment opportunities either to the Company or instead to
other funds or accounts managed by Investment Manager and its affiliates unless
and if an exemptive order is obtained.
The exemptive relief for which the Company, the Investment Manager and
its related companies intend to apply would permit the Company to co-invest in
these privately negotiated transactions with Unregistered Funds managed by the
Investment Manager and its affiliates in
44
the following circumstances. The Company, the Investment Manager and its related
companies intend to apply for exemptive relief so that, among other things, each
time the Investment Manager proposes that an unregistered account acquire
private placement securities that are suitable for the Company, the Investment
Manager would be required to offer to the Company a pro rata amount of such
securities (based on amounts available for investment by the Company and the
unregistered accounts that the Investment Manager believes should invest in such
securities) in accordance with exemptive relief previously granted by the SEC.
In addition, the exemptive relief would enable the Company's independent
Directors to review the proposed transaction and authorize co-investment by the
Company on terms that the independent Directors find appropriate. These terms
would be provided for in the exemptive relief granted, which may include, among
other things: (i) the transaction is consistent with the Company's investment
objectives and policies; (ii) the terms of co-investment are fair to the Company
and its shareholders and do not involve overreaching; and (iii) participation by
the Company would not disadvantage the Company or be on a basis different from
or less advantageous than that of the Unregistered Funds. The independent
Directors may also approve a lower amount or determine that the Company should
not invest. In general, except as set forth in the exemptive order, follow-on
investments and disposition opportunities must be made available on a pro rata
basis and no co-investment (other than permitted follow-on investments) is
permitted where the Company, on the one hand, or Unregistered Funds advised by
the Investment Manager or an affiliate, on the other hand, already holds
securities of the issuer.
If the Company, the Investment Manager and its related companies do not
obtain an exemptive order, the Investment Manager will seek to implement
policies that would allow the Company to co-invest with the Unregistered Funds
in covered investments to the maximum extent possible in accordance with the
Investment Company Act, current SEC interpretations and other applicable
requirements. In such a case, the Investment Manager may be required to allocate
some covered investments solely to the Company and others solely to the
Unregistered Funds. The allocation process would take into account the size of
the transaction, the investable assets of each affiliated fund, the alternative
investments potentially available in the near term, prior allocations to each
fund, the expected holding period for the transaction, the remaining life of the
fund in question and issuer diversification and industry concentration matters
as well as other potential factors. The Investment Manager would not follow any
mathematical or formulaic allocation policy, but would rather make each
allocation decision based on what it considered to be in the overall best
interests of its clients in light of the factors identified by the Investment
Manager as being relevant to its allocation decision. In view of the size of the
Company and the portfolio status of the Investment Manager's and its affiliates'
other funds, the Investment Manager believes that such allocations would not be
materially adverse to the Company.
FUNDAMENTAL INVESTMENT POLICIES
The Company's investment objective (that is, seeking to achieve high
total risk-adjusted returns while attempting to minimize losses) and the
following investment restrictions are fundamental and cannot be changed without
the approval of the holders of the lesser of (1) a majority of the Company's
outstanding Common Shares and Preferred Shares voting together as a single
class, or (2) two-thirds of the Common Shares and Preferred Shares present if a
quorum of at least 50% of the total outstanding Common Shares and Preferred
Shares is present. All
45
other investment policies or practices are considered by the Company not to be
fundamental and, accordingly, may be changed without approval of the holders of
a majority of the Company's outstanding voting securities. If a percentage
restriction on investment or use of assets set forth below is adhered to at the
time a transaction is effected, later changes in percentage resulting from
changing market values will not be considered a deviation from policy. Subject
to the foregoing, the Company may not:
o borrow money or issue senior securities, except insofar as the
foregoing would not violate the Investment Company Act;
o make loans of money or property to any person, except insofar as
the foregoing would not violate the Investment Company Act;
o underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities or
the sale of its own shares or securities of its subsidiaries the
Company may be deemed to be an underwriter;
o purchase real estate or interests therein, except to the extent
that as a result of such investments the Company would not cease
to be a RIC under the Code; or
o purchase or sell commodities or commodity contracts for any
purposes except to the extent permitted by applicable law
without the Company becoming subject to registration with the
Commodity Futures Trading Commissions as a commodity pool or a
commodity pool operator.
CODES OF ETHICS AND VOTING POLICIES
The Company will adopt a code of ethics in accordance with Rule 17j-l
under the Investment Company Act. In addition, the Investment Manager has
adopted a code of ethics. Persons subject to the Investment Manager's code of
ethics are subject to, among other things, various restrictions relating to the
acquisition by them of securities. These restrictions include preauthorization
and disclosure requirements, restrictions on short term trading, and general
prohibitions on transactions in securities in certain circumstances, including:
o when in possession of inside information;
o transactions in securities of issuers on the Company's restricted
list or during specified blackout periods;
o transactions in securities at a time when the employee intends, or
know of another employee's intention, to purchase or sell that
security or an equivalent security on behalf of an advisory
client; and
o acquisitions of securities in initial public offerings.
There are also restrictions on the acquisition by persons subject to
the Investment Manager's code of ethics in private placements, which
acquisitions require the prior written approval by its chief compliance officer
and the satisfaction of certain conditions. The code of
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ethics also addresses the fiduciary duties expected of the persons subject to
the code, including confidentiality obligations, gift and corporate opportunity
policies, and restrictions on outside business activities.
The Company's code of ethics will be available for review and copying
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. The code of ethics will also be available on the EDGAR Database
on the SEC's Internet site at http://www.sec.gov, by electronic request, after
paying a duplicating fee, at the following e-mail address: publicinfo@sec.gov,
or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0 102.
Copies of the code of ethics of the Company and also the Investment Manager will
be available upon request to the Investment Manager.
The Company will adopt voting policies and procedures, which will be
approved by the Board of Directors, to guide the Investment Manager's exercise
of this responsibility on behalf of the Company and its other clients.
York Capital's managed investment funds and separate accounts are
supervised by certain members of the management team at York Capital, which may
include members of the Investment Committee. In each case, the voting is subject
to the advisory agreements of the respective funds and managed account. With
respect to shareholder governance, covenants, social issues and other votes, it
is the policy of York Capital to discuss each of these votes and issues in order
to determine its position on a case by case basis. York Capital may, upon
occasion, delegate, pursuant to its approved voting procedures, the right to
vote on particular issues to the individual monitoring that investment.
A list of voting actions taken by the Investment Manager during the
previous year with respect to securities held by the Company, as well as the
Investment Manager's voting policy, will be available upon request to the
Investment Manager.
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CAPITALIZATION OF THE COMPANY
CAPITALIZATION OF THE COMPANY
The Company will issue Common Shares, Term Preferred Shares, one Series
A-2 Preferred Share and the Notes. The following table sets forth one possible
capitalization scenario for the Company after the Closing, without deduction for
organizational and offering costs and expenses, until all debt and equity is
fully funded (although the actual capitalization of the Company at any point in
time is likely to differ due to market conditions and other factors):
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ANTICIPATED CAPITALIZATION TABLE
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TERM
COMMON PREFERRED AGGREGATE TOTAL
SHARES NOTES SHARES ($ MILLIONS)
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Closing 50% 0% 0% $202.3
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End of Month 3 25% 25% 25% $404.5
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End of Month 6 25% 25% 25% $606.7
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End of Month 9 0% 50% 50% $809.0
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COMMON SHARES
The Company is authorized to issue an unlimited number of Common
Shares. The Common Shares have no preference, preemptive, conversion, appraisal,
exchange or redemption rights, and there are no sinking fund provisions
applicable to the Common Shares. Each holder of Common Shares has one vote per
Common Share held by it on all matters subject to approval by the holders of the
Common Shares. Further, holders of Common Shares have voting rights on the
election of certain Directors together with the holders of Preferred Shares,
which shall be governed by plurality voting. When issued against payment
therefor, the Common Shares will be fully paid and nonassessable. No person has
any liability for obligations of the Company by reason of owning Common Shares,
although each person that subscribes for Common Shares is liable for the full
amount of such subscription in accordance with and subject to the terms of the
related Subscription Agreement. See "--Preferred Shares--Voting Rights."
The Company is authorized to require holders of Common Shares to make
Capital Contributions to the Company pursuant to and in accordance with the
terms of their respective Subscription Agreements.
The rights attached to the Common Shares are set forth in the Operating
Agreement. The Operating Agreement may be amended by the Board of Directors
without a vote of holders of Common Shares and Preferred Shares in any manner
that does not materially and adversely affect the holders of the Common Shares
and Preferred Shares, by the affirmative vote of not less than a majority of the
outstanding Common Shares and Preferred Shares outstanding and entitled to vote
in the case of any amendment that does adversely and materially affect the
holders of the Common Shares and Preferred Shares and by the affirmative vote of
not less than a majority of
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the outstanding Common Shares or Preferred Shares voting as a separate class in
the event of any amendment that adversely and materially affects the contract
rights of one class but not the other or affects one class materially
differently than the other class.
The Company may merge or consolidate with any other entity, or sell,
lease or exchange all or substantially all of the Company's assets upon approval
of two-thirds of the directors then in office and the affirmative vote of the
holders of not less than 67% of the Common Shares and Preferred Shares, voting
together as a single class. The Company will terminate at the end of the
Investment Period, subject to up to two one-year extensions if requested by the
Investment Manager and approved by the holders of a majority of the Common
Shares and preferred shares, voting together as a single class. The holders of
the Common Shares and Preferred Shares will also vote on the Management Fee at
the time of such extension. In addition, the Company may be terminated prior to
the expiration of its term upon the occurrence of certain events set forth in
the Operating Agreement.
The Common Shares are junior to the Preferred Shares, indebtedness of
the Company, including outstanding Notes, and other liabilities of the Company.
Prospective investors should review the terms of the Indenture and the Preferred
Shares to understand fully the extent of subordination of the Common Shares and
the limitations on distributions, voting rights and other matters imposed by the
terms of such other securities.
The Operating Agreement provides that the holders of Common Shares must
consent, pursuant to Section 565 of the Code and the Treasury Regulations
thereunder, in the event that payments or distributions to the Common Shares are
restricted under the agreements governing the Notes, any statement of
preferences with respect to the Preferred Shares or the Investment Company Act,
to treat as a dividend for U.S. federal income tax purposes (a "Consent
Dividend") any such payment or distribution that would otherwise be required to
be made in order to preserve the U.S. federal income tax status of the Company
as a RIC or to avoid the imposition of the excise tax under Section 4982 of the
Code. The Company will pay any U.S. withholding taxes arising in respect of such
Consent Dividend deemed paid to holders of Common Shares who are not U.S.
persons. In order for the Company to avail itself of the Consent Dividend
procedure, each holder of Common Shares must execute an IRS Form 972 for the
taxable year in which the Company intends to claim the Consent Dividend and must
deliver the Form 972 to the Company. The Operating Agreement provides that each
holder of Common Shares must agree to execute a Form 972 (or any successor form)
and deliver it to the Company within ten (10) calendar days after the receipt of
a written request from the Company.
If it is determined that the requisite consents for a Consent Dividend
have not been obtained from the holders of its Common Shares, but a Common Share
dividend payment or distribution would otherwise be required to be made in order
to preserve the U.S. federal income tax status of the Company as a RIC or to
avoid the imposition of the excise tax under Section 4982 of the Code, such
payment or distribution shall be distributed for the benefit of the holders of
its Common Shares and deposited into one or more escrow accounts, which will be
considered part of the Collateral. Any such amounts deposited into escrow
accounts for the benefit of the holders of Common Shares will no longer be
available to be paid or distributed to holders of the Preferred Shares. If any
amounts deposited in the escrow accounts are paid over to the holders of the
Notes under the Indenture, the holders of the Common Shares will have an
unsecured, recourse claim against the Company for any such amounts paid to such
lenders. There can be no
49
assurance that a distribution that is deposited into an escrow account will be
treated as a dividend for U.S. federal income tax purposes. If the distribution
were not treated as a dividend for U.S. federal income tax purposes, the Company
would be subject to regular corporate federal income tax (or, if the Company had
met the 90% distribution test described above without this distribution, would
be subject to the 4% excise tax under Section 4982 of the Code) for the relevant
taxable year.
PREFERRED SHARES
The Company is authorized to issue an unlimited number of preferred
shares in one or more series, with each preferred share having such liquidation
preference and other terms authorized by the Board of Directors at the time of
issuance in conformity with the Investment Company Act. The Company anticipates
that it will issue $136.0 million of Term Preferred Shares. Morgan Stanley will
act as placement agent with respect to the Term Preferred Shares. The Company
also expects to issue a single Series A-2 Preferred Share to York with a
liquidation preference of $1,000 plus accumulated but unpaid dividends. As long
as any Preferred Shares are outstanding, the Company will not, without both the
affirmative vote or consent of the holders of at least a majority of the
Preferred Shares, voting together as a separate class, and the written consent
of the Credit Enhancer (as defined below), authorize, create or issue, or
increase the authorized or issued amount of, any class or series of shares
ranking prior to or on a parity with the Term Preferred Shares with respect to
payment of dividends or the distribution of assets on liquidation, or authorize,
create or issue additional shares of or increase the authorized amount of the
Term Preferred Shares or any other preferred shares, unless, in the case of
shares of preferred shares on parity with the Term Preferred Shares, the Company
obtains confirmation from S&P (if S&P is then rating the Term Preferred Shares),
Moody's (if Moody's is then rating the Term Preferred Shares) and any substitute
rating agency (if any such substitute rating agency is then rating the Term
Preferred Shares at the request of the Company) that the issuance of such class
or series would not at that time cause such rating agency to reduce the rating
then assigned by such rating agency to the Term Preferred Shares and the
issuance of any such class or series would not cause the Company to violate or
breach any provision of the Indenture, in which case the vote or consent of the
holders of the Term Preferred Shares is not required.
Subject to applicable law, the Board of Directors may, without the vote
or consent of the shareholders of the Company, including the holders of the Term
Preferred Shares, amend, alter or repeal provisions of the Statement if the
prior written consent of the Credit Enhancer is obtained and if the Board of
Directors determines that the amendment, alteration or repeal will not
materially adversely affect the preferences, rights or powers of the Term
Preferred Shares, and is necessary to prevent a reduction in the rating of the
Notes or Term Preferred Shares of the Company, is necessary to comply with a
reasonable request of the Credit Enhancer, or is necessary to conform the
provisions of the Statement with the provisions of the Indenture. The Board of
Directors may not make any amendment, alteration or repeal as described in the
preceding sentence, however, unless the Board of Directors receives confirmation
from each rating agency then rating the Term Preferred Shares at the request of
the Company that the proposed amendment, alteration or repeal would not impair
the ratings then assigned by such rating agency to the Notes and the Term
Preferred Shares.
50
The following paragraphs briefly summarize the significant provisions
of the Preferred Shares that would affect the Common Shares. For a detailed
description of the Term Preferred Shares, refer to the offering memorandum for
the Term Preferred Shares, a copy of which may be obtained by any potential
investor upon request to the Investment Manager.
Under the Investment Company Act, the Company is generally not
permitted to issue preferred shares unless immediately after such issuance the
value of the Company's assets, less all liabilities and indebtedness of the
Company that are not senior securities (such as fees for services, due diligence
expenses and other expense accruals), is at least 200% of all indebtedness of
the Company representing senior securities plus the liquidation value of all
outstanding preferred shares. In addition, the Company is not permitted to
declare any cash dividend or other distribution on its Common Shares or
repurchase any Common Shares unless, at the time of and after giving effect to
such declaration or repurchase, the 200% Asset Coverage Ratio is met. If
preferred shares are issued, the Company intends, to the extent possible, to
purchase or redeem preferred shares or Notes from time to time to the extent
necessary in order to maintain coverage of any preferred shares of at least
200%.
As discussed above, under the provisions of the Investment Company Act,
the Company may issue debt in compliance with the 300% Asset Coverage Ratio, and
may issue debt and preferred stock in compliance with the 200% Asset Coverage
Ratio. The use of leverage creates an opportunity for increased income and gains
to the holders of Common Shares, but also creates increased risk of loss.
Accordingly, the use of leverage magnifies the potential gains and losses from
an investment and increases the risk of loss of capital. To the extent that
income derived by the Company from investments purchased with borrowed funds is
greater than the cost of borrowing, the Company's net income will be greater
than if borrowing had not been used. Conversely, if the income from investments
purchased with borrowed funds is not sufficient to cover the cost of borrowing,
the net income of the Company will be less than if borrowing had not been used,
and the amount available for ultimate distribution to the holders of Common
Shares will be reduced. See "Risk Factors -- The Company will be leveraged,
which could create an increased risk of loss to holders of the Common Shares."
In addition, the terms of the Term Preferred Shares include asset
coverage maintenance provisions which will require a reduction of indebtedness
or the redemption of Term Preferred Shares in the event of non-compliance by the
Company in certain circumstances and may also prohibit dividends and other
distributions on the Common Shares in such circumstances. In order to meet
redemption requirements, the Company may have to liquidate portfolio securities.
Such liquidations and redemptions, or reductions in indebtedness, would cause
the Company to incur related transaction costs and could result in capital
losses to the Company. Prohibitions on dividends and other distributions on the
Common Shares could impair the Company's ability to qualify as a RIC under the
Code.
Rating Agency Guidelines and Asset Coverage. As a condition to the
issuance of the Term Preferred Shares, the Term Preferred Shares must have
received prior to its initial issuance date a Aaa rating from Moody's and a AAA
rating from S&P, such rating giving effect to the Preferred Shares insurance
policy described below.
At any time, for any reason, S&P's or Moody's could withdraw or
downgrade its rating of Term Preferred Shares (after giving effect to the
Preferred Shares insurance policy), which
51
may make Term Preferred Shares less liquid in the secondary market. If Moody's
or S&P withdraws or downgrades such rating of Term Preferred Shares, the Company
may alter its portfolio or redeem Term Preferred Shares in an effort to
reinstate or improve, as the case may be, the rating, although there is no
assurance that it will be able to do so to the extent necessary to restore the
prior rating. If the Company fails to satisfy the asset coverage ratios
discussed below, the Company will be required to redeem a sufficient number of
Term Preferred Shares or repay a sufficient principal amount of Notes in order
to return to compliance with the asset coverage ratios. The Company may be
required to redeem Term Preferred Shares at a time when it is not advantageous
for the Company to make such redemption or to liquidate portfolio securities in
order to have available cash for such redemption.
The Company is required under the Investment Company Act and the
Statement to maintain asset coverage of at least 200% with respect to senior
securities which are equity shares, including the Term Preferred Shares. The
minimum required Investment Company Act asset coverage amount of 200% may be
increased or decreased if the Investment Company Act is amended.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the
Preferred Shares will be entitled to receive a preferential liquidating
distribution of $1,000 per share, plus any accumulated but unpaid dividends
(whether or not declared), before any distribution of assets is made to holders
of Common Shares. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of the Preferred Shares
will not be entitled to any further participation in any distribution of assets
by the Company. The Series A-2 Preferred Share will not be rated, but the
liquidation preference and dividends of such share will be taken into account in
the various asset coverage tests applicable to the Notes and the Term Preferred
Shares described herein.
Voting Rights. Holders of the Company's outstanding preferred shares,
including Term Preferred Shares, have one vote per share on all matters on which
they are entitled to vote.
Holders of the Company's outstanding preferred shares, including Term
Preferred Shares, voting as a separate class, are entitled to elect two of the
Company's directors. The remaining directors are elected by holders of Common
Shares and preferred shares of the Company, including Term Preferred Shares,
voting together as a single class. In addition, if at any time dividends
(whether or not declared) on outstanding preferred shares, including the Term
Preferred Shares, are due and unpaid in an amount equal to six months of
dividends, and sufficient cash or specified securities have not been deposited
with the appropriate agent for the payment of such dividends, then the number of
directors constituting the Board of Directors will be automatically increased by
the smallest number that, when added to the two directors elected exclusively by
the holders of preferred shares of the Company, including Term Preferred Shares
as described above, would constitute a majority of the Board of Directors. The
holders of preferred shares of the Company, including Term Preferred Shares,
will be entitled to elect that smallest number of additional directors at a
special meeting of shareholders held as soon as possible and at all subsequent
meetings at which directors are to be elected. The terms of office of the
persons who are directors at the time of that election will continue. If the
Company thereafter shall pay, or declare and set apart for payment, in full, all
dividends payable on all outstanding preferred shares of the Company, including
Term Preferred Shares, the special
52
voting rights stated above will cease, and the terms of office of the additional
directors elected by the holders of preferred shares of the Company, including
Term Preferred Shares, will automatically terminate.
Dividends. The holders of the Term Preferred Shares will be entitled to
receive periodic distributions at the rate provided in the Statement of
Preferences of the Term Preferred Shares, as and if declared by the Board of
Directors. The Term Preferred Shares will have a dividend rate for any
particular rate period that they are outstanding that is equal to the applicable
LIBOR (as that term is defined in the Statement of Preferences) for that rate
period plus 0.30% per annum plus an additional amount. The additional amount
(the "Additional Amount") will be payable for any rate period only if U.S.
withholding tax is required to be paid by any holder of Term Preferred Shares
with respect to an amount of dividends payable on the Term Preferred Shares for
such rate period. In the event no such withholding tax is required for a rate
period, then the Additional Amount will be zero for that rate period. In the
event an Additional Amount is payable, then the Additional Amount will be a
number which is equal to (A) 0.42857 multiplied by (B) the amount of dividends
(which could be all or some portion of the aggregate dividends payable to the
holders of the Term Preferred Shares) which are subject to withholding for the
rate period. The Additional Amount will be payable to all holders of the Term
Preferred Shares entitled to dividends for such rate period, when as and if such
dividends are declared by the Board of Directors out of funds legally available
therefor. Such Additional Amount will be made without consideration being given
to the time value of money with respect to any such withholding.
Redemption and Purchase. The terms of the Term Preferred Shares provide
that (1) they are redeemable by the Company in whole or in part at $1,000 per
share plus accumulated and unpaid dividends per share, (2) the Company may
tender for or purchase the Term Preferred Shares and (3) the Company may
subsequently reissue any shares so tendered for or purchased. Any redemption or
purchase of the Term Preferred Shares by the Company will reduce the leverage
applicable to the Common Shares, while any reissuance of shares by the Company
will increase that leverage.
Insurance Policy. Ambac Assurance Corporation (the "Credit Enhancer")
will provide credit enhancement with respect to the Term Preferred Shares
through a Preferred Shares insurance policy. Under this policy, the Credit
Enhancer will guarantee the payment of dividends on the Term Preferred Shares on
each dividend payment date, whether or not earned or declared by the Board of
Directors of the Fund, and the payment of the redemption price of the
outstanding Term Preferred Shares on the final redemption date. If the Credit
Enhancer makes a payment under the Preferred Shares insurance policy, the Credit
Enhancer will be entitled to the voting rights of the Term Preferred Shares,
which the Credit Enhancer may vote in its own interests even if contrary to the
interests of the holders of the Company's securities (including the Common
Shares); provided that the Credit Enhancer may not vote in a manner that would
adversely affect the right of the holders of the Term Preferred Shares to
receive payment. The Insurance Agreement that the Company plans to enter into
with the Credit Enhancer to provide for the Preferred Shares insurance policy
will include customary covenants and events of default, including, without
limitation, cross-defaults under the Indenture and any demands for payment under
the policy.
53
Maturity. The Term Preferred Shares will be subject to mandatory
redemption on November 15, 2013, at a redemption price equal to $1,000 per share
plus any accumulated but unpaid dividends (whether or not declared) thereon to
such date, if still outstanding on that date. The Final Redemption Date for the
Term Preferred Shares may be extended for up to two one-year periods with the
approval of both (1) the holders of 75% of the then-outstanding shares of the
Term Preferred Shares, voting as a separate class and (2) the Credit Enhancer.
The stated maturity of the Common Shares will be 2015. Accordingly, absent
extension of the maturity of the Term Preferred Shares, holders of the Term
Preferred Shares may be paid two years before holders of the Common Shares.
Series A-2 Preferred Share. The Company will also issue, as a separate
series of Preferred Shares, one share of its Series A-2 Preferred Shares to
York, having a liquidation preference of $1,000 plus accumulated but unpaid
dividends. The Carried Interest is anticipated to be paid as dividends on the
Series A-2 Preferred Share, which will be redeemable by the Company for its
liquidation preference in the event the Investment Management Agreement is
terminated. The Series A-2 Preferred Share will rank on par with the Term
Preferred Shares and will vote with them as a single class. See "Summary --
Carried Interest." The Preferred Shares insurance policy will also cover the
payment of any dividends and liquidation preference payable in respect of the
outstanding Series A-2 Preferred Share.
NOTES
The Company may issue debt (including, without limitation, the Notes)
so long as the Company is in compliance with the 300% Asset Coverage Ratio, and
may issue debt and preferred stock in compliance with the 200% Asset Coverage
Ratio. As discussed above, the use of leverage creates an opportunity for
increased income and gains to the holders of Common Shares, but also creates
increased risk of loss. To the extent that income derived by the Company from
investments purchased with borrowed funds is greater than the cost of borrowing,
the Company's net income will be greater than if borrowing had not been used.
Conversely, if the income from investments purchased with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Company will be
less than if borrowing had not been used, and the amount available for ultimate
distribution to the holders of Common Shares will be reduced. See "Risk Factors
-- The Company will be leveraged, which could create an increased risk of loss
to holders of the Common Shares."
Subject to the terms of the Indenture and the Insurance Agreement, the
Company may also 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 which otherwise might
require untimely dispositions of Company securities.
The Company expects to issue up to $268.5 million in aggregate
principal amount of the Notes. For a detailed description of the Notes, refer to
the offering memorandum for the Notes, a copy of which may be obtained by any
potential investor upon request to the Investment Manager.
Proceeds of the Notes will be available to the Company in advances
requested by the Company from time to time (each such advance, a "Borrowing").
The aggregate amount of
54
Borrowings that may be outstanding will be subject to the Over-Collateralization
Tests (as defined in the Moody's Collateral Valuation Schedule and the S&P
Collateral Valuation Schedule). The Company reserves the right, with the prior
written consent of the Credit Enhancer, to issue additional Notes in an amount
up to 25% of the maximum amount of the Commitments in effect at closing.
Rating. The Notes will be required to receive a rating from Moody's of
not less than "Aaa" and from S&P of not less than "AAA." The Company shall not
be permitted to take certain actions under the Indenture unless it can continue
to comply with the foregoing minimum ratings.
Principal Payments; Stated Maturity. The Notes will mature at par on
November 15, 2013, but the holders of at least 100% of the outstanding principal
amount of the Notes may, at their option subject to certain terms and conditions
and subject to the approval of the Credit Enhancer, exercise their right to
extend the original stated maturity pursuant to two 364 day extension options.
Unless extended, the principal of the Notes will be due and payable in full at
the original stated maturity.
Interest; Commitment Fee. The Company will be obligated to pay interest
on the outstanding principal amount of the Notes at the rates set forth in the
Indenture and a commitment fee based on the undrawn amount of the Notes.
Prepayments. The Company may prepay the Notes (in whole or in part)
without premium. The Company must make a prepayment of the Notes on any date
that the aggregate outstanding principal amount of all Borrowings under the
Notes exceeds the maximum amount of the commitments (the "Commitments")
available thereunder. In addition, the Company must make a prepayment of the
Notes when required pursuant to the Indenture in the event that the Company has
failed to satisfy the Over-Collateralization Tests.
Commitment Reduction. The Company may not terminate in full or reduce
in part the Commitments at any time prior to 5 years after the Closing unless
such termination or reduction is required to comply with the provisions of the
Investment Company Act or an event of default occurs under the Insurance
Agreement entered into by the Company with the Credit Enhancer. In addition, the
Company may terminate the commitment of any noteholder if (i) the Company is
required to pay such noteholder certain increased costs of tax gross-up amounts
as a result of a change in law and (ii) under certain circumstances, such
noteholder fails to satisfy the ratings criteria set forth in the Indenture.
After the expiration of such 5 year period, the Company may terminate in full or
reduce in part the Commitments.
Security for the Notes and Other Obligations. The Notes, certain
hedging transactions entered into by the Company, the obligations to the Credit
Enhancer in respect of the Preferred Shares insurance policy and certain other
obligations will be secured by the Collateral on a pari passu basis pursuant to
a Pledge and Intercreditor Agreement, which will provide for the distribution of
the proceeds of the Collateral in accordance with certain payment priorities
that generally provide for the payment of the amounts secured thereby.
Covenants; Events of Default. The Indenture will contain customary
covenants that will, among other things, require the Company to comply at all
times with Over-Collateralization
55
Tests, require the Company to comply at all times with all applicable law,
including, but not limited to, the Asset Coverage Ratio under the Investment
Company Act, require the Company to maintain a minimum net worth, limit the
Company's ability to issue additional equity and incur debt, limit the Company's
ability to make restricted payments, including, but not limited to, dividends in
respect of the Common Shares, limit the Company's ability to merge or
consolidate with any other entity or sell assets, prohibit the Company from
creating liens on assets, limit the Company's ability to pay investment
management fees under certain circumstances, and limit the Company's ability to
enter into certain short sale transactions. The Indenture will also contain
customary events of default, including, but not limited, failure to pay amounts
due under the Notes, breach of any representation and warranty, breach of any
covenant under the Indenture, insolvency, cross-default to certain other
indebtedness and judgment defaults.
56
RISK FACTORS
An investment in the Company involves a significant degree of risk and,
therefore, should be undertaken only by investors capable of evaluating the
risks of the Company and bearing the risks it represents. Prospective purchasers
of Common Shares should carefully consider the following risk factors in
connection with a purchase of Common Shares. The following list is not a
complete enumeration of all risks involved in connection with an investment in
the Company. There can be no assurance that the Company will be able to achieve
its investment objective or that holders of Common Shares will recoup any or all
of their investment in the Company or receive a positive return on their
capital.
INVESTMENT DECISIONS WILL BE MADE BY THE INVESTMENT MANAGER AND THE BOARD OF
DIRECTORS OF THE COMPANY AND INVESTORS IN THE COMMON SHARES MUST RELY ON THOSE
DECISIONS.
The Board of Directors will set broad policies for the Company and its
officers, and the Investment Manager will manage the day-to-day operations of
the Company, subject to the oversight of the Board of Directors. Accordingly, no
potential purchaser of Common Shares should purchase such Common Shares unless
such purchaser is willing to entrust the management of the Company to the
Investment Manager and the Board of Directors.
INVESTORS IN THE COMMON SHARES COULD EXPERIENCE A TOTAL LOSS OF THEIR INVESTMENT
IN THE COMPANY IN THE EVENT OF A DISSOLUTION.
The Common Shares represent equity interests in the Company only and
will not be insured or guaranteed by any person or entity. The Company will have
no substantial assets other than the Company Investments, substantially all of
which will initially be included in the Collateral as security for certain
creditors of the Company, including the holders of the Notes and the Credit
Enhancer, which will have a first claim on all of the Company's assets included
in the Collateral. In the event of the dissolution of the Company or otherwise,
if the proceeds of the Company's assets (after payment in full of obligations to
any holders of the Notes and of any liquidation preference to any holders of
Preferred Shares) are insufficient to repay Capital Contributions made to the
Company by the holders of the Common Shares, no other assets will be available
for the payment of any deficiency. None of the Directors, the Investment
Manager, the Placement Agent, or any of their respective affiliates, have any
liability for the repayment of capital contributions made to the Company by the
holders of Common Shares. Holders of Common Shares could experience a total loss
of their investment in the Company.
THE COMPANY WILL BE LEVERAGED, WHICH COULD CREATE AN INCREASED RISK OF LOSS TO
HOLDERS OF THE COMMON SHARES.
Under the provisions of the Investment Company Act, the Company may
issue debt so long as the Asset Coverage Ratio of the Company is at least 300%,
and may issue debt and preferred stock so long as the Asset Coverage Ratio of
the Company is at least 200%. In addition, as permitted by the Investment
Company Act, the Company may make certain limited temporary borrowings from time
to time that would be excluded from the calculations of the Asset Coverage
Ratios. The use of leverage creates an opportunity for increased returns on the
Common Shares, but also creates increased risk of loss. The use of leverage
magnifies the potential gains and losses from an investment and increases the
risk of loss of capital. To the
57
extent that income and gain derived by the Company from investments purchased
with borrowed funds is greater than the cost of borrowing, the Company's net
income will be greater than if borrowing had not been used. Conversely, if the
income and gain from investments purchased with borrowed funds is not sufficient
to cover the cost of borrowing, the net income of the Company will be less than
if borrowing had not been used, and the amount available for ultimate
distribution to the holders of Common Shares will be reduced. The extent to
which the income, gains and losses associated with leveraged investing are
increased will generally depend on the degree of leverage employed. The Company
may, under some circumstances, be required to dispose of the Company Investments
under unfavorable market conditions, thus causing the Company to recognize a
loss that might not otherwise have occurred.
If an event of default under the Indenture occurs, or compliance with
regulatory asset coverage requirements or any provision of the Statement or the
Indenture requires that certain leverage being utilized by the Company be
retired and thus Company Investments are sold, losses also may occur that might
otherwise not have occurred. In the event of such a sale of the Company
Investments, secured creditors may be contractually entitled to direct such
sales and may be expected to do so in their interest, rather than in the
interests of the holders of Common Shares. The holders of Common Shares will
incur losses if the proceeds from such a sale are insufficient, after payment in
full of amounts due and payable on borrowed amounts, including administrative
expenses, to repay all of the capital invested by holders of Common Shares. As a
result, they could experience a total or partial loss of their investment in the
Company.
PROJECTIONS RELATING TO THE COMPANY'S PERFORMANCE ARE INHERENTLY RISKY AND
ACTUAL PERFORMANCE MAY DIFFER MATERIALLY FROM ANY PROJECTION.
The Company and the Placement Agent may rely upon projections,
forecasts or estimates developed by the Investment Manager, a portfolio company
or a company in which the Investment Manager is considering an investment
concerning such company's future performance and cash flow. Projections,
forecasts and estimates are forward-looking statements and are based upon
certain assumptions. Actual events are difficult to predict and beyond the
Company's control. Actual events may differ from those assumed. Some important
factors which could cause actual results to differ materially from those in any
forward-looking statements include changes in interest rates; domestic and
foreign business, market, financial or legal conditions; differences in the
actual allocation of the Company Investments among Asset Groups from those
assumed herein; changes in the degree of leverage actually used by the Company
from time to time; the degree to which the Company Investments are hedged and
the effectiveness of such hedges; and the terms of the borrowing agreements,
among others. In addition, the degree of risk will be increased as a result of
leveraging of the Company Investments. Accordingly, there can be no assurance
that estimated returns or projections can be realized or that actual returns or
results will not be materially lower than those estimated therein.
Projections are inherently subject to uncertainty and factors beyond
the control of the Investment Manager and the portfolio company. The inaccuracy
of certain assumptions, the failure to satisfy certain financial requirements
and the occurrence of other unforeseen events could impair the ability of a
portfolio company to realize projected values and cash flow.
58
THE COMPANY WILL BE SUBJECT TO RESTRICTIONS IMPOSED BY THE INDENTURE AND THE
TERMS OF THE TERM PREFERRED SHARES, WHICH MAY INHIBIT OR PREVENT THE COMPANY
FROM MAKING VARIOUS ATTRACTIVE INVESTMENTS.
By limiting the circumstances in which the Company may borrow under the
Indenture, the Indenture in effect provides for various asset coverage, credit
quality and diversification limitations on the Company Investments. The terms of
the Indenture and the Term Preferred Shares will restrict distributions on and
repurchases of Common Shares. Such limitations may cause the Company to be
unable to make or retain certain potentially attractive investments or to be
forced to sell investments at an inappropriate time and consequently impair the
profitability or increase losses of the Company or result in adverse tax
consequences. See "Capitalization of the Company--Preferred Shares" and "Notes."
IF AN EVENT OF DEFAULT OCCURS UNDER THE INDENTURE, THE NOTEHOLDERS OR THE CREDIT
ENHANCER COULD ACCELERATE AMOUNTS DUE, WHICH COULD FORCE THE COMPANY TO INCUR
LOSSES ON SOME OF ITS INVESTMENTS, TO THE DETRIMENT OF THE HOLDERS OF THE COMMON
SHARES.
A material decline in the Company's net asset value may impair the
Company's ability to maintain required levels of asset coverage. If an event of
default occurs under the Indenture, whether related to asset coverage or
otherwise, the Noteholders, pursuant to the Indenture, or the Credit Enhancer
would be permitted to accelerate amounts due under the Indenture and could
liquidate the assets of the Company to redeem some or all of the Notes. In
addition, the Noteholders may impose limitations on the Company with respect to
the purchase or sale of investments. Such limitations may cause the Company to
be unable to make or retain certain potentially attractive investments or to be
forced to sell investments at an inappropriate time and consequently impair the
profitability or increase losses of the Company or result in adverse tax
consequences. Remedies pursued by the holders of the Notes could be adverse to
the interests of the holders of the Common Shares, and the holders of the Notes
will have no obligation to consider any possible adverse effect on such other
interests.
UNDER CERTAIN CIRCUMSTANCES THE HOLDERS OF TERM PREFERRED SHARES MAY LOSE THEIR
VOTING RIGHTS TO THE CREDIT ENHANCER, WHICH IT WOULD VOTE IN ITS OWN INTERESTS.
If the Credit Enhancer makes a payment under the Preferred Shares
insurance policy, it will be entitled to voting rights of the holders of Term
Preferred Shares in respect of their Term Preferred Shares, which the Credit
Enhancer will vote in its own interests even if contrary to the interests of the
holders of the Term Preferred Shares (provided that the Credit Enhancer may not
vote in a manner that would adversely affect the right of the holders of the
Term Preferred Shares to receive payment) and the holders of the Common Shares.
The Credit Enhancer will retain these voting rights until the dissolution of the
Company, which will, among other things, entitle it to elect at least two of the
Directors at all times after it makes a payment under the Preferred Shares
insurance policy.
THERE IS NO LIQUID MARKET FOR THE COMMON SHARES.
No market exists for the Common Shares, and none is expected to
develop. Neither the Placement Agent nor any other person is under any
obligation to make a market in the Common
59
Shares. Consequently, a purchaser must be prepared to hold the Common Shares for
an indefinite period of time or until the termination date of the Company.
THE COMMON SHARES ARE SUBJECT TO TRANSFER RESTRICTIONS, WHICH COULD INHIBIT OR
PREVENT A HOLDER FROM TRANSFERRING ITS COMMON SHARES.
The Common Shares will not be registered under the Securities Act or
any state securities laws and may not be transferred unless registered under
applicable federal and state securities laws or unless an exemption from such
laws is available. The Company has no plans, and is under no obligation, to
register the Common Shares under the Securities Act. Further, approval by the
Company of a transfer is required before any transfer may occur.
The Common Shares may be transferred only to other Qualified Investors
and only with the prior written consent of the Company, which will not be
withheld unreasonably.
THE COMPANY WILL BE YORK'S FIRST REGISTERED INVESTMENT COMPANY UNDER MANAGEMENT.
The Company is expected to be organized as a closed-end, nondiversified
registered investment company, as that term is defined under the Investment
Company Act. York has not served as an investment manager to, nor managed, a
registered investment company subject to the Investment Company Act. York
Capital and its investment professionals have no experience managing a portfolio
of assets under the constraints imposed by the Investment Company Act. These
constraints may hinder their ability to take advantage of attractive investment
opportunities and, as a result, hinder the Company in achieving its investment
objective. If the Company's registration as an investment company under the
Investment Company Act is not effective at any time, then the Company's assets
could be deemed plan assets subject to ERISA. See "Benefit Plan Investor
Considerations."
THE COMPANY'S LACK OF OPERATING HISTORY MEANS THAT THERE IS NO PERFORMANCE
HISTORY FOR A PROSPECTIVE INVESTOR TO CONSIDER.
The Company is a newly organized entity and has no prior operating
history. Accordingly, the Company has no performance history for a prospective
investor to consider. Although the investment professionals of York Capital have
experience in the types of investment activities in which the Company proposes
to engage, the nature of, and risks associated with, the Company's future
investments may differ significantly from those professionals' experience.
THE COMPANY AND THE INVESTMENT MANAGER EXPECT TO BE EXCLUDED FROM CERTAIN
REGULATION.
The Company is operated by persons who have claimed an exclusion from
the definition of a commodity pool operator under the CE Act and therefore such
persons would not be subject to regulation under the CE Act. The Investment
Manager has claimed an exclusion from the definition of a commodity trading
advisor under CFTC regulation ss. 4.6 and therefore would not be subject to
regulation under the CE Act. Accordingly, investors will not be afforded the
benefit of the protections offered by such statute or the regulations
promulgated thereunder.
60
THE COMPANY WILL BE SUBJECT TO CORPORATE-LEVEL INCOME TAX IF IT IS UNABLE TO
QUALIFY AS A RIC.
To qualify as a RIC, the Company must meet certain income source, asset
diversification and annual distribution requirements. For purposes of satisfying
the annual distribution requirement, a distribution will not qualify if it is a
"preferential" dividend (i.e., a distribution which is not fully pro rata among
shares of the same class or where there is preference to one class of stock as
compared with another class, except to the extent that such preference exists by
reason of the terms inherent in any class of stock). Although the Company
believes that distributions which comply with the terms of the Preferred Shares
and the Company's other equity interests should not create "preferential"
dividends, there can be no assurance that such distributions will not be
"preferential" dividends.
In addition, the Company will be subject to certain asset coverage
ratio requirements under the Investment Company Act and financial covenants
under the terms of the Term Preferred Shares and the Indenture that could, under
certain circumstances, restrict the Company from making distributions necessary
to qualify as a RIC. If the Company is unable to obtain cash to make such
distributions from other sources, it may fail to qualify as a RIC and thus may
be subject to corporate-level income tax. To qualify as a RIC, the Company must
also meet certain asset diversification requirements at the end of each calendar
quarter. Failure to meet these tests may result in the Company having to dispose
of certain investments in order to prevent the loss of RIC status. Because many
of the Company Investments will be in illiquid securities, any such dispositions
could be made at disadvantageous prices and may result in substantial losses. If
the Company fails to qualify as a RIC for any reason and remains or becomes
subject to corporate income tax, the resulting corporate taxes could
substantially reduce the Company's net assets, the amount of income available
for distribution and the amount of distributions. Such a failure would have a
material adverse effect on the Company.
AS A RIC, THE COMPANY WILL BE SUBJECT TO CERTAIN TAX RULES REGARDING
"MISCELLANEOUS ITEMIZED DEDUCTIONS."
The Company expects to qualify each year as a RIC for U.S. federal
income tax purposes. If the Company meets the requirements for RIC status, it
will not generally be subject to tax on any income that is distributed to the
shareholders. Amounts so distributed will generally be taxable to U.S. Holders,
either as dividends or as a "pass through" of other items from the Company. See
"Certain Federal Income Tax Aspects of an Investment in the Company."
Special rules apply, however, to "miscellaneous itemized
deductions" of RICs. A U.S. Holder that is an individual will generally be
treated both (i) as receiving a taxable dividend in the amount of its pro rata
share of such Company expenses and (ii) as paying such expenses for deduction
purposes. Deduction of such amounts will, however, be subject to the so-called
"2% floor" limitation on "miscellaneous itemized deductions" of individuals
(i.e., they will be allowable only to the extent they exceed 2% of the
taxpayer's adjusted gross income for U.S. federal income tax purposes
(generally, gross income less trade or business expenses). See "Certain Federal
Income Tax Aspects of an Investment in the Company-Taxation of Holders." The
Company expects to incur expenses that qualify as "miscellaneous itemized
deductions" in most or all years. Thus, the 2% floor may result in "phantom
income" to individual U.S. holders, which will result in the inclusion in
taxable income of amounts in excess of actual cash
61
distributions. There are exceptions to the 2% limitation, including exceptions
for "publicly offered" RICs and for expenses incurred in connection with a trade
or business, which may apply to the Company. Individual U.S. holders are advised
to consult with their own tax advisors as to the application of the 2% floor to
expenses of the Company.
THE COMPANY'S ASSET MIX WILL INCLUDE PRIMARILY HIGH RISK INVESTMENTS, AND THE
COMPANY COULD INCUR LOSSES ON SOME OR ALL OF THEM.
General. The Company will have broad discretion in making Company
Investments. The Company Investments will generally consist of debt obligations
and other securities and assets that present significant risks as a result of
business, financial, market and legal uncertainties. There can be no assurance
that the Investment Manager will correctly evaluate the nature and magnitude of
the various factors that could affect the value of and return on the Company
Investments. Prices of the Company Investments may be volatile, and a variety of
other factors that are inherently difficult to predict, such as domestic or
international economic and political developments, may significantly affect the
results of the Company's activities and the value of the Company Investments.
The Company's performance over a particular period may not necessarily be
indicative of the results that may be expected in future periods. Similarly, the
past performance of the Investment Manager and its affiliates may not
necessarily be indicative of the results the Investment Manager may be able to
achieve with the Company Investments in the future.
Mezzanine Investments and High Yield Debt. A significant portion of the
Company Investments will consist of investments that may generally be
characterized as either "high yield securities" or "mezzanine investments."
Mezzanine investments of the type in which the Company intends to invest are
primarily privately negotiated subordinated debt and equity securities issued in
connection with leveraged transactions, such as management buyouts,
acquisitions, refinancings, recapitalizations and later stage growth capital
financings, and are generally rated below investment-grade. Mezzanine
investments may also include investments with equity participation features such
as warrants, convertible securities, senior equity investments and common stock.
Mezzanine investments are subject to the same risks described below in the case
of high yield securities, and also may be subject to risks associated with
illiquid investments, since there will usually be relatively few holders of any
particular mezzanine investment.
High yield securities are expected to be rated below investment-grade
by one or more nationally recognized statistical rating organizations or will be
unrated but of comparable credit quality to obligations rated below
investment-grade, and have greater credit and liquidity risk than more highly
rated obligations. High yield securities are generally unsecured and may be
subordinate to other obligations of the obligor. The lower rating of high yield
securities reflects a greater possibility that adverse changes in the financial
condition of the issuer or in general economic conditions (including, for
example, a substantial period of rising interest rates or declining earnings) or
both may impair the ability of the issuer to make payment of principal and
interest. Many issuers of high yield securities are highly leveraged, and their
relatively high debt-to-equity ratios create increased risks that their
operations might not generate sufficient cash flow to service their obligations.
Overall declines in the below investment-grade bond and other markets may
adversely affect such issuers by inhibiting their ability to refinance their
obligations at maturity.
62
High yield securities are often issued in connection with leveraged
acquisitions or recapitalizations in which the issuers incur a substantially
higher amount of indebtedness than the level at which they had previously
operated. High yield securities that are debt instruments have historically
experienced greater default rates than has been the case for investment-grade
securities. The Company may also invest in equity securities issued by entities
whose obligations are unrated or are rated below investment-grade.
The Company will be authorized to invest in obligations of issuers
which are generally trading at significantly higher yields than had been
historically typical of the applicable issuer's obligations. Such investments
may include debt obligations that have a heightened probability of being in
covenant or payment default in the future. Such investments generally are
considered speculative. The repayment of defaulted obligations is subject to
significant uncertainties. Defaulted obligations might be repaid only after
lengthy workout or bankruptcy proceedings, during which the issuer might not
make any interest or other payments. Typically such workout or bankruptcy
proceedings result in only partial recovery of cash payments or an exchange of
the defaulted security for other debt or equity securities of the issuer or its
affiliates, which may in turn be illiquid or speculative.
High yield securities purchased by the Company will be subject to
certain additional risks to the extent that such obligations may be unsecured
and subordinated to substantial amounts of senior indebtedness, all or a
significant portion of which may be secured. Moreover, such obligations
purchased by the Company may not be protected by financial covenants or
limitations upon additional indebtedness.
Distressed Debt. The Company will be authorized to invest in the
securities and other obligations of distressed and bankrupt issuers, including
debt obligations that are in covenant or payment default. Such investments
generally trade significantly below par and are considered speculative. The
repayment of defaulted obligations is subject to significant uncertainties.
Defaulted obligations might be repaid only after lengthy workout or bankruptcy
proceedings, during which the issuer might not make any interest or other
payments. Typically such workout or bankruptcy proceedings result in only
partial recovery of cash payments or an exchange of the defaulted obligation for
other debt or equity securities of the issuer or its affiliates, which may in
turn be illiquid or speculative.
There are a number of significant risks inherent in the bankruptcy
process. First, many events in a bankruptcy are the product of contested matters
and adversarial proceedings and are beyond the control of the creditors. While
creditors are generally given an opportunity to object to significant actions,
there can be no assurance that a bankruptcy court in the exercise of its broad
powers would not approve actions that would be contrary to the interests of the
Company. Second, the effect of a bankruptcy filing on an issuer may adversely
and permanently affect the issuer. The issuer may lose its market position and
key employees and otherwise become incapable of restoring itself as a viable
entity. If for this or any other reason the proceeding is converted to a
liquidation, the value of the issuer may not equal the liquidation value that
was believed to exist at the time of the investment. Third, the duration of a
bankruptcy proceeding is difficult to predict. A creditor's return on investment
can be adversely affected by delays while the plan of reorganization is being
negotiated, approved by the creditors and confirmed by the bankruptcy court and
until it ultimately becomes effective. Fourth, the administrative costs in
connection with a bankruptcy proceeding are frequently high and would be paid
out of the
63
debtor's estate prior to any return to creditors. For example, if a
proceeding involves protracted or difficult litigation, or turns into a
liquidation, substantial assets may be devoted to administrative costs. Fifth,
bankruptcy law permits the classification of "substantially similar" claims in
determining the classification of claims in a reorganization. Because the
standard for classification is vague, there exists the risk that the Company's
influence with respect to the class of securities or other obligations it owns
can be lost by increases in the number and amount of claims in that class or by
different classification and treatment. Sixth, in the early stages of the
bankruptcy process it is often difficult to estimate the extent of, or even to
identify, any contingent claims that might be made. Seventh, especially in the
case of investments made prior to the commencement of bankruptcy proceedings,
creditors can lose their ranking and priority if they exercise "domination and
control" over a debtor and other creditors can demonstrate that they have been
harmed by such actions. Eighth, certain claims that have priority by law (for
example, claims for taxes) may be substantial.
In any investment involving distressed debt obligations, there exists
the risk that the transaction involving such debt obligations will be
unsuccessful, take considerable time or will result in a distribution of cash or
a new security or obligation in exchange for the distressed debt obligations,
the value of which may be less than the Company's purchase price of such debt
obligations. Furthermore, if an anticipated transaction does not occur, the
Company may be required to sell its investment at a loss. Given the substantial
uncertainties concerning transactions involving distressed debt obligations in
which the Company will invest, there is a potential risk of loss by the Company
of its entire investment in any particular investment.
Investments in companies operating in workout modes or under Chapter 11
of the Bankruptcy Code are also, in certain circumstances, subject to certain
additional liabilities which may exceed the value of the Company's original
investment in a company. For example, under certain circumstances, creditors who
have inappropriately exercised control over the management and policies of a
debtor may have their claims subordinated or disallowed or may be found liable
for damages suffered by parties as a result of such actions. The Investment
Manager's active management style may present a greater risk in this area than
would a more passive approach. In addition, under certain circumstances,
payments to the Company and distributions by the Company to its shareholders or
payments on the debt may be reclaimed if any such payment is later determined to
have been a fraudulent conveyance or a preferential payment. See "Risk
Factors--Various Company Investments could be alleged to be fraudulent
conveyances."
The Investment Manager on behalf of the Company may participate on
committees formed by creditors to negotiate with the management of financially
troubled companies that may or may not be in bankruptcy or may negotiate
directly with debtors with respect to restructuring issues. If the Company does
choose to join a committee, the Company would likely be only one of many
participants, all of whom would be interested in obtaining an outcome that is in
their individual best interests. There can be no assurance that the Company
would be successful in obtaining results most favorable to it in such
proceedings, although the Company may incur significant legal and other expenses
in attempting to do so. As a result of participation by the Company on such
committees, the Company may be deemed to have duties to other creditors
represented by the committees, which might thereby expose the Company to
liability to such other creditors who disagree with the Company's actions.
Participation by the
64
Company on such committees may cause the Company to be
subject to certain restrictions on its ability to trade in a particular
investment and may also make the Company an "insider" for purposes of the
federal securities laws. Either circumstance will restrict the Company's ability
to trade in or acquire additional positions in a particular investment when it
might otherwise desire to do so.
Bank Loans. A portion of the Company Investments may consist of loans
and participations therein originated by banks and other financial institutions.
The Company Investments may include loans of a type generally incurred by
borrowers in connection with highly leveraged transactions, often to finance
internal growth, acquisitions, mergers or stock purchases, or for other reasons.
As a result of the additional debt incurred by the borrower in the course of the
transaction, the borrower's creditworthiness is often judged by the rating
agencies to be below investment grade. Such loans are typically private
corporate loans which are negotiated by one or more commercial banks or
financial institutions and syndicated among a group of commercial banks and
financial institutions. In order to induce the lenders to extend credit and to
offer a favorable interest rate, the borrower often provides the lenders with
extensive information about its business which is not generally available to the
public.
Bank loans are typically at the most senior level of the capital
structure, and are often secured by specific collateral, including, but not
limited to, trademarks, patents, accounts receivable, inventory, equipment,
buildings, real estate, franchises and common and preferred stock of the obligor
or its affiliates. Bank loans often contain restrictive covenants designed to
limit the activities of the borrower in an effort to protect the right of
lenders to receive timely payments of principal and interest. Such covenants may
include restrictions on dividend payments, specific mandatory minimum financial
ratios, limits on total debt and other financial tests. Bank loans usually have
shorter terms than subordinated obligations and may require mandatory
prepayments from excess cash flow, asset dispositions and offerings of debt
and/or equity securities. The bank loans and other debt obligations to be
acquired by the Company in this Asset Group are likely to be below
investment-grade. For a discussion of the risks associated with below
investment-grade investments, see "--Mezzanine Investments and High Yield Debt"
above.
The Company may acquire interests in bank loans and other debt
obligations either directly (by way of sale or assignment) or indirectly (by way
of participation). The purchaser of an assignment typically succeeds to all the
rights and obligations of the assigning institution and becomes a lender under a
credit agreement with respect to the debt obligation; however, its rights can be
more restricted than those of the assigning institution. A participation
interest in a portion of a debt obligation typically results in a contractual
relationship only with the institution participating out the interest, not with
the borrower. In purchasing participations, the Company generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement, nor any rights of set-off against the borrower, and the Company may
not directly benefit from the collateral supporting the debt obligation in which
it has purchased the participation. As a result, the Company will be exposed to
the credit risk of both the borrower and the institution selling the
participation.
Purchasers of bank loans are predominantly commercial banks, investment
funds and investment banks. As secondary market trading volumes increase, new
bank loans frequently adopt standardized documentation to facilitate loan
trading which should improve market
65
liquidity. There can be no assurance, however, that future levels of supply and
demand in bank loan trading will provide an adequate degree of liquidity or that
the current level of liquidity will continue. Because of the provision to
holders of such loans of confidential information relating to the borrower, the
unique and customized nature of the loan agreement, and the private syndication
of the loan, bank loans are not as easily purchased or sold as a publicly traded
security, and historically the trading volume in the bank loan market has been
small relative to the high yield debt market.
Equity Securities. The Company will also be permitted to invest in
common and preferred stock and other equity securities, including both public
and private equity securities. Equity securities generally involve a high degree
of risk and will be subordinate to the debt securities and other indebtedness of
the issuers of such equity securities. Prices of equity securities generally
fluctuate more than prices of debt securities and are more likely to be affected
by poor economic or market conditions. In some cases, the issuers of such equity
securities may be highly leveraged or subject to other risks such as limited
product lines, markets or financial resources. In addition, some of these equity
securities may be illiquid. Because of perceived or actual illiquidity or
investor concerns regarding leveraged capitalization, these securities often
trade at significant discounts to otherwise comparable investments or are not
readily tradable. These securities generally do not produce current income for
the Company and may also be speculative. In addition, actual and perceived
accounting irregularities may cause dramatic price declines in the equity
securities of companies reporting such irregularities or that are rumored to be
subject to accounting irregularities. The Company may experience a substantial
or complete loss on individual equity securities.
THE COMPANY INVESTMENTS MAY BE CONCENTRATED IN INDUSTRIES OR ISSUERS.
The Company is required, at the end of each quarter, subject to certain
exceptions, to have (1) no more than 20% of the value of the Company's
consolidated gross assets invested in the securities of any single issuer or
affiliated issuers, and (2) no more than 50% of the value of the Company's
consolidated gross assets invested in the securities of issuers representing, in
the case of any single issuer, more than 5% of the Company's consolidated gross
assets, or more than 10% of that issuer's voting securities. The Investment
Manager, moreover, intends to follow a general policy of seeking to spread the
Company's capital among a number of industries and issuers. Notwithstanding
these facts, however, the Investment Manager may depart from its general policy
from time to time and may hold a few, relatively large industry positions in
relation to the Company's capital. The result of such concentration of
investments is that a loss in any such position could materially reduce the
Company's capital.
HISTORICAL RETURNS ACHIEVED IN OTHER FUNDS AND ACCOUNTS MANAGED BY YORK CAPITAL
ARE NOT NECESSARILY INDICATIVE OF RETURNS IN COMPANY INVESTMENTS.
The prior investment results and returns achieved for other funds and
accounts managed by York Capital and related entities may not be indicative of
the Company's investment results. The nature of, and risk associated with, the
Company may differ substantially from those investments and strategies
undertaken historically by York Capital. In some instances, return rates
targeted by the Company may be less than the historical results of York Capital.
In addition, market conditions and investment opportunities may not be the same
for the Company as they may have been for other funds and accounts managed by
York Capital and related
66
entities, and may be less favorable. Therefore, there can be no assurance that
the Company's assets will perform as well as the past investments managed by
York Capital. In view of the current geopolitical situation, it is possible that
significant disruptions in, or historically unprecedented effects on, the
financial markets and/or the businesses in which the Company expects to invest
may occur, which could diminish any relevance the historical performance data of
those other funds may have to the future performance of the Company.
THE DIVIDEND RATE PAYABLE TO HOLDERS OF TERM PREFERRED SHARES MAY DECREASE THE
AMOUNT OF FUNDS AVAILABLE TO HOLDERS OF THE COMMON SHARES.
The dividend rate the Company has agreed to pay to holders of Term
Preferred Shares includes an additional amount if U.S. withholding tax is
required to be paid by any holder of Term Preferred Shares. This decreases the
amount of funds available to repay Capital Contributions made to the Company by
the holders of the Common Shares in the event of the dissolution of the Company
or otherwise. This also decreases the amount of funds available to the Company
for investment.
INCREASES IN ASSETS UNDER MANAGEMENT BY YORK CAPITAL MAY AFFECT INVESTMENT
DECISIONS.
York Capital and its affiliates have not presently agreed to limit the
amount of additional assets they may manage and they will continue to seek major
new accounts. From time to time, York Capital may close one or more of its
investment vehicles to new investments based on market conditions and perceived
opportunities. The more assets under management by York Capital and its
affiliates, the more difficult it may be for York to invest profitably for the
Company because of the difficulty of trading larger positions without adversely
affecting prices and performance of and managing risk associated with larger
positions. In addition, there can be no assurance that appropriate investment
opportunities will be available to accommodate future increases in assets under
management which may require York to modify its investment decisions for the
Company because it cannot deploy all the assets in the manner it desires. York
and its affiliates, however, will periodically evaluate their staffing needs
commensurate with the growth of assets under management and intends to add staff
as needed to accommodate such growth.
THE COMPANY INVESTMENTS COMPRISED OF DEBT OBLIGATIONS ARE SUBJECT TO CREDIT AND
INTEREST RATE RISKS.
Debt portfolios are subject to credit and interest rate risks. "Credit
risk" refers to the likelihood that an issuer will default in the payment of
principal and/or interest on an instrument. Financial strength and solvency of
an issuer are the primary factors influencing credit risk. In addition, lack or
inadequacy of collateral or credit enhancement for a debt instrument may affect
its credit risk. Credit risk may change over the life of an instrument, and debt
obligations which are rated by rating agencies are often reviewed and may be
subject to downgrade. "Interest rate risk" refers to the risks associated with
market changes in interest rates. Interest rate changes may affect the value of
a debt instrument indirectly (especially in the case of fixed rate securities)
and directly (especially in the case of instruments whose rates are adjustable).
In general, rising interest rates will negatively impact the price of a fixed
rate debt instrument and falling interest rates will have a positive effect on
price. Adjustable rate instruments also react to interest rate changes in a
similar manner although generally to a lesser degree (depending,
67
however, on the characteristics of the reset terms, including the index chosen,
frequency of reset and reset caps or floors, among other factors). Interest rate
sensitivity is generally more pronounced and less predictable in instruments
with uncertain payment or prepayment schedules. In addition, interest rate
increases generally will increase the interest carrying costs to the Company of
borrowed securities and leveraged investments.
An unstable geopolitical climate and continued threats of terrorism
could have a material effect on general economic conditions, market conditions
and market liquidity. A negative impact on economic fundamentals and consumer
confidence may increase the risk of default of particular Company Investments,
negatively impact market value, increase market volatility, cause credit spreads
to widen and reduce liquidity, all of which could have an adverse effect on the
investment performance of the Company. No assurance can be given as to the
effect of these events on the value of or markets for Company Investments.
THE COMPANY INVESTMENTS ARE ILLIQUID, AND AS A RESULT, THE INVESTMENT MANAGER
MAY NOT BE ABLE TO EXECUTE AN EXIT STRATEGY WITH RESPECT TO SUCH COMPANY
INVESTMENTS ON FAVORABLE TERMS IN A TIMELY FASHION OR AT ALL.
The market value of Company Investments (including those in the
Collateral) will fluctuate with, among other things, changes in market rates of
interest, general economic conditions, economic conditions in particular
industries, the condition of financial markets and the financial condition of
the issuers of Company Investments. In addition, the lack of an established,
liquid secondary market for many of the Company Investments may have an adverse
effect on the market value of Company Investments and on the Company's ability
to dispose of them. Furthermore, Company Investments will be subject to certain
transfer restrictions that may also contribute to illiquidity. Therefore, no
assurance can be given that, if the Company is determined to dispose of a
particular investment, it could dispose of such investment at the previously
prevailing market price.
A portion of the Company's investments will consist of securities that
are subject to restrictions on resale by the Company for reasons including that
they were acquired in a "private placement" transaction or that the Company is
deemed to be an affiliate of the issuer of such securities. Generally, the
Company will be able to sell such securities without restriction to other large
institutional investors but may be restrained in its ability to sell them to
other investors. If restricted securities are sold to the public, the Company
may be deemed to be an underwriter or possibly a controlling person with respect
thereto for the purposes of the Securities Act and be subject to liability as
such under the Securities Act.
THE SUCCESS OF THE COMPANY DEPENDS ON THE INVESTMENT MANAGER, AND THE LOSS OF
ONE OR MORE INVESTMENT PROFESSIONALS BY THE INVESTMENT MANAGER COULD HARM THE
COMPANY.
The success of the Company will be highly dependent on the financial
and managerial expertise of the Investment Manager. See "Management." The loss
of one or more of the members of the Investment Committee could have a material
adverse effect on the performance of the Company. Although the Investment
Manager and the members of the Investment Committee will devote a significant
amount of their respective efforts to the Company, they actively manage
investments for other clients and are not required to and will not devote all of
their time to the Company's affairs.
68
THE COMPANY MAY NOT OBTAIN EXEMPTIVE RELIEF FROM THE SEC AND WOULD NOT BE
PERMITTED TO CO-INVEST WITH RELATED PARTIES.
As explained above in the section captioned "Investment
Program--Co-Investment," the Company, the Investment Manager and its related
companies intend to apply to the SEC for exemptive relief to enable the Company
, the Investment Manager and its related companies to co-invest with
Unregistered Funds in privately placed securities. There are no assurances that
the Company, the Investment Manager and its related companies will receive the
requested relief. If such relief is not obtained, the Investment Manager may be
required to allocate some covered investments solely to the Company and others
solely to the Unregistered Funds. Although the Company does not anticipate that
this would have a material adverse effect on the Company, it could have an
adverse effect on the speed at which the Company is able to invest its assets
and on the performance of the Company.
THE INVESTMENT MANAGER'S STRATEGIES TO HEDGE INTEREST RATE RISK MAY NOT BE
SUCCESSFUL.
The Investment Manager is authorized to use various investment
strategies to hedge interest rate risks. These strategies are generally accepted
as portfolio management techniques and are regularly used by many investment
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur. The Investment Manager may use any or all such types of interest rate
hedging transactions at any time and no particular strategy will dictate the use
of one transaction rather than another. The choice of any particular interest
rate hedging transactions will be a function of numerous variables, including
market conditions.
Although the Investment Manager intends to engage in interest rate
hedging transactions only for hedging and risk management purposes and not for
speculation, use of interest rate hedging transactions involves certain risks.
These risks include (i) the possibility that the market will move in a manner or
direction that would have resulted in gain for the Company had interest rate
hedging transactions not been utilized, in which case it would have been better
had the Company not engaged in the interest rate hedging transactions, (ii) the
risk of imperfect correlation between the risk sought to be hedged and the
interest rate hedging transactions utilized and (iii) potential illiquidity for
the hedging instrument utilized, which may make it difficult for the Company to
close out or unwind one or more interest rate hedging transactions.
The Company is also authorized to enter into certain hedging and short
sale transactions, referred to herein as "Defensive Hedge Transactions," for the
purpose of protecting the market value of a Company Investment for a period of
time without having to currently dispose of such Company Investment. Such
Defensive Hedge Transactions may be entered into when the Company is legally
restricted from selling a Company Investment or when the Company otherwise
determines that it is advisable to decrease its exposure to the risk of a
decline in the market value of a Company Investment. There can be no assurance
that the Company will accurately assess the risk of a market value decline with
respect to a Company Investment or enter into an appropriate Defensive Hedge
Transaction to protect against such risk. Furthermore, the Company is not
obligated to enter into any Defensive Hedge Transaction.
The Company may from time to time employ various investment programs
including the use of derivatives, short sales, swap transactions, securities
lending agreements and repurchase
69
agreements. There can be no assurance that any such investment program will be
undertaken successfully.
THE COMPANY MAY ENTER INTO SPECULATIVE HEDGING TRANSACTIONS WHICH MAY NOT BE
PROFITABLE.
In addition to hedging transactions entered into for the purpose of
interest rate hedging and Defensive Hedge Transactions, the Company is also
authorized to make investments in the form of hedging and short sale
transactions. These investments are more generally known as total rate of return
swaps or credit derivatives. These transactions generally provide for the
transfer from one counterparty to another of certain credit risks inherent in
the ownership of a financial asset such as a bank loan or a high yield security.
Such risks include, among other things, the risk of default and insolvency of
the obligor of such asset, the risk that the credit of the obligor or the
underlying collateral will decline or that credit spreads for like assets will
change (thus affecting the market value of the financial asset). The transfer of
credit risk pursuant to a credit derivative may be complete or partial, and may
be for the life of the related asset or for a shorter period. Credit derivatives
may be used as a risk management tool for a pool of financial assets, providing
the Company with the opportunity to gain or reduce exposure to one or more
reference loans or other financial assets (each, a "Reference Asset") without
actually owning or selling such assets in order, for example, to increase or
reduce a concentration risk or to diversify a portfolio. Conversely, credit
derivatives may be used by the Company to reduce exposure to an owned asset
without selling it in order, for example, to maintain relationships with
clients, avoid difficult transfer restrictions, manage illiquid assets or hedge
declining credit quality of the financial asset.
The Company would typically enter into these transactions in order to
permit the Company to realize the same or similar economic benefit of owning one
or more Reference Assets on a leveraged basis. However, because the Company
would not own the Reference Assets, the Company may not have any voting rights
with respect to the Reference Assets, and in such cases all decisions related to
the obligors on the Reference Assets, including whether to exercise certain
remedies, will be controlled by the swap counterparties. In addition, the
Company will not benefit from general rights applicable to the holders of the
Reference Assets, such as the right to indemnity and rights of setoff. The
economic performance of the Reference Assets will largely depend upon the
ability of the actual lenders or holders or their agents or trustees to
administer the Reference Assets. Moreover, in monitoring and enforcing the
lenders' or holders' rights under related documentation and in consenting to or
proposing amendments to the terms included in such documentation, the actual
lenders or holders will not have any obligation to consider the economic
interests of the Company.
Total rate of return swaps and other credit derivatives are subject to
many of the same types of risks described above in "--The Investment Manager's
strategies to hedge interest rate risk may not be successful." For example, in
the event that the Company enters into a credit derivative with a counterparty
who subsequently becomes insolvent or files a bankruptcy case, the credit
derivative may be terminated in accordance with its terms and the Company's
ability to realize its rights under the credit derivative could be adversely
affected.
Total rate of return swaps and other credit derivatives are a
relatively recent development in the financial markets. Consequently, there are
certain legal, tax and market uncertainties that
70
present risks in entering into such total rate of return swaps and other credit
derivatives. There is currently little or no case law or litigation
characterizing total rate of return swaps or other credit derivatives,
interpreting their provisions, or characterizing their tax treatment.
In addition, additional regulations and laws may apply to total rate of return
swaps or other credit derivatives that have not heretofore been applied or in
existence. There can be no assurance that future decisions construing similar
provisions to those in any swap agreement or other related documents or
additional regulations and laws will not have a material adverse effect on the
Company.
The use of leverage will significantly increase the sensitivity of the
market value of the total rate of return swaps or other credit derivatives to
changes in the market value of the Reference Assets. The Reference Assets are
subject to the risks related to the credit of their underlying obligors. These
risks include the possibility of a default or bankruptcy of the obligors or a
claim that the pledging of collateral to secure a loan constituted a fraudulent
conveyance or preferential transfer that can be subordinated to the rights of
other creditors of the obligors or nullified under applicable law. See "--The
Company's asset mix will include primarily high risk investments, and the
Company could incur losses on some or all of them," "--The Company could be
subject to allegations of lender liability and equitable subordination, which
could require the Company to incur expense defending its actions," and
"--Various Company Investments could be alleged to be fraudulent conveyances."
THE COMPANY MAY ENGAGE IN SELLING SECURITIES SHORT, WHICH CREATES THE RISK OF
LOSING AN AMOUNT GREATER THAN THE INITIAL INVESTMENT IN A RELATIVELY SHORT TIME.
A short sale involves the theoretically unlimited risk of an increase in the
market price of the securities sold short, which could theoretically expose the
Company to an unlimited loss. The Indenture governing the Notes limits the
amount of equity securities borrowed in connection with Short Sale Transactions
to no more than the greater of 15% of Total Capitalization (as defined in
Appendix C and Appendix D) of the Company and 15% of the net asset value of the
Company.
MEMBERS OF THE INVESTMENT COMMITTEE MAY HAVE ACCESS TO CERTAIN NON-PUBLIC
INFORMATION WITH RESPECT TO ISSUERS IN WHICH THE COMPANY INVESTS WHICH MAY
AFFECT THE ABILITY OF THE COMPANY TO SELL COMPANY INVESTMENTS AT CERTAIN TIMES.
It is anticipated that the Company, through the members of the
Investment Committee, will be represented on the boards of some of the companies
in which the Company makes investments (although the Company has no obligation
to seek representation on any such boards). While such representation is
important to the Investment Manager's investment strategy and should enhance the
Investment Manager's ability to manage Company Investments, it may also have the
effect of impairing the ability of the Company to sell the related Company
Investments when, and upon the terms, it might otherwise desire, including as a
result of applicable securities laws. Under its current policies, the Investment
Manager restricts members of the Investment Committee from investing in
investments under the Investment Committee's consideration.
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THE COMPANY MAY BE SUBJECT TO LITIGATION RELATING TO ITS INVESTMENT ACTIVITIES.
The Company's investment activities subject it to the normal risks of
becoming involved in litigation by third parties. This risk is somewhat greater
where the Company exercises control or significant influence over a company's
direction, including as a result of board participation. The expense of
defending against claims made against the Company by third parties and paying
any amounts pursuant to settlements or judgments would, to the extent that (i)
the Company has not been able to protect itself through indemnification or other
rights against the portfolio company, (ii) the Company is not entitled to such
protections or (iii) the portfolio company is not solvent, be borne by the
Company pursuant to indemnification obligations and reduce net assets. The
Directors, the Investment Manager and others are indemnified by the Company in
connection with such litigation, subject to certain conditions.
THE COMPANY COULD BE SUBJECT TO ALLEGATIONS OF LENDER LIABILITY AND EQUITABLE
SUBORDINATION, WHICH COULD REQUIRE THE COMPANY TO INCUR EXPENSE DEFENDING ITS
ACTIONS.
In recent years, a number of judicial decisions in the United States
have upheld the right of borrowers to sue lending institutions on the basis of
various evolving legal theories (collectively termed "lender liability").
Generally, lender liability is founded upon the premise that an institutional
lender has violated a duty (whether implied or contractual) of good faith and
fair dealing owed to the borrower or has assumed a degree of control over the
borrower resulting in creation of a fiduciary duty owed to the borrower or its
other creditors or shareholders. Because of the nature of certain of the Company
Investments, the Company could 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 lending institution (i) intentionally
takes an action that results in the under capitalization of a borrower to the
detriment of other creditors of such borrower, (ii) engages in other inequitable
conduct to the detriment of such other creditors, (iii) engages in fraud with
respect to, or makes misrepresentations to, such other creditors or (iv) uses
its influence to dominate or control a borrower to the detriment of the other
creditors of such borrower, a court may elect to subordinate the claim of the
offending lending institution to the claims of the disadvantaged creditor or
creditors, a remedy called "equitable subordination." Because of the nature of
certain of the Company Investments and investments in an obligor by affiliates
of the Company, the Company could be subject to claims from creditors of an
obligor that Company Investments issued by such obligor that are held by the
Company should be equitably subordinated. A significant number of Company
Investments will involve investments in which the Company would not be the lead
creditor. It is, accordingly, possible that lender liability or equitable
subordination claims affecting the Company Investments could arise without the
direct involvement of the Company.
VARIOUS COMPANY INVESTMENTS COULD BE ALLEGED TO BE FRAUDULENT CONVEYANCES.
Various federal and state laws enacted for the protection of creditors
may apply to the Company Investments by virtue of the Company's role as a
creditor with respect to such Company Investments. If a court in a lawsuit
brought by an unpaid creditor or representative of creditors of a borrower, such
as a trustee in bankruptcy or the borrower as debtor-in-possession, were to find
that the borrower did not receive fair consideration or reasonably equivalent
value
72
for incurring indebtedness evidenced by a Company Investment and the grant
of any security interest or other lien securing such Company Investment, and,
after giving effect to the incurring of such indebtedness, the borrower (i) was
insolvent, (ii) was engaged in a business for which the assets remaining in such
borrower constituted unreasonably small capital or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
mature, such court could invalidate, in whole or in part, such indebtedness and
such security interest or other lien as fraudulent conveyances, subordinate such
indebtedness to existing or future creditors of the borrower or recover amounts
previously paid by the borrower (including to the Company) in satisfaction of
such indebtedness or proceeds of such security interest or other lien previously
applied in satisfaction of such indebtedness. In addition, in the event of the
insolvency of an issuer of a Company Investment, payments made on the Company
Investment could be subject to avoidance as a "preference" if made within a
certain period of time (which may be as long as one year) before insolvency
depending on a number of factors, including the amount of equity of the borrower
owned by the Company and its affiliates and any contractual arrangements between
the borrower, on the one hand, and the Company and its affiliates, on the other
hand. The measure of insolvency for purposes of the foregoing will vary
depending on the law of the jurisdiction which is being applied. Generally,
however, a borrower would be considered insolvent at a particular time if the
sum of its debts was greater than all of its property at a fair valuation or if
the present fair saleable value of its assets was then less than the amount that
would be required to pay its probable liabilities on its existing debts as they
became absolute and matured. There can be no assurance as to what standard a
court would apply in order to determine whether a borrower was insolvent after
giving effect to the incurrence of the loan or that, regardless of the method of
evaluation, a court would not determine that the borrower was "insolvent" upon
giving effect to such incurrence.
In general, if payments on a Company Investment are avoidable, whether
as fraudulent conveyances or preferences, such payments can be recaptured either
from the initial recipient (such as the Company) or from subsequent transferees
of such payments, including shareholders.
THE INVESTMENT MANAGER MAY MAKE UNPROFITABLE INVESTMENTS.
The level of analytical sophistication, both financial and legal,
necessary for successful investment in the Company Investments is unusually
high. There is no assurance that the Investment Manager will correctly judge the
nature and magnitude of the many factors that could affect the prospects for
successful investments in Company Investments.
DUE TO THE COMPETITIVE NATURE OF THE BUSINESS OF INVESTING, THE INVESTMENT
MANAGER MAY NOT EFFECTIVELY OBTAIN SUITABLE INVESTMENT OPPORTUNITIES.
The business of investing in Mezzanine Investments and High Yield Debt,
Distressed Debt, Bank Loans and Equity Securities is highly competitive. The
identification of attractive investment opportunities is difficult and involves
a high degree of uncertainty. Consequently, there can be no assurance that the
Investment Manager will be able to invest fully the Company's assets or that
suitable investment opportunities will be identified which satisfy the Company's
rate of return objective.
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THE INTERESTS OF THE INVESTMENT MANAGER, THE PLACEMENT AGENT AND THEIR
AFFILIATES MAY CONFLICT WITH THE INTERESTS OF HOLDERS OF THE COMMON SHARES.
The Investment Manager, the Placement Agent and their respective
partners, officers, directors, shareholders, members, managers, employees,
affiliates and agents may be subject to certain potential or actual conflicts of
interest in connection with the activities of, and investments by, the Company.
The Placement Agent and its respective affiliates may have provided, and may in
the future provide, investment banking, commercial banking, prime brokerage and
other services to the Company, the issuers of Company Investments and to other
persons whose activities may affect Company Investments. Affiliates and
employees of the Investment Manager may be equity investors in the Company. The
Placement Agent or its affiliates may also be selected by the Investment Manager
to value Company Investments.
Carried Interest and Management Fees
The existence of the Carried Interest arrangement may create a conflict
of interest between the Investment Manager and the shareholders as it may cause
the Investment Manager to increase leverage and/or to make investments for the
Company which are more speculative or subject to greater risk than the
Investment Manager might otherwise make for the Company in the absence of such
Carried Interest arrangement. Because the Carried Interest is paid only on
realized gains, such an arrangement may create an incentive for the Investment
Manager to realize gains on certain investments in order to receive a Carried
Interest when it may be in the best interests of the Company to wait to
liquidate such positions. In addition, initially the Management Fee will be
based on Committed Capital, regardless of whether the Company issues Common
Shares, Preferred Shares or Notes. After the Initial Draw Period, the Management
Fee will be based on the NAV of the Company Investments and other assets held by
the Company per annum. The Management Fee and Carried Interest may be higher
than fees and allocations charged by other investment managers for similar
services. See "Summary of Terms--Carried Interest" and "--Management Fee."
Other Investment Activities
The Investment Manager and its respective affiliates, employees and
associates currently do and in the future may manage other funds and accounts
other than the assets of the Company, including for certain holders of Common
Shares ("Other Adviser Accounts"), that invest in assets eligible for purchase
or sale by the Company. The investment policies, fee arrangements and other
circumstances of the Company may vary from those of Other Adviser Accounts.
Accordingly, conflicts may arise regarding the allocation of investments or
opportunities among the Company and Other Adviser Accounts. In general, as
permitted by the Investment Company Act and an exemptive order if granted to the
Investment Manager and its related companies, the Investment Manager and its
related companies will allocate investment opportunities pro rata among the
Company and Other Adviser Accounts (assuming the investment satisfies the
objectives of each) based on the amount of funds each then has available for
such investment and under management by the Investment Manager and its related
companies. Investment opportunities in privately placed securities will be
subject to allocation procedures. In certain cases, investment opportunities may
be made other than on a pro rata basis. For example, the Company may desire to
retain an asset at the same time that one or more Other Adviser Accounts desire
to sell it. The Investment Manager and its related companies intend to allocate
74
investment opportunities to the Company and Other Adviser Accounts in a manner
that they believe in their judgment and based upon applicable regulatory
requirements and their fiduciary duties to be appropriate given the investment
objectives, size of transaction, investable assets, alternative investments
potentially available, prior allocations, liquidity, maturity, expected holding
period, diversification, lender covenants and other limitations of the Company
and the Other Adviser Accounts. All of the foregoing procedures could in certain
circumstances affect adversely the price paid or received by the Company or the
availability or size of a particular investment purchased or sold by the
Company. In other cases, however, the ability of the Company to participate in
volume transactions may produce better execution for the Company. The Investment
Manager believes that this advantage, when combined with the other benefits
available due to the Investment Manager's organization, outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
Representation
The Company, the Investment Manager, the Placement Agent and the
trustee for the Indenture have used their own legal, tax and other advisors in
connection with the offering of the Common Shares. These advisors do not
represent the shareholders or prospective purchasers individually solely as a
result of their investment in the Company. Prospective purchasers of the Common
Shares should consult their own legal, tax and accounting advisors with respect
to their investment in the Company.
THE INVESTMENT MANAGER WILL UTILIZE AND RELY ON BROKERS IN CONDUCTING CERTAIN
TRADES, WHICH MAY CAUSE THE COMPANY TO INCUR TRANSACTION COSTS.
Subject to the supervision of the Board of Directors, decisions to buy
and sell securities and bank loans for the Company and decisions regarding
brokerage commission rates are made by the Investment Manager. Transactions on
stock exchanges involve the payment by the Company of brokerage commissions. In
certain instances the Company may make purchases of underwritten issues at
prices which include underwriting fees.
Selection of Brokers and Dealers
The Investment Manager is authorized to designate the brokers, dealers,
banks, clearing associations, depositaries and other counterparties and
financial institutions (collectively, "brokers and dealers"), to be used for all
transactions by the Company. Accordingly, the Investment Manager will designate
brokers and dealers from time to time.
The policy of the Investment Manager regarding purchases and sales for
the portfolio is that primary consideration will be given to obtaining the most
favorable execution of the transactions in seeking to implement the Investment
Manager's investment strategy. The Investment Manager will effect transactions
with those brokers and dealers which the Investment Manager believes provide the
most favorable prices and who are capable of providing efficient executions.
Those factors that the Investment Manager believes contribute to efficient
execution include size of the order, difficulty of execution, operational
capabilities and facilities of the broker or dealer involved, whether that
broker or dealer has risked its own capital in purchasing a block of securities
or other assets and the prior experience of the broker or dealer in effecting
transactions of the type in which the Investment Manager will engage. Additional
considerations
75
include the ability of brokers and dealers to provide internal
and external research services and research related travel, special execution
capabilities, clearance, settlement, custody or other services including
communications and data processing and other similar equipment and services and
the furnishing of stock quotation information. In selecting brokers or dealers
to execute particular transactions, the Investment Manager may consider
"brokerage and research services" (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) and
other information provided by the brokers and dealers. Subject to the
limitations set forth under Section 28(e) of the Exchange Act, (i) research may
include, among other things, proprietary research from brokers, which may be
written, oral or on-line, (ii) research products may include, among other
things, computers or terminals, computer databases and quotation equipment, in
each case, to access research or which provide research directly, and (iii)
research services may include, among other things, research concerning market,
economic and financial data, statistical information, data on pricing and
availability of securities, financial publications, electronic market
quotations, performance measurement services, analyses concerning specific
securities, companies or sectors, and market, economic and financial studies and
forecasts. Any such brokerage and research services will be used for the benefit
of all accounts managed by the Investment Manager. Consistent with obtaining the
most favorable execution, the Investment Manager may use certain brokers and
dealers who may refer or who have referred prospective investors to the Fund or
to Other Adviser Accounts. The Investment Manager also may cause a broker or
dealer who provides such brokerage and research services to be paid a commission
or, in the case of a dealer, a dealer spread for executing a portfolio
transaction, which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction. Prior to making such
an allocation to a broker or dealer, however, the Investment Manager will make a
good faith determination that such commission or spread was reasonable in
relation to the value of the brokerage, research or other services provided,
viewed in terms of that particular transaction or in terms of all the accounts
over which the Investment Manager or its affiliates exercise trading discretion.
These services or products would otherwise only be available to the
Investment Manager for a cash payment. To the extent that the Investment Manager
utilizes commissions to obtain items that would otherwise be an expense of the
Investment Manager, such use of commissions could be viewed as additional
compensation to the Investment Manager. This creates a potential conflict of
interest between the Investment Manager's fiduciary duty to operate the Company
in the best interest of the members and its desire to receive or direct these
"soft-dollar" benefits. As a result of receiving such services or products, the
Investment Manager has an incentive to use, and to continue to use, such brokers
and dealers to effect transactions for the accounts over which the Investment
Manager or its affiliates exercise trading discretion so long as such brokers
and dealers continue to provide such soft dollar credits to the Investment
Manager.
The above-mentioned services and equipment obtained by the Investment
Manager through the Company's brokerage allocations and dealer spreads, whether
or not directly useful to it, may be useful to the Investment Manager in
connection with services rendered to the Company or to Other Adviser Accounts.
Similarly, the above mentioned services and equipment obtained by the Investment
Manager for commissions paid to brokers or spreads paid to dealers in the course
of managing such other accounts may be useful to the Company. Since any
particular above mentioned services and equipment obtained by the Investment
Manager may be useful to the Company, the Investment Manager, in considering the
reasonableness of the
76
brokerage commission or dealer spreads paid by the Company, does not attempt to
allocate the relative costs or benefits of research or other consideration.
Allocation of Investments
One or more of the other investment funds or accounts which the
Investment Manager manages may own from time to time some of the same
investments as the Company. When two or more companies or accounts seek to
purchase or sell the same securities, the securities actually purchased or sold
and any transaction costs will be allocated among the companies and accounts on
a good faith equitable basis by the Investment Manager in its discretion in
accordance with the accounts' various investment objectives, subject to the
Investment Company Act, the terms of any exemptive relief obtained from the
Securities and Exchange Commission and the allocation procedures adopted by the
Board of Directors related to privately placed securities. In some cases, this
system may adversely affect the price or size of the position obtainable for the
Company. In other cases, however, the ability of the Company to participate in
volume transactions may produce better execution for the Company. This
advantage, when combined with the other benefits available due to the Investment
Manager's organization, outweighs any disadvantages that may be said to exist
from exposure to simultaneous transactions.
Other business activities of the Placement Agent
The Placement Agent and its affiliates may underwrite or act as agent
or lender in respect of certain of the Company Investments, may have ongoing
relationships (including, without limitation, the provision of investment
banking, commercial banking, prime brokerage and advisory services or engaging
in securities or derivatives transactions) with issuers whose debt obligations
or equity securities constitute Company Investments and may own either equity
securities or debt obligations (including the debt obligations or equity
securities which constitute Company Investments) issued by such issuers. The
Placement Agent and its affiliates may have ongoing relationships (including,
without limitation, the provision of investment banking, commercial banking,
prime brokerage and advisory services or engaging in securities or derivatives
transactions) with the Investment Manager and investors in the Common Shares,
Preferred Shares or the Notes. In addition, the Placement Agent and its
affiliates and clients may invest in obligations that have interests different
from or adverse to the obligations that constitute Company Investments. From
time to time, the Company may purchase or sell Company Investments from or
through the Placement Agent or any of its affiliates. The Placement Agent does
not take any responsibility for, and has no obligation in respect of, the
Company or any of its affiliates. The Placement Agent or its affiliates may act
as a hedge counterparty with respect to any hedge agreement entered into by the
Company.
ECONOMIC DOWNTURNS COULD IMPAIR THE VALUE OF THE COMPANY'S PORTFOLIO SECURITIES
AND HARM THE COMPANY'S PERFORMANCE RESULTS.
An investment in the Company should be made with the understanding that
the value of the Company's portfolio securities may fluctuate in accordance with
changes in the financial condition of the issuers of the portfolio securities,
the value of debt and equity securities in general and other factors that affect
the market. Economic slowdowns or downturns could lead to financial losses in
the Company's portfolio securities and a decrease in the revenues, net
77
income and assets of the Company. In addition, many of the Company's portfolio
securities may be similarly subject to the same economic conditions, which could
adversely impact the Company's returns.
An investment in the Company should also be made with the understanding
of the risks inherent in an investment in debt and equity securities, including
the risk that the financial condition of issuers may become impaired or that the
general condition of the debt and equity markets may deteriorate. Debt and
equity securities are susceptible to general stock market fluctuations and to
volatile increases and decreases in value as market confidence and perceptions
of their issuers' change. These investor perceptions are based on various and
unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies, inflation and interest rates, economic expansion
or contraction, and global or regional political, economic or banking crises.
Decreases in the market value of the Company's portfolio securities will
adversely affect the return on the Common Shares.
All investors should review "Benefit Plan Investor Considerations" and
"Certain U.S. Federal Income Tax Aspects of an Investment in the Company" for a
discussion of certain additional risk factors.
78
CERTAIN TERMS OF THE OFFERING
SUBSCRIPTIONS
The Investment Manager, on behalf of the Company, hereby offers to
Qualified Investors Common Shares in the Company, with a minimum subscription of
$10 million subject to waiver in the Investment Manager's discretion for
selected investors. There is no maximum amount of Common Shares for which an
investor may subscribe, subject to the right of the Company, in its sole
discretion, to reduce the amount of a subscription prior to acceptance. The
Investment Manager and the Placement Agent may reject any subscription for any
reason. In addition, the Company and the Investment Manager may, in their
discretion, allocate the amount of the Common Shares to potential investors.
Common Shares will be sold only to investors satisfying the investor suitability
standards of the Company. See "--Investor Suitability Standards."
INVESTOR SUITABILITY STANDARDS
An investment in the Company is suitable only for persons of
substantial financial means who have no need for liquidity with respect to their
investment in the Company and who fully understand, are willing to assume and
have the financial resources necessary to withstand, the risks involved in the
Company's specialized investment program. Shareholders must be able to bear the
loss of their entire investment in the Company. The Common Shares will be sold
only to investors each of whom represents in its Subscription Agreement that:
(i) it is acquiring the Common Shares for its own account, for investment
purposes only and not with a view to the resale or distribution thereof; (ii) it
is aware that the Common Shares have not been registered under the Securities
Act and that its right to transfer the Common Shares will be restricted by the
Securities Act, applicable state securities laws and the terms of the Operating
Agreement, and it is aware of the absence of a market for the Common Shares;
(iii) it is an "accredited investor" as defined in Rule 501(a) under the
Securities Act, (iv) it is a "qualified client" within the meaning of Rule 205-3
of the Advisers Act; and (v) it is a "qualified purchaser" as defined in Section
2(a)(51)(A) under the Investment Company Act.
Each prospective investor in the Company is required to execute and
deliver a Subscription Agreement and to make other representations and to
satisfy certain other standards set forth in the Subscription Agreement.
Investors in certain states or jurisdictions outside the United States may be
required to meet additional requirements or standards imposed by the securities
laws or regulations of such states or jurisdictions.
The Company may revoke the offer made herein and refuse to sell any
Common Shares to a prospective investor if the Company concludes for any reason
that the Common Shares are not a suitable investment for such investor, even if
such investor returns a Subscription Agreement with appropriate representations.
THE SUITABILITY STANDARDS DISCUSSED ABOVE REPRESENT MINIMUM SUITABILITY
STANDARDS FOR PROSPECTIVE INVESTORS. EACH PROSPECTIVE INVESTOR, TOGETHER WITH
ITS INVESTMENT, TAX, LEGAL, ACCOUNTING AND OTHER ADVISORS, SHOULD DETERMINE
WHETHER THIS INVESTMENT IS APPROPRIATE FOR SUCH INVESTOR.
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SUBSCRIPTION PROCEDURES
To subscribe for the Common Shares, a prospective investor must
request, complete and execute a Subscription Agreement and deliver it to the
Company at:
York Enhanced Strategies Management, LLC
767 Fifth Avenue, 17th Floor
New York, New York 10153
Attention: Brooke S. Parish
With a copy to:
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Attention: Zach Buchwald or Fatima Steiner
By completing, executing and delivering the Subscription Agreement, a
prospective investor agrees to purchase the Common Shares subscribed for and to
make payment to the Company, as described in the Subscription Agreement, subject
to acceptance by the Investment Manager. In addition, by executing the
Subscription Agreement, including the power of attorney (the "Power of
Attorney") contained therein, the investor irrevocably appoints the Investment
Manager as its attorney-in-fact to execute and deliver in its name and on its
behalf the Operating Agreement and all documents necessary to carry out the
Operating Agreement and all further amendments to the Operating Agreement made
in accordance with the terms of the Operating Agreement and that the Investment
Manager deems appropriate to reflect a change, modification or continuation of
the Company. The Power of Attorney is irrevocable. Investors who breach the
Subscription Agreement by failing to pay a capital call within 10 days after
receiving a second notice from the Company may be subject to having the Common
Shares repurchased, retired and canceled by the Company at a discount to the NAV
of such Common Shares, which price will in no event be less than 66 2/3% of the
NAV of such Common Shares, and/or to other consequences, subject to the sole
discretion of a majority of independent Directors.
A portion of the Common Shares will be offered through Morgan Stanley,
as placement agent for the Common Shares of the Company. Organizational and
offering expenses of the Company will include a placement fee payable by the
Company to Morgan Stanley for subscriptions accepted by the Company through
Morgan Stanley. See "Summary of Material Terms of the Company--Placement and
Organizational Fees and Expenses." As with organizational expenses of the
Company, all investors in the Common Shares will bear a pro rata portion of the
placement fee expense.
FORM OF SECURITIES; BOOK ENTRY
The Common Shares will initially be issued in the form of a Global
Security to be deposited with DTC/Clearstream or its nominee. Any holder may
request a physical security be issued to it. Holders that are not "qualified
institutional buyers," as that term is defined in Rule 144A(a) promulgated under
the Securities Act, will not be permitted to hold their Common Shares through a
Global Security and will instead be required to hold physical securities
80
representing their Common Shares. Interests in the Common Shares may not be
transferred through DTC/Clearstream or its nominee in a transaction unless the
proposed transferee is a "qualified institutional buyer" and the aggregate price
of the Common Shares proposed to be purchased and sold in such transaction is
equal to or greater than $1.0 million. If the proposed transferee is not such a
"qualified institutional buyer," or if the aggregate price of the Common Shares
proposed to be purchased and sold in such transaction is less than $1.0 million,
the transferee will receive physical certificates representing the transferred
Common Shares.
ANTI-MONEY LAUNDERING REQUIREMENTS
The Investment Manager is committed to the prevention of money
laundering. To this end, the Investment Manager may require detailed information
about a subscriber's or shareholder's identity, the identity of any beneficial
owner of the Common Shares and the source of the subscriber's funds. The
Investment Manager maintains the privacy of information provided by subscribers
and shareholders, as required by federal law. No such information will be
supplied to any nonaffiliated party except as required by law.
The Investment Manager reserves the right to request information as it
deems necessary to confirm the identity of a subscriber and/or a shareholder.
The Investment Manager may refuse to accept a subscription if such information
is not forthcoming or found to be inadequate or non-responsive, in the
Investment Manager's sole discretion. The Investment Manager may suspend
distributions to any shareholder if the Investment Manager deems it necessary to
comply with applicable anti-money laundering regulations.
Each subscriber shall be required to make representations to the
Investment Manager in connection with the anti-money laundering program (the
"AML Program") adopted by the Investment Manager, including, without limitation,
representation to the Investment Manager that the subscriber is not a prohibited
country, territory, individual or entity listed on the U.S. Department of the
Treasury's Office of Foreign Asset Control ("OFAC") website and that it is not
directly or indirectly affiliated with any country, territory, individual or
entity named on an OFAC list or prohibited by any OFAC sanctions programs.
PRIVACY POLICY OF THE COMPANY AND THE INVESTMENT MANAGER
The Company and the Investment Manager are committed to maintaining the
privacy of the investors and to safeguarding their nonpublic personal
information. The following information is provided to help you understand what
personal information the Company and the Investment Manager collect, how they
protect that information and why, in certain cases, the Company and the
Investment Manager may share information with select other parties.
The Company and the Investment Manager do not disclose, except with
consent, any nonpublic personal information about holders or former holders of
securities of the Company to anyone, except as permitted or required by law or
as is necessary in order to service shareholder accounts (for example, to a
transfer agent or third-party administrator). The Company and the Investment
Manager do not share such information with third parties for financial gain or
commercial advantage; rather, such information is shared only in accordance with
the core investment business of the Company.
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The Company and the Investment Manager restrict access to nonpublic
personal information about holders of securities of the Company to the Company's
and Investment Manager's affiliates and agents with a legitimate business need
for the information. The Company maintains physical, electronic and procedural
safeguards designed to protect the nonpublic personal information of its
shareholders.
CUSTOMER IDENTIFICATION PROGRAM
Federal law requires the Company to obtain, verify and record
identifying information, which may include the name, residential or business
street address, date of birth (for an individual), social security or taxpayer
identification number or other identifying information, for each holder of
securities of the Company. Subscription packets without the required
information, or without any indication that a social security or taxpayer
identification number has been applied for, may not be accepted. After
acceptance, to the extent permitted by applicable law or its customer
identification program, the Company reserves the right (a) to place limits on
transactions in any security holder's account until the identity of such
security holder is verified; or (b) to refuse an investment in the Company or to
redeem involuntarily a security holder's shares and close the shareholder's
account in the event that the security holder's identity is not verified. The
Company and its agents will not be responsible for any loss in a security
holder's account resulting from the security holder's delay in providing all
required identifying information or from closing an account and redeeming a
security holder's shares when the security holder's identity is not verified.
CLEARANCE THROUGH DTC/CLEARSTREAM
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Company believes to be reliable,
but the Company, the Investment Manager and the Placement Agent take no
responsibility for the accuracy thereof.
It is anticipated that the Common Shares will initially be issued in
the form of a Global Security to be deposited with DTC or its nominee. Any
holder of Common Shares may request a physical security be issued to it. It is
also anticipated that the Common Shares will be accepted for clearance through
Clearstream.
The Depository Trust Company, New York, NY, will act as securities
depository for the Common Shares. The Common Shares will be issued as
fully-registered securities registered in the name of Cede & Co. (DTC's
partnership nominee) or such other name as may be requested by an authorized
representative of DTC. One fully-registered Common Share certificate will be
issued for each issue of the Common Shares, each in the aggregate principal
amount of such issue, and will be deposited with DTC.
DTC, the world's largest securities depository, is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds and provides asset servicing for
over 2.2 million issues of U.S. and non-U.S. equity issues, corporate and
municipal debt issues, and money market instruments from over 100 countries that
DTC's
82
participants ("Direct Participants") (including Clearstream) deposit with
DTC. DTC also facilitates the post-trade settlement among Direct Participants of
sales and other securities transactions in deposited securities, through
electronic computerized book-entry transfers and pledges between Direct
Participants' accounts. This eliminates the need for physical movement of
securities certificates. Direct Participants include both U.S. and non-U.S.
securities brokers and dealers, banks, trust companies, clearing corporations,
and certain other organizations. DTC is a wholly-owned subsidiary of The
Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a
number of Direct Participants of DTC and Members of the National Securities
Clearing Corporation, Fixed Income Clearing Corporation and Emerging Markets
Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well
as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and
the National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as both U.S. and non-U.S. securities brokers and
dealers, banks, trust companies, and clearing corporations that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating:
AAA. The DTC rules applicable to its Participants are on file with the
Securities and Exchange Commission. More information about DTC can be found at
www.dtcc.com and www.dtc.org.
Purchases of Common Shares under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Common Shares
on DTC's records. The ownership interest of each actual purchaser of each Common
Share ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchase. Beneficial Owners are, however, expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Common Shares are to be accomplished by entries made on the
books of Direct and Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners who decide to hold the Common Shares through the Direct and
Indirect Participants will not receive certificates representing their ownership
interests in Common Shares, except in the event that use of the book-entry
system for the Common Shares is discontinued.
To facilitate subsequent transfers, all Common Shares deposited by
Direct Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co., or such other name as may be requested by an authorized
representative of DTC. The deposit of Common Shares with DTC and their
registration in the name of Cede & Co. or such other DTC nominee do not effect
any change in beneficial ownership. DTC has no knowledge of the actual
Beneficial Owners of the Common Shares; DTC's records reflect only the identity
of the Direct Participants to whose accounts such Common Shares are credited,
which may or may not be the Beneficial Owners. The Direct and Indirect
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
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Redemption notices shall be sent to DTC. If less than all of the Common
Shares are being redeemed, DTC's practice is to determine by lot the amount of
the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or
vote with respect to Common Shares unless authorized by a Direct Participant in
accordance with DTC's procedures. Under its usual procedures, DTC mails an
Omnibus Proxy to the Company as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Redemption proceeds, distributions, and dividend payments on the Common
Shares will be made to Cede & Co., or such other nominee as may be requested by
an authorized representative of DTC. DTC's practice is to credit Direct
Participants' accounts upon DTC's receipt of funds and corresponding detail
information from the Company or JPMorgan Chase Bank, National Association (the
"Agent"), on payable date in accordance with their respective holdings shown on
DTC's records. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such Participant and not of DTC, the
Agent or the Company, subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of redemption proceeds, distributions,
and dividend payments to Cede & Co. (or such other nominee as may be requested
by an authorized representative of DTC) is the responsibility of the Company or
the Agent, disbursement of such payments to Direct Participants will be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners will be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as depository with respect
to the Common Shares at any time by giving reasonable notice to the Company or
the Agent. Under such circumstances, in the event that a successor depository is
not obtained, Common Share certificates are required to be printed and
delivered.
The Company may decide to discontinue use of the system of
book-entry-only transfers through DTC (or a successor securities depository). In
that event, Common Share certificates will be printed and delivered to DTC.
ARBITRATION
The Operating Agreement will provide that, to the extent permitted by
law, any dispute relating to such Operating Agreement or the Company which
cannot be amicably resolved shall be resolved by binding arbitration conducted
in New York, New York in accordance with the rules of the American Arbitration
Association then prevailing, and the decisions of the arbitrators shall be final
and binding on all the parties. The costs of the arbitration (other than fees
and expenses of counsel, which shall be the responsibility of the parties
retaining such counsel) shall be allocated among the parties as determined by
the arbitrator.
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BENEFIT PLAN INVESTOR CONSIDERATIONS
To ensure compliance with U.S. Treasury Department Circular 230,
investors in the Common Shares are hereby notified that: (A) any discussion of
U.S. federal tax issues in this document is not intended or written to be relied
upon, and cannot be relied upon by investors in Common Shares, for the purposes
of avoiding penalties that may be imposed on investors in securities under the
U.S. Internal Revenue Code; (B) such discussion is written in connection with
the promotion or marketing of the Common Shares and other matters addressed
herein by the Company, the Investment Manager and the Placement Agent; and (C)
investors in the Common Shares should seek advice based on their particular
circumstances from their own independent tax advisors. U.S. counsel does not
intend to be, and is not, engaged in the promotion or marketing of the
transactions or matters described in this document, and no inference to the
contrary shall be implied by reason of the U.S. tax discussion set forth herein.
Fiduciaries and other persons who are proposing to invest in the Common
Shares on behalf of an employee benefit plan investor subject to Title I of
ERISA (an "ERISA Plan") and/or a benefit plan investor within the meaning of
U.S. Department of Labor Regulation Section 2510.3-101(f)(2) (collectively
"Benefit Plan Investors") should review the following summary.
THIS SUMMARY IS BASED ON THE PROVISIONS OF ERISA AND THE CODE (AND
RELATED REGULATIONS AND ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS) AS OF THE
DATE HEREOF. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND NO ASSURANCE CAN
BE GIVEN THAT FUTURE LEGISLATION, COURT DECISIONS, ADMINISTRATIVE REGULATIONS,
RULINGS OR ADMINISTRATIVE PRONOUNCEMENTS WILL NOT SIGNIFICANTLY AFFECT THE
DISCUSSION BELOW. ANY SUCH CHANGES MAY BE RETROACTIVE AND MAY THEREBY APPLY TO
TRANSACTIONS ENTERED INTO PRIOR TO THE DATE OF THEIR ENACTMENT OR RELEASE.
FIDUCIARY RESPONSIBILITY REQUIREMENTS AND PROHIBITED TRANSACTIONS
The fiduciary or fiduciaries of an ERISA Plan contemplating an
investment in the Common Shares should carefully consider whether the investment
is consistent with ERISA's fiduciary responsibility requirements, taking into
account the facts and circumstances of the plan. Such considerations include,
without limitation, whether the investment: (i) satisfies the diversification
requirements of ERISA Section 404(a)(1)(C) taking into account the plan's
investment policy and portfolio; (ii) is for the exclusive purpose of providing
benefits to plan participants and beneficiaries and defraying reasonable plan
expenses; (iii) is permitted under the plan's governing instruments; and (iv) is
prudent in accordance with the requirements of ERISA Section 404(a)(1)(B),
taking into account, among other factors, the long-term and illiquid nature of
the Common Shares.
Persons proposing to invest on behalf of Benefit Plan Investors should
also consider: (i) in the case of Benefit Plan Investors subject to the
prohibited transaction provisions of the Code, including individual retirement
accounts and individual retirement annuities ("IRAs") under Code Section 408,
whether the investment is a non-exempt prohibited transaction under ERISA
Section 406 and/or Code Section 4975; (ii) whether such person or persons have
the authority to make the investment; (iii) whether the investment is consistent
with the investment
85
policy of the Benefit Plan Investors; and (iv) the potential
consequences (including tax effects) of the investment under ERISA and the Code.
Certain Benefit Plan Investors, including governmental plans (as
defined in Section 3(32) of ERISA) ("Governmental Plans"), church plans (as
defined in Section 3(33) of ERISA) that have not made an election under section
410(d) of the Code ("Church Plans") and foreign plans, are not subject to ERISA.
Although a Governmental Plan, a Church Plan or a foreign plan is not subject to
ERISA or the prohibited transaction provisions of the Code, it may be subject to
other federal, state, local or foreign laws, which may be similar to Title I of
ERISA or the prohibited transaction provisions of the Code (a "Similar Law"). A
fiduciary of a Governmental Plan, a Church Plan or a foreign plan should make
its own determination as to the requirements, if any, under a Similar Law
applicable to the purchase of the Common Shares.
PLAN ASSETS
Pursuant to U.S. Department of Labor Regulations Section 2510.3-101,
the assets of a Benefit Plan Investor subject to Title I of ERISA or Section
4975 of the Code include its investment in securities issued by an investment
company registered under the Investment Company Act, such as Common Shares
issued by the Company, but its assets will not, solely by reason of such
investment, include the investment company's underlying assets unless such a
plan or related group of such plans, as determined in accordance with the U.S.
Department of Labor Regulation Section 2510.3-101(h)(3), owns all of the
outstanding equity interests in the investment company. As a result, assuming no
such plan or related group of plans owns all of the outstanding equity interests
in the Company, the Company's assets should not be deemed "plan assets" under
ERISA or Section 4975 of the Code with respect to a Benefit Plan Investor that
invests in the Common Shares.
If the Company's registration as an investment company under the
Investment Company Act ceases to be effective at any time, then the assets of
the Company could be deemed plan assets subject to ERISA. In general, when a
Benefit Plan Investor subject to Title I of ERISA or Section 4975 of the Code
purchases an equity interest in an entity, then such assets will include the
underlying assets of the entity (the "Look-Through Rule") unless one or more
exceptions apply.
The Common Shares of the Company are equity interests in the Company,
and, therefore, if the Look-Through Rule were to apply and the assets of the
Company were deemed plan assets, then (i) transactions involving the assets of
the Company could be subject to the fiduciary responsibility and prohibited
transaction provisions of ERISA and Section 4975 of the Code, (ii) the assets of
the Company could be subject to reporting and disclosure requirements of ERISA,
and (iii) the fiduciary causing a Benefit Plan Investor subject to Title I of
ERISA to make an investment in the Common Shares that constitute equity
interests in the Company could be deemed to have delegated its responsibility to
manage the assets of such Benefit Plan Investor subject to Title I of ERISA.
The sale of any Common Shares to a Benefit Plan Investor is in no
respect a representation by the Company that such an investment meets all
relevant legal requirements with respect to investments by Benefit Plan
Investors generally or any particular Benefit Plan
86
Investor, or that such an investment is appropriate for Benefit Plan Investor
generally or any particular Benefit Plan Investor.
FIDUCIARIES AND OTHER PERSONS PROPOSING TO INVEST IN COMMON SHARES OF
THE COMPANY ON BEHALF OF BENEFIT PLAN INVESTORS ARE STRONGLY URGED TO CONSULT
WITH THEIR OWN COUNSEL CONCERNING THE CONSEQUENCES UNDER ERISA, THE CODE AND
SIMILAR LAWS OF AN INVESTMENT IN COMMON SHARES, INCLUDING ALL COMPENSATION
ARRANGEMENTS.
CERTAIN U.S. FEDERAL INCOME TAX ASPECTS OF AN
INVESTMENT IN THE COMPANY
To ensure compliance with U.S. Treasury Department Circular 230,
investors in the Common Shares are hereby notified that: (a) any discussion of
U.S. federal tax issues in this document is not intended or written to be relied
upon, and cannot be relied upon by investors in Common Shares, for the purpose
of avoiding penalties that may be imposed on investors in Common Shares under
the U.S. Internal Revenue Code; (b) such discussion is written in connection
with the promotion or marketing of the Common Shares and other matters addressed
herein by the Company, the Investment Manager and the Placement Agent; and (c)
investors in Common Shares should seek advice based on their particular
circumstances from their own independent tax advisors. U.S. counsel does not
intend to be, and is not, engaged in the promotion or marketing of the
transactions or matters described in this document, and no inference to the
contrary shall be implied by reason of the U.S. tax discussion set forth herein.
The following discussion is a general summary of certain material U.S.
federal income tax considerations applicable to the Company and to holders of
its Common Shares and does not purport to be a complete description of the
income tax considerations applicable to such an investment to the Company or the
holders, or to all categories of investors. In particular, special tax
considerations that may apply to certain types of taxpayers, including
securities dealers, financial institutions, entities treated as partnerships for
U.S. federal income tax purposes, insurance companies, qualified plans,
individual retirement accounts, and persons holding Common Shares as part of a
hedge, are not addressed. This discussion is based upon the Code, Treasury
Regulations thereunder, and administrative and judicial interpretations thereof,
each as of the date hereof, all of which are subject to change, possibly on a
retroactive basis. Prospective holders should consult their own tax advisors
with respect to tax considerations which pertain to their purchase of the Common
Shares. This summary assumes that holders will hold Common Shares as capital
assets.
Except as otherwise provided, this summary applies only to U.S.
persons. A "U.S. person" generally is (i) an individual citizen or resident of
the United States; (ii) a corporation or partnership created or organized in or
under the laws of the United States, any state thereof or the District of
Columbia, (iii) an estate whose income is subject to U.S. federal income tax
regardless of its source; or (iv) a trust, if a court within the United States
is able to exercise primary supervision over the administration of the trust and
one or more U.S. persons have authority to control all substantial decisions of
the trust. A "non-U.S. person" means any person who is not a U.S. person.
87
TAXATION OF COMPANY AS A RIC
The Company will elect to be treated as a corporation for U.S. federal
tax purposes, and intends to qualify each year and elect to be taxed as a RIC
under Subchapter M of the Code. As long as it so qualifies, the Company should
not be subject to U.S. federal income tax to the extent that it distributes its
investment company taxable income and its net realized capital gains. The
Company intends to distribute substantially all of such income.
To qualify as a RIC, the Company must, among other things: (a) derive
at least 90% of its annual gross income (including tax-exempt interest) from
dividends, interest, payments with respect to certain securities loans, gains
from the sale or other disposition of stock or securities, foreign currencies,
or other income (including but not limited to gain from options, futures and
forward contracts and potentially excluding certain types of fee income) derived
with respect to its business of investing in such stock, securities or
currencies (such income, "Qualifying Income" and such requirement, the
"Qualified Income Requirement") and (b) diversify its holdings so that, at the
end of each fiscal quarter of the Company, subject to certain limited
exceptions, (i) at least 50% of the value of the Company's 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 Company's assets, and to not more than 10% of
the outstanding voting securities of such issuer and (ii) not more than 25% of
the value of the Company's assets is invested in the securities of (A) any one
issuer (other than U.S. government securities or securities of other regulated
investment companies), (B) or two or more issuers controlled by the Company and
engaged in the same, similar or related trade or business other than regulated
investment companies or (C) the securities of certain publicly traded
partnerships. In addition, the Company each year must distribute at least 90% of
the sum of its (i) investment company taxable income (which includes, among
other items, dividends, interest, the excess of any net short-term capital gains
over net long-term capital losses and other taxable income other than net
capital gain (as defined below) reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) its net tax-exempt
interest (the excess of its gross tax-exempt interest over certain disallowed
deductions) (the "Distribution Requirement"). For purposes of satisfying the
Distribution Requirement, a distribution will not qualify if it is a
"preferential" dividend (i.e., a distribution which is not fully pro rata among
shares of the same class or where there is preference to one class of stock as
compared with another class, except to the extent that such preference exists by
reason of the terms inherent in any class of stock. Although the Company
believes that distributions which comply with the terms of its shares should not
create "preferential" dividends, there can be no assurance that such
distributions will not be "preferential" dividends.
If the Company retains any net capital gain or any investment company
taxable income, it will be subject to tax at regular corporate rates on the
amount retained. If the Company retains any net capital gain, it may designate
the retained amount as undistributed capital gains in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income their share of such
undistributed long-term capital gain and (ii) will be entitled to credit their
proportionate share of the tax paid by the Company against their U.S. federal
income tax liability, if any, and to claim refunds to the extent the credit
exceeds such liability. For U.S. federal income tax purposes, the tax basis of
Common Shares
88
owned by a holder will be increased by the amount of undistributed capital gain
included in the gross income of such holder less the tax deemed paid by such
holder under clause (ii) of the preceding sentence.
The Internal Revenue Service ("IRS") has taken the position in a
revenue ruling that if a RIC has two classes of shares, it may designate
distributions made to each class in any year as consisting of no more than such
class's proportionate share of particular types of income, including net
long-term capital gains. A class's proportionate share of a particular type of
income is determined according to the percentage of total dividends paid by the
RIC during such year that was paid to such class. Consequently, if, as is
expected, both Common Shares and preferred shares are outstanding, the Company
intends to designate distributions made to the classes as consisting of
particular types of income in accordance with the classes' proportionate shares
of such income. Thus, capital gain dividends, ordinary income dividends and
other distributions will be allocated between the holders of Common Shares and
preferred shares in proportion to the total dividends paid to each class during
the taxable year.
If, as expected, the Company utilizes leverage through borrowings, it
may be restricted by loan covenants with respect to the declaration and payment
of dividends in certain circumstances. Additionally, if at any time when
preferred shares are outstanding, the Company does not meet the asset coverage
requirements of the Investment Company Act, the Company will be required to
suspend distributions to holders of Common Shares until the asset coverage is
restored. Limits on the Company's payment of dividends may prevent the Company
from distributing at least 90% of its net income and may therefore jeopardize
the Company's qualification for taxation as a RIC and/or may subject the Company
to the 4% excise tax (the "Excise Tax") described below. Upon any failure to
meet the asset coverage requirements of the Investment Company Act, the Company
may, in its sole discretion, redeem preferred shares in order to maintain or
restore the requisite asset coverage and avoid the adverse consequences to the
Company and the holders of its Common Shares from failing to qualify as a RIC.
There can be no assurance, however, that any such action would achieve these
objectives. The Company will endeavor to avoid restrictions on its ability to
make dividend payments.
If the Company fails to satisfy the Distribution Requirement or
otherwise fails to qualify as a RIC in any taxable year, it will be subject to
tax in such year on all of its taxable income, regardless of whether it makes
any distributions to the holders of its Common Shares. In addition, in that
case, all of its distributions to the such holders will be characterized as
ordinary income (to the extent of its current and accumulated earnings and
profits). In contrast, as is explained below, if the Company qualifies as a
RIC, a portion of its distributions may be characterized as long-term capital
gain in the hands of the holders.
The Code requires a RIC to pay a nondeductible Excise Tax equal to 4%
of the excess of (i) the sum of (I) 98% of its ordinary income, determined on a
calendar year basis, (II) 98% of its capital gain net income, determined, in
general, on an October 31 year end, and (III) certain undistributed amounts
from previous years, over (ii) the sum of (I) the deduction for dividends paid
by the RIC during such calendar year, (II) any amount taxed to the RIC as
ordinary income or capital gains in such calendar year, and (III) the prior
year's overdistribution, if any. While the Company intends to distribute its
ordinary income and capital gains in the manner necessary to eliminate
imposition of the Excise Tax, there can be no assurance that sufficient amounts
of the Company's ordinary taxable income and capital gains will be distributed
to avoid entirely the
89
imposition of the tax. In such event, the Company will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements. See discussion of Consent Dividends in "Capitalization of the
Company - Common Shares."
TAXATION OF HOLDERS
U.S. Holders
Dividends paid by the Company from its "investment company taxable
income," which is generally the Company's ordinary income plus the excess of net
short-term capital gains over net long-term capital losses (together referred to
hereinafter as "ordinary income dividends") will be taxable to holders of the
Common Shares who are U.S. persons as ordinary income to the extent of the
Company's earning and profits. Due to the Company's expected investments, in
general, distributions to U.S. corporate holders will not be eligible for the
dividends received deduction and such distributions will not qualify for the
reduced tax rate on qualified dividend income applicable to U.S. individual
shareholders under the Jobs and Growth Tax Relief Reconciliation Act of 2003
(the "2003 Act"). Designated distributions made from an excess of net long-term
capital gains over net short-term capital losses ("capital gain dividends"),
including capital gain dividends credited to a holder who is a U.S. person but
retained by the Company, are taxable to such holders as long-term capital gains,
regardless of the length of time the shareholder has owned Common Shares. The
maximum tax rate on net long-term capital gain of individuals is 15% for such
gain realized before January 1, 2009 and 20% for such gain realized thereafter.
Distributions in excess of the Company's earnings and profits will first reduce
the adjusted tax basis of a holder's Common Shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder (assuming
the Common Shares are held as capital assets). Generally, not later than 60 days
after the close of its taxable year, the Company will provide its shareholders
with a written notice designating the amount of any capital gain dividends,
ordinary income dividends and other distributions.
In general, the miscellaneous itemized deductions of an individual
taxpayer are allowed as a deduction paid to the extent that such miscellaneous
itemized deductions exceed 2% of the taxpayer's adjusted gross income for U.S.
federal income tax purposes (generally, gross income less trade or business
expenses). If a RIC incurs expenses that would be miscellaneous itemized
deductions if incurred directly by a non-corporate shareholder (other than
certain limited expenses including directors' and trustees' fees and
registration fees), the limit on such itemized deductions generally will apply
to a shareholder of a RIC as if the shareholder had paid his allocable share of
the expenses of the RIC directly using income deemed distributed to him by the
RIC. Thus, a non-corporate holder will be treated both as receiving an
additional dividend equal to its allocable share of such expenses, and as paying
such expenses. Any such dividend will constitute additional gross income to such
non-corporate holder while the amount of any deduction in connection with the
deemed payment of such expenses will be subject to the aforementioned 2%
limitation and the other applicable limitations of the Code. The Company expects
to incur expenses in most or all years that qualify as "miscellaneous itemized
deductions" and that will thus be subject to the 2% limitation under the rules
described above. Exceptions are provided to the 2% limitation, including
exceptions for "publicly offered" RICs and for expenses incurred in connection
with a trade or business, which may apply to the Company. U.S. Holders are
advised to consult with their own tax advisors as to the application of these
limitations in their individual situations.
90
In the event the holders of Common Shares treat any amount as a Consent
Dividend, as described under "Capitalization of the Company -- Common Shares",
such holder will be treated as having received a taxable dividend in such amount
on the last day of the Company's tax year and having immediately thereafter
contributed such amount to the capital of the Company (with a corresponding
increase in such holder's basis in its Common Shares). As noted above, if it is
determined that the requisite consents for a Consent Dividend have not been
obtained from the holders of its Common Shares, but a Common Share dividend
payment or distribution would otherwise be required to be made in order to
preserve the U.S. federal income tax status of the Company as a RIC or to avoid
the imposition of the Excise Tax, such payment or distribution will be made for
the benefit of the holders of its Common Shares and deposited into one or more
escrow accounts, which will be considered part of the Collateral. In the
Operating Agreement, the holders of the Common Shares will agree to treat any
amounts so deposited in the escrow accounts as a taxable dividend received at
the time of the deposit into the escrow accounts even though the holders of
Common Shares may never receive such amounts, and in any event will not have
access to such amounts unless and until they are released from such escrow
accounts. There can be no assurance that a distribution that is deposited into
an escrow account will be treated as a dividend for U.S. federal income tax
purposes. If such a distribution were not treated as a dividend for U.S. federal
income tax purposes, the Company would be subject to regular corporate federal
income tax (or, if the Company had met the Distribution Requirement without such
distribution, would be subject to Excise Tax) for the relevant taxable year.
The sale or other disposition of Common Shares will generally result in
capital gain or loss. Any loss upon the sale or exchange of Common Shares held
for six months or less will be treated as long-term capital loss to the extent
of any capital gain dividends received (including amounts credited as an
undistributed capital gain dividend) by the holder. A loss realized on a sale or
exchange of Common Shares will be disallowed if other Common Shares are acquired
within a 61-day period beginning 30 days before and ending 30 days after the
date that the shares are disposed of. In such case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Present law taxes both
long-term and short-term capital gains of corporations at the rates applicable
to ordinary income. For non-corporate taxpayers, the maximum tax rate currently
applicable to short-term capital gains is 35% while the maximum tax rate
currently applicable to long-term capital gains generally is 15%. After December
31, 2008, those rates are scheduled to increase to 39.6% and 20% respectively.
Under recently promulgated Treasury Regulations, if a shareholder
recognizes a loss with respect to shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder in any single
taxable year (or a greater loss over a combination of years), the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct holders of
securities held by the Company are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC are not excepted.
Future guidance may extend the current exception from this reporting requirement
to shareholders of most or all RICs. The fact that a loss is reportable under
these regulations does not affect the legal determination of whether the
taxpayer's treatment of the loss is proper. Holders should consult their tax
advisors to determine the applicability of these regulations in light of their
individual circumstances.
91
Tax-Exempt Holders
Distributions by the Company to a U.S. person that is an organization
that is exempt from U.S. income tax will not be taxable to such person and the
tax on unrelated business taxable income should not apply to such person's
interest in the Company's investments, provided, in each case, that such holder
has not leveraged its investment in the Company.
Non-U.S. Holders
A holder of the Common Shares that is a non-U.S. person generally will
be subject to U.S. withholding tax at the rate of 30% (or possibly a lower rate
provided by an applicable tax treaty) on ordinary income dividends (including
Consent Dividends and dividends deposited into any escrow accounts as described
above), unless in each case such dividends are effectively connected with the
conduct of a U.S. trade or business by a given holder. In order to obtain a
reduced rate of withholding, a non-U.S. holder will be required to provide an
IRS Form W-8BEN certifying its entitlement to benefits under that treaty.
Capital gain dividends, to the extent so designated by the Company, and
gain recognized by non-U.S. holders on the sale, exchange or redemption of
Common Shares will generally not be subject to U.S. federal income or
withholding tax, unless such payments or gain are effectively connected with a
U.S. trade or business of such holder, or, in the case of gain, such holder is a
nonresident alien individual who holds the Common Shares as a capital asset and
who is present in the United States more than 182 days in the taxable year of
the sale and certain other conditions are met. The Company anticipates that its
activities should not in and of themselves cause any non-U.S. person to be
required to treat income in respect of the Common Shares of the Company as
effectively connected with a U.S. trade or business.
The American Jobs Creation Act of 2004 (the "2004 Act"), enacted on
October 22, 2004, modifies the tax treatment of certain distributions from the
Company to non-U.S. persons. Under the 2004 Act, for taxable years of the
Company beginning after December 31, 2004 and before January 1, 2008, the
Company will not be required to withhold any amounts with respect to
distributions it designates as attributable to the Company's (i) net short-term
capital gains in excess of net long-term capital losses or (ii) U.S. source
interest income that would be subject to U.S. federal income tax if earned
directly by a non-U.S. person, including portfolio interest, provided that the
non-U.S. holder furnish the Company with an IRS Form W-8BEN.
The 2004 Act also modified the tax treatment of distributions
attributable to gain from the disposition of U.S. real property interests. Under
the 2004 Act, any distributions before January 1, 2008 attributable to gain from
the disposition of a U.S. real property interest could be subject to U.S.
withholding tax when paid to a non-U.S. holder and could give rise to an
obligation on the part of such non-U.S. holder to file an income tax return.
Although the Company does not intend to invest directly in U.S. real property,
it is possible that the Company could become the owner of U.S. real property as
a result of a default on securities it may own. Further, an interest in a U.S.
corporation may be treated as a U.S. real property interest where more that 50%
of the assets of such corporation consist of U.S. real property interests during
a defined time period.
Generally, the Common Shares are includable in the estate of a deceased
non-U.S. holder for purposes of determining U.S. estate tax (subject to
reduction or elimination of such tax under
92
an applicable tax treaty). However, the 2004 Act provides that the value of the
Common Shares that is attributable to a RIC's ownership of certain qualifying
assets, including assets which would be portfolio debt obligations if held
directly by the non-U.S. holder, are not includable in such non-U.S. holder's
estate for U.S. estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company generally is required to withhold and remit to the U.S.
Treasury a percentage of the taxable dividends and other distributions paid to
and proceeds of share sales, exchanges, or redemptions made by any individual
holder who is a U.S. person and fails to furnish the Company with a correct
taxpayer identification number (TIN), who has under-reported dividends or
interest income, or who fails to certify to the Company that he or she is a U.S.
person who is not subject to such backup withholding. Pursuant to recently
enacted tax legislation, the backup withholding tax rate is 28% for amounts paid
through 2010. The backup withholding tax rate is scheduled to revert to 31% for
amounts paid after December 31, 2010. Backup withholding is not an additional
tax. Any amounts withheld from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
INVESTMENTS OF THE COMPANY
The Company may invest in, among other things, securities rated in the
lower rating categories of nationally recognized rating organizations ("high
yield bonds"). Some of these high yield bonds may be purchased at a discount and
may therefore cause the Company to recognize income before amounts due under the
obligations are paid. Accordingly, in order to satisfy the Distribution
Requirement, the Company may be required to liquidate portfolio securities or
borrow funds. In addition, a portion of the interest on such high yield bonds
may be treated as a dividend for purposes of the rules relating to the dividends
received deduction. In such cases, if the issuer of the high yield bonds is a
qualifying corporation, dividend payments by the Company may be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such interest.
The Company may invest in debt instruments, some of which may be at a
heightened risk of becoming non-performing, or be non-performing, at the time
they are purchased and which may require modifications of their terms in order
to make such investments fully, or more fully, performing investments. If
substantial modifications are made to a particular debt investment, the Company
will be treated for federal income tax purposes as having exchanged such debt
investment for a new debt investment, and may be required to recognize a gain or
loss equal to the difference between the issue price of such renegotiated debt
investment and the Company's basis therein. Such gain or loss may be ordinary in
character, as it may be treated as arising in the context of the conduct of a
trade or business. Any gain recognized by virtue of such deemed exchange will
increase the amount that the Company is required to distribute to its
shareholders in order to satisfy the Distribution Requirement and to not be
subject to the Excise Tax. In some years, therefore, the Company may be required
to distribute an amount greater than the total cash revenue that the Company
receives. Accordingly, in order to make the required distributions, the Company
may be required to liquidate portfolio securities or borrow funds.
93
To the extent that the Company is unable to convert non-performing
secured debt investments into performing debt investments, the Company may
foreclose on such debt investments and take title to the underlying collateral,
which may include real property. Income arising from the rental or sale of any
such real property will not satisfy the Qualified Income Requirement. To the
extent that such income, when combined with any other non-Qualifying Income of
the Company, exceeds 10% of the Company's gross income for any taxable year, the
Company would be unable to qualify as a RIC for such taxable year. The Company
will use its best efforts to ensure that it qualifies as a RIC for each taxable
year.
The Company may engage in various hedging transactions. Under various
provisions of the Code, the result of such investments and transactions may be
to change the character of recognized gains and losses, accelerate the
recognition of certain gains and losses, and defer the recognition of certain
losses. The amount of the Company's income that must be distributed each year to
satisfy the Distribution Requirement and to prevent imposition of the Excise
Tax, and the amount and timing of the recognition by shareholders of ordinary
income and long-term capital gain, may be affected by these provisions.
Pursuant to a provision of the Code governing the treatment of stripped
securities, an investment in a principal-only class of securities will result in
original issue discount and, consequently, will result in income to the Company.
Accordingly, investment by the Company in such instruments (or in other
instruments which bear original issue discount) would require the Company to
include such original issue discount in its income as it accrues, prior to the
receipt of the cash attributable to such income. Accordingly, in order to
satisfy the Distribution Requirement, the Company may be required to liquidate
portfolio securities or borrow funds.
Investment by the Company in certain "passive foreign investment
companies" could subject the Company to federal income tax (including interest
charges) on certain distributions or dispositions with respect to those
investments which cannot be eliminated by making distributions to shareholders.
Elections may be available to the Company to mitigate the effect of these
provisions but such elections generally accelerate the recognition of income
without the receipt of cash. Accordingly, in order to satisfy the Distribution
Requirement, the Company may be required to liquidate portfolio securities or
borrow funds.
The Company may invest in non-U.S. securities that may be subject to
non-U.S. withholding taxes. In that case, the Company's yield on those
securities would be decreased. Shareholders will generally not be entitled to
claim a credit or deduction with respect to foreign taxes paid by the Company.
Certain of the Company's investment practices are subject to special
and complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gains into higher taxed
short-term capital or ordinary income, (iii) convert ordinary loss or a
deduction into capital loss (the deductibility of which is more limited), (iv)
cause the Company to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Company will monitor its
transactions and may make certain tax elections to mitigate the effect of these
rules and generally attempt to reduce the risk that the Company might be
disqualified as a RIC. The Company may
94
he required to liquidate portfolio securities or borrow funds in order to
satisfy the Distribution Requirement and not be subject to the Excise Tax.
The foregoing is a general summary of the provisions of the Code and
the Treasury Regulations in effect as they directly govern the taxation of the
Company and holders of its Common Shares. These provisions are subject to change
by legislative or administrative action, and any such change may be retroactive.
Ordinary income and capital gain dividends may also be subject to state and
local taxes. Certain states exempt from state income taxation dividends paid by
a RIC which are derived from interest on U.S. government obligations. State law
varies as to whether dividend income attributable to U.S. government obligations
is exempt from state income tax.
Preliminary information regarding potential tax consequences in certain
non-U.S. jurisdictions may be available upon request. Any such information shall
not be deemed tax advice.
ALL PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR
FURTHER INFORMATION ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
OF PURCHASING AN INTEREST IN THE COMPANY.
LEGAL MATTERS
Jones Day serves or has served as counsel to the Company and the
Placement Agent in connection with the preparation of this Memorandum. Jones Day
has not represented and will not represent investors in the Company. In
assisting in the preparation of this Memorandum, Jones Day has relied upon
information provided by the Company and the Investment Manager.
Arnold & Porter LLP serves or has served as counsel for the Investment
Manager and certain of its affiliates as to matters of U.S. law. In acting as
counsel to the Investment Manager and its affiliates as to matters of U.S. law,
Arnold & Porter LLP has not represented and will not represent investors in the
Company. In assisting in the preparation of this Memorandum, Arnold & Porter LLP
has relied upon information provided by the Investment Manager and the Company.
No independent counsel has been retained to represent investors in the
Fund.
ACCESS TO ADDITIONAL INFORMATION
Prior to the Closing of this Offering, each prospective investor and
its representatives and advisors may ask questions to and receive answers from
the Investment Manager concerning the terms and conditions of this Offering and
request additional information necessary to verify the accuracy of the
information set forth herein, to the extent that the Investment Manager
possesses such information or can acquire it without unreasonable effort or
expense. The address of the Investment Manager and the location of the Company's
accounts and records is York Enhanced Strategies Management, LLC, 767 Fifth
Avenue, 17th Floor, New York, New York 10153. York's telephone number is (212)
300-1300, and its facsimile number is (212) 300-1301.
95
INDEX OF DEFINED TERMS
PAGE
2003 Act......................................................................90
2004 Act......................................................................92
200% Asset Coverage Ratio......................................................5
300% Asset Coverage Ratio......................................................5
Accredited Investors..........................................................ii
Additional Amount.............................................................53
Advisers Act...................................................................2
AML Program...................................................................81
Asset Coverage Ratio...........................................................5
Asset Group....................................................................1
Bank Loans....................................................................37
Beneficial Owner..............................................................83
Benefit Plan Investors........................................................85
Board of Directors.............................................................4
Borrowing.....................................................................55
Capital Commitments............................................................5
Carried Interest..............................................................20
Cayman Feeder Fund............................................................16
CE ACT........................................................................iv
CFTC..........................................................................iv
Church Plans..................................................................86
Clearstream...................................................................26
Closing........................................................................5
Closing Date...................................................................5
Collateral.....................................................................9
Commitments...................................................................55
Committed Capital.............................................................20
Common Capital Commitments.....................................................5
Common Shares..................................................................i
Common Subscription Agreements.................................................5
Company........................................................................i
Company Investments............................................................1
Company's Target Asset Mix....................................................38
Consent Dividend..............................................................48
Credit Enhancer...............................................................54
Credit risk...................................................................67
Custodian.....................................................................26
Defensive Hedge Transactions..................................................69
Delaware Feeder Fund..........................................................16
Director......................................................................16
I-1
INDEX OF DEFINED TERMS
(continued)
PAGE
Direct Participants...........................................................83
Disabling Conduct.............................................................23
Disinterested Non-Party Directors.............................................34
Distressed Debt...............................................................36
Distribution Requirement......................................................88
Drawdown Date..................................................................6
DTCC..........................................................................83
Equity Securities.............................................................37
ERISA..........................................................................5
ERISA Plan....................................................................85
Exchange Act..................................................................76
Excise Tax....................................................................89
Feeder Funds...................................................................2
Fund...........................................................................1
Governmental Plans............................................................86
High Yield Debt...............................................................36
Indemnified Persons...........................................................33
Indenture......................................................................5
Indirect Participants.........................................................83
Initial Draw Period...........................................................19
Insurance Agreement...........................................................19
Interest rate risk............................................................67
Intermediaries.................................................................6
Investment Committee...........................................................4
Investment Company Act.........................................................5
Investment Management Agreement................................................2
Investment Manager.............................................................1
Investment Period..............................................................8
IRAs..........................................................................86
IRS...........................................................................89
Look-Through Rule.............................................................86
Management Fee................................................................19
Member........................................................................23
Memorandum.....................................................................i
Mezzanine Investments.........................................................36
Morgan Stanley................................................................16
MS............................................................................16
MSIL..........................................................................16
NAV............................................................................6
Noteholders....................................................................8
Notes..........................................................................5
Notes Commitment...............................................................5
OFAC..........................................................................81
Operating Agreement...........................................................22
Other Adviser Accounts........................................................75
I-2
INDEX OF DEFINED TERMS
(continued)
PAGE
Placement Agent................................................................i
Power of Attorney.............................................................80
Preferred Shares..............................................................15
Qualified Clients.............................................................ii
Qualified Income Requirement..................................................88
Qualified Investors............................................................6
Qualified Purchasers..........................................................ii
Qualifying Income.............................................................88
Ramp-Up Period.................................................................8
Reference Asset...............................................................70
RIC............................................................................4
SEC............................................................................i
Securities Act.................................................................i
Similar Law...................................................................86
Statement.....................................................................19
Subscription Period............................................................6
Term Preferred Capital Commitments.............................................5
Term Preferred Shares..........................................................5
Total Available Capital........................................................5
Unregistered Funds............................................................24
Valuation Date................................................................19
York...........................................................................i
York Capital...................................................................2
I-3
APPENDIX A: COMPANY TARGETED RETURN ANALYSIS
The following discussion describes the analysis used by the Investment
Manager to determine the estimated target returns on the Common Shares (the
"Targeted Returns"), based upon assumptions that the Investment Manager
considers reasonable as of November 2, 2005.
ANY HYPOTHETICAL RETURNS, PROJECTIONS, FORECASTS AND ESTIMATES IN THIS
MEMORANDUM, INCLUDING ESTIMATES OF RETURNS OR PERFORMANCE, ARE FORWARD-LOOKING
STATEMENTS, ARE BASED UPON CERTAIN ASSUMPTIONS AND ARE PRELIMINARY IN NATURE.
FUTURE EVENTS ARE DIFFICULT OR IMPOSSIBLE TO PREDICT, MAY DIFFER FROM THOSE
ASSUMED AND OFTEN DEPEND ON FACTORS THAT ARE BEYOND THE COMPANY'S AND THE
INVESTMENT MANAGER'S CONTROL. SOME IMPORTANT FACTORS WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING STATEMENTS
INCLUDE CHANGES IN INTEREST RATES OR EXPECTED INTEREST RATES; CHANGES IN
DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL AND LEGAL CONDITIONS;
DIFFERENCES IN THE ACTUAL ALLOCATION OF THE COMPANY INVESTMENTS AMONG ASSET
GROUPS FROM THOSE ASSUMED HEREIN; CHANGES IN THE DEGREE OF LEVERAGE ACTUALLY
USED BY THE COMPANY FROM TIME TO TIME; THE DEGREE TO WHICH THE COMPANY
INVESTMENTS ARE HEDGED AND THE EFFECTIVENESS OF SUCH HEDGES; AND THE TERMS OF
BORROWING AGREEMENTS. IN ADDITION, THE DEGREE OF RISK WILL BE INCREASED AS A
RESULT OF LEVERAGING OF THE COMPANY INVESTMENTS. OTHER RISK FACTORS ARE
DESCRIBED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS MEMORANDUM. OTHER EVENTS
WHICH WERE NOT TAKEN INTO ACCOUNT, SUCH AS EVENTS SIMILAR TO THE TERRORIST
ATTACKS OF SEPTEMBER 11, 2001, AND THEIR REPERCUSSIONS, MAY OCCUR AND MAY
SIGNIFICANTLY AFFECT THE PROJECTIONS, FORECASTS AND ESTIMATES CONTAINED HEREIN.
ANY ASSUMPTIONS SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE ACTUAL
COMPOSITION OF THE PORTFOLIO, OF THE ACTUAL RANGE, MAGNITUDE OR TIMING OF
CHANGES IN THE MARKET VALUE OF THE COMPANY INVESTMENTS, OF THE ACTUAL AMOUNT AND
TIMING OF THE EXPENSES AND LIABILITIES OF THE COMPANY OR OF THE ACTUAL LEVEL OF
INTEREST RATES. IN ADDITION, CERTAIN ASSUMPTIONS, INCLUDING THOSE RELATING TO
THE TIMING OF RECEIPT AND APPLICATION OF CASH FLOWS, HAVE BEEN MADE TO SIMPLIFY
THE PRESENTATION AND, ACCORDINGLY, ACTUAL RESULTS WILL DIFFER, AND MAY DIFFER
SIGNIFICANTLY, FROM THOSE PRESENTED. AS A RESULT, THERE CAN BE NO ASSURANCE THAT
ESTIMATED RETURNS OR PROJECTIONS CAN BE REALIZED OR THAT ACTUAL RETURNS OR
RESULTS WILL NOT BE MATERIALLY LOWER THAN THOSE ESTIMATED HEREIN. SUCH ESTIMATED
RETURNS AND PROJECTIONS SHOULD BE VIEWED AS HYPOTHETICAL AND DO NOT REPRESENT
THE ACTUAL RETURNS THAT MAY BE ACHIEVED BY AN INVESTOR. INVESTORS SHOULD CONDUCT
THEIR OWN ANALYSIS, USING SUCH ASSUMPTIONS AS THEY DEEM APPROPRIATE, AND SHOULD
FULLY CONSIDER OTHER AVAILABLE INFORMATION, INCLUDING THE INFORMATION DESCRIBED
UNDER "RISK FACTORS" HEREIN, IN MAKING AN INVESTMENT DECISION.
A-1
PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO RELY ON THE RETURNS SET
FORTH BELOW IN MAKING A DECISION ON WHETHER OR NOT TO PURCHASE THE COMMON SHARES
OFFERED HEREBY.
The following assumptions are for illustrative and modeling purposes
only. No representation is made that the assumptions to or outcomes from the
modeling necessarily reflect historical performance of similar investment
securities. The analysis assumes:
o Two investment return profiles provided by York given as Case A
and Case B above and forward LIBOR curve for the 10-year life of
the transaction.
o That the Notes bears interest at a rate of LIBOR plus 40 basis
points. Any defaulted interest earns compound interest at the same
rate. In addition a commitment fee of 20 basis points per annum
will be paid in respect of Note Commitments that have not been
drawn down.
o A dividend yield of LIBOR plus 30 basis points on the Term
Preferred Shares, plus an additional payment of 30 basis points on
the Term Preferred Shares to the Credit Enhancer as an insurance
premium. In addition, an unissued share fee of 10 basis points
each will be paid to the holders of the Term Preferred Shares and
the Credit Enhancer, respectively. Any unpaid dividends (or
payments to the Credit Enhancer) will be compounded at the same
rate.
o Expenses are paid quarterly and are assumed to be 20 basis points
per annum on the anticipated value of the total collateral. The
analysis assumes certain upfront legal and other expenses.
o A 10 month investment deployment period.
o The Company will fully draw the capital commitments within nine
months in stages commencing at the Closing as set forth in the
Anticipated Capitalization Table on page A-6.
o The Company will distribute all of its net income and net capital
gains each period and may distribute capital at any time, subject
to restrictions set forth in the terms of the Indenture and Term
Preferred Shares.
o That the Company will pay Management Fees to the Investment
Manager of approximately 1% per annum as described on page 19.
o That the Investment Manager will be entitled to the Carried
Interest as described on page 20.
o That the cash collected during each period earns a return equal to
the average return on assets, if such return is positive,
otherwise cash collected during each period earns a zero return.
A-2
o Quarterly coupon payments for High Yield (bearing 8% interest per
annum) and Bank Loans (bearing interest at a rate of LIBOR plus
250 basis points per annum).
o The number of reinvestment cycles is 10 for High Yield, 2 for
Distressed Debt, 6 for Bank Loans, and 40 for Equities. Capital
gains on equity are assumed to be distributed uniformly throughout
the year in which they are generated.
o All internal rates of return are computed using 365 days in a year
and assume that the initial cash outflow takes place at the
Closing.
o That the maturity of the Notes and redemption of the Term
Preferred Shares are extended until the end of the transaction,
and that the holders of the Notes and the Term Preferred Shares do
not accelerate if the interest or dividend yield remains unpaid in
any period.
ASSUMPTIONS OF THE INVESTMENT MANAGER
The following potential targeted returns of the Company have been
developed based upon certain assumptions of the Investment Manager. These
assumptions include, among others, (i) asset mix; (ii) investment returns; (iii)
timing of investments; (iv) frequency of investment cycles; (v) degree of
leverage used by the Company and the terms of its borrowing arrangements; (vi)
interest rates; (vii) timing of liability drawdowns; (viii) advisory fees; (ix)
other expenses; and (x) Company distributions.
o ASSET MIX: The value and composition of the Company Investments will
vary over time and may be affected by, among other things, financial
covenants to which the Company is subject under its borrowing
arrangements and changing market conditions which, in the opinion of
the Investment Manager, may warrant a different allocation of the
Company Investments. The Targeted Return calculations assume the
Company will achieve the target asset mix indicated below (the "Target
Asset Mix") by investing evenly in the various Asset Groups during the
investment deployment period.
[Download Table]
TARGET ASSET MIX
APPROXIMATE %
COMPANY INVESTMENTS OF PORTFOLIO
------------------- -------------------
MEZZANINE INVESTMENTS AND HIGH YIELD DEBT 30%
DISTRESSED DEBT 30%
BANK LOANS 20%
EQUITY SECURITIES 20%
----
TOTAL PORTFOLIO ASSETS 100%
o INVESTMENT RETURNS: The Investment Manager estimates that the Target
Asset Mix indicated above would generate returns on Common Shares as
set forth below.
A-3
[Enlarge/Download Table]
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Hypothetical Net Returns to Common Shares at Assumed Collateral Return Rate (1)
-------------------------------------------------------------------------------------------------------------------
Assumed Return Rates
% of Assets Case A Case B
-------------------------------------------------------------------------------------------------------------------
Mezzanine Investments and 30% 8% IRR 10% IRR
High Yield Debt
-------------------------------------------------------------------------------------------------------------------
Distressed Debt 30% 15% IRR 20% IRR
-------------------------------------------------------------------------------------------------------------------
Bank Loans 20% 7% IRR 10% IRR
-------------------------------------------------------------------------------------------------------------------
Equity Securities 20% 18% IRR 25% IRR
-------------------------------------------------------------------------------------------------------------------
Hypothetical Projected Leveraged Returns Under Target 14% 20%
Asset Mix(2)
-------------------------------------------------------------------------------------------------------------------
(1) There can be no assurance that these returns or any other particular
level of return will be achieved.
(2) Calculated net of estimated fees, expenses, interest, dividends on the
Preferred Shares and the Carried Interest payable to the Investment Manager.
-----------------------------------------
There can be no assurance that these returns or any other particular level of
return will be achieved. Assumed investment returns may not be indicative of
actual returns. There are two hypothetical scenarios contemplated for estimated
returns. Case A is a lower return scenario, while Case B is a higher return
scenario. Actual returns may be greater or less than the returns shown above.
Investors should note that certain assumptions have been made in order to
calculate the expected returns. Many of those assumptions are detailed herein.
No representation is made that any hypothetical return will be achieved, that
all factors relevant to any such return have been considered, that all
assumptions made in calculating any such return have been stated, that any
assumptions that have been made reflect the Placement Agent's or York's best
estimate of future conditions, or that any stated or unstated assumptions will
turn out to be correct. Changes to any assumptions or consideration of different
or additional factors may have a material impact on any hypothetical return.
Future events are difficult or impossible to predict, may differ from those
assumed and often depend on factors that are beyond the Placement Agent's and
York's control. Any hypothetical returns, projections, forecasts and estimates,
including hypothetical projected returns and estimates of future performance,
are forward-looking statements, and are preliminary in nature. Prospective
investors are cautioned not to rely on the hypothetical projected returns
presented above in making a decision on whether or not to purchase securities of
the Company.
Hypothetical or simulated results have certain inherent limitations. Unlike an
actual performance record, simulated results do not represent actual investment
activities. Also, because investments have not actually been made, the
hypothetical results may have under- or over-compensated for the impact, if any,
of certain market factors such as the lack of liquidity. No representation is
made that the Company will earn profits or incur losses similar to those shown
above or that York's investment strategies will perform as set forth above under
certain or any market conditions. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE
RESULTS.
A-4
The assumed return rates have been calculated net of anticipated fees, expenses
and the Carried Interest payable to the Investment Manager.
o TIMING OF INVESTMENTS: The Investment Manager has made the following
assumptions about the timing of investments:
(i) The Notes, the Term Preferred Shares and the Common Shares
will be issued according to the Anticipated Capitalization
Table ("Anticipated Capitalization Table") below.
(ii) Capital will be invested at the assumed return on assets
throughout the existence of the Company.
(iii) During the investment deployment period, cash will be invested
consistent with the timing discussed in "Asset Mix" above.
After the investment deployment period, all cash from both
maturing Company Investments and from the disposition of
certain other Company Investments will periodically be
reinvested into Collateral of the same asset class of the
disposed assets at prices set to yield the stated return rate.
(iv) Returns in excess of the coupon on certain Company Investments
will be realized periodically in the form of capital
appreciation upon disposition of investments. Principal from
the disposition of such investments during such periods is
estimated to be reinvested in assets like those that matured or
were otherwise disposed of, although it may be used to redeem
the Notes or the Term Preferred Shares or invested in other
types of assets.
(v) The Company will distribute substantially all of its net
realized income each year and may distribute capital at any
time. For this purpose, net income includes all interest
income, dividends and realized capital gains, less applicable
fees, expenses and reserves.
(vi) The market value of the assets is assumed to exceed the
required minimums associated with the Moody's Advance Amounts
or S&P Advance Amounts (as defined in Appendix C and Appendix
D, respectively) required by the rating agencies and the
Anticipated Capitalization Table as of the end of month 9 is
assumed to stay constant until the Notes have been retired in
year 10.
o DEGREE OF LEVERAGE; TERMS OF THE INDENTURE: The assumptions with
respect to the investment return cases described above are based upon a
100% utilization rate of the Notes and the Term Preferred Shares. In
addition, the Investment Manager has assumed that: (a) the Notes are
issued in installments in accordance with the funding schedule set
forth below; (b) the Company becomes fully invested within twelve
months after the Closing; (c) all of the Notes are retired within 10
years from Closing, and the Term Preferred Shares are redeemed 10 years
from closing, with proceeds from (1) the disposition of certain assets
made in order to realize capital gains as described in (iv) above and
(2) from the liquidation of Company Investments at prices set to yield
the
A-5
stated return; and (d) all remaining Company Investments are assumed to
be liquidated within ten years after the Closing, to redeem the Common
Shares.
[Enlarge/Download Table]
ANTICIPATED CAPITALIZATION TABLE
TERM
COMMON SENIOR PREFERRED TOTAL
SHARES FACILITY SHARES ($ MILLIONS)
-------------------------------------------------------------------------------------------------------------------
Closing 50% 0% 0% $202.3
-------------------------------------------------------------------------------------------------------------------
End of Month 3 25% 25% 25% $404.5
-------------------------------------------------------------------------------------------------------------------
End of Month 6 25% 25% 25% $606.7
-------------------------------------------------------------------------------------------------------------------
End of Month 9 0% 50% 50% $809.0
-------------------------------------------------------------------------------------------------------------------
The Investment Manager assumes that the costs and expenses related to the Notes
and the Term Preferred Shares will include, but not be limited to, interest
expense, unused commitment fees, insurance fees, and hedging expenses. See
"Other Expenses."
o LEVERAGED STRUCTURE: Assuming that the Term Preferred Shares will
represent approximately 16.8% of the Company's capital and pay
dividends at a rate of LIBOR plus 30 bps (plus an additional payment of
30 bps on the Term Preferred Shares to the Credit Enhancer as an
insurance premium) and that the Company's debt (including, without
limitation, outstanding Notes) will represent approximately 33.2% of
the Company's capital and require interest payments at a rate of LIBOR
plus 40 bps, the income generated by the Company's portfolio (net of
estimated expenses) must exceed approximately LIBOR plus 47 bps to
cover the interest payments specifically related to the Term Preferred
Shares (including the fee to the Credit Enhancer) and such debt
assuming the Term Preferred Shares and such debt are fully drawn. Of
course, these numbers are merely estimates used for illustration.
Actual interest rates and drawdown schedules on the Preferred Shares
and the debt will vary frequently and may be significantly higher or
lower, and vary, respectively, than the rate estimated above.
o INTEREST RATES: The Investment Manager has assumed a representative
forward LIBOR curve for purposes of determining the base rate for
calculating the interest and dividend expense for the Notes and the
Term Preferred Shares assumed to be issued with a floating rate of
interest during the entire period.
o MANAGEMENT FEE: In calculating the Targeted Returns, the Investment
Manager has included the Management Fee in addition to the Carried
Interest. The Management Fee used in the calculation is equal to 100
basis points per annum, payable in arrears, on the Committed Capital or
the NAV of the Company, as applicable, as described on page 19.
o OTHER EXPENSES: The Company will be responsible for paying the
recurring fees and certain expenses of the Investment Manager, due
diligence and negotiation expenses, rating agency monitoring fees, fees
and expenses of custodians, administrators, transfer and distribution
agents, counsel, directors, insurance, filings and registrations, proxy
expenses, communications to investors, interest, taxes and audit
expenses, portfolio transaction expenses, indemnification, litigation
and other extraordinary expenses and such other expenses as are
approved by the directors as being reasonably related to the
A-6
organization, capitalization, operation or administration of the
Company and any portfolio investments.
Certain organizational expenses, such as legal, tax, accounting
and other organizational expenses incurred in connection with the Notes
and the Term Preferred Shares, the formation of the Company and related
entities and the payment of certain fees due to the Placement Agent,
the placement agent with respect to the Notes and the Term Preferred
Shares are assumed to total approximately 2.4% of Total Available
Capital, payable upon Closing. Such expenses, other than placement
agency fees, will be expensed during the Company's first fiscal year.
Placement agency fees will be amortized. However, for purposes of this
Appendix A it has been assumed that all fees and expenses discussed in
this paragraph will be expensed entirely upon Closing.
The Investment Manager has assumed that ongoing expenses
(exclusive of management costs), will be 20 basis points per annum on
the anticipated average Total Available Capital.
The Investment Manager has assumed that the cost of hedging
activities will average zero basis points per annum. In fact, there may
be costs associated with any hedging activities, which would reduce the
investment returns of the Company.
COMPANY DISTRIBUTIONS: The Investment Manager intends to make
quarterly cash distributions of cumulative net income to the
shareholders (as described under "Summary of Material Terms of the
Company--Distributions"). Realization of this assumption will be
subject to, among other factors, the Company's performance, limitations
under the Indenture and potentially limitations under the Investment
Company Act on multiple distributions of long-term capital gain during
a single year. Changes in market value are treated as cumulative net
income (or loss) for distribution purposes.
A-7
APPENDIX B: ADDITIONAL HYPOTHETICAL RETURNS
EFFECT OF LEVERAGE
The following table is designed to illustrate the effect of leverage on
Common Share total return, assuming investment portfolio total internal rate of
returns per annum (comprised of income and changes in the value of securities
held in the Company's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed
investment portfolio returns are hypothetical figures and are not necessarily
indicative of the investment portfolio returns experienced or expected to be
experienced by the Company. See "Risk Factors." The table further reflects the
issuance of Term Preferred Shares and debt representing 50% of the Company's
capital, and the Company's currently projected annual leverage dividend and
borrowing interest rate.
Assumed Portfolio Total Return -10% -5% 0% 5% 10%
(Net of Expenses)
Common Share Total Return -12.73% -7.29% -2.07% 2.29% 10.04%
In cases where the Assumed Portfolio Return is not positive, it is
assumed that the Company is unable to issue any Preferred Shares or debt
(including the Notes), that a commitment fee of 0.2% per annum is paid to
holders of the Notes for five years, that an unissued share fee of 0.1% per
annum is paid to the holders of the Term Preferred Shares for one and a half
years, and that an unissued share fee of 0.1% per annum is paid to the Credit
Enhancer (in respect of unissued Term Preferred Shares) for one and a half
years. It is probable that, under these circumstances, an Event of Default might
occur. These analyses assume that any Event of Default is avoided.
In cases where the Assumed Portfolio Return is less than the interest
rate per annum for High Yield and Bank Loans, it is assumed that the deal loses
a portion of the interest due such that the asset internal rate of return equals
the Assumed Portfolio Return.
Unless and until preferred shares are issued or the Company uses
leverage through borrowing, the Common Shares will not be leveraged and the
foregoing illustrations for positive Assumed Portfolio Return will not be
pertinent.
The calculations of projected returns in this Appendix B, except where
otherwise noted, use the same methodology and are subject to the same
qualifications as those of Appendix A.
B-1
APPENDIX C: MOODY'S COLLATERAL VALUATION SCHEDULE
CALCULATION OF MOODY'S ADVANCE AMOUNT
"Moody's Advance Rate" means the Moody's Senior Advance Rate or the
Moody's Total Advance Rate, as applicable.
"Moody's Senior Advance Rate" means, for purposes of determining the
Senior Over-Collateralization Test, for each Moody's Asset Category, the
percentage specified in the table below opposite such Moody's Asset Category:
[Download Table]
MOODY'S MOODY'S AAA
ASSET CATEGORY ADVANCE RATE
A-1 100.00%
A-2 97.00%
A-3 91.75%
A-4 79.75%
A-5 69.25%
A-6 63.75%
B-1 89.00%
B-2 87.70%
B-3 75.25%
B-4 81.50%
B-5 79.00%
B-6 59.00%
B-7 73.00%
B-8 68.75%
B-9 54.50%
B-10 48.50%
C-1 91.00%
C-2 79.75%
C-3 83.75%
C-4 71.25%
C-5 66.75%
C-6 52.25%
D-1 80.00%
D-2 73.00%
D-3 70.00%
D-4 64.75%
D-5 48.00%
D-6 44.50%
E-1 72.00%
E-2 66.75%
E-3 61.00%
E-4 57.75%
E-5 35.50%
E-6 35.50%
F-1 53.50%
F-2 50.25%
F-3 42.25%
F-4 42.25%
F-5 25.25%
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[Download Table]
MOODY'S MOODY'S AAA
ASSET CATEGORY ADVANCE RATE
F-6 25.25%
G-1 57.00%
G-2 47.75%
G-3 40.75%
G-4 29.75%
H-1 24.50%
H-2 22.25%
H-3 18.75%
H-4 15.75%
I-1 58.75%
I-2 39.25%
I-3 19.25%
J-1(A) 33.00%
J-1(B) 18.00%
J-2 20.25%
J-3 14.25%
J-4 26.25%
"Moody's Total Advance Rate" means, for purposes of determining the
Total Over-Collateralization Test, for each Moody's Asset Category, the
percentage specified in the table below opposite such Moody's Asset Category:
[Download Table]
MOODY'S MOODY'S AA2
ASSET CATEGORY ADVANCE RATE
A-1 100.00%
A-2 97.50%
A-3 93.00%
A-4 82.75%
A-5 73.50%
A-6 67.50%
B-1 90.50%
B-2 89.50%
B-3 79.25%
B-4 85.25%
B-5 83.25%
B-6 66.25%
B-7 78.75%
B-8 74.00%
B-9 61.75%
B-10 55.00%
C-1 93.00%
C-2 84.25%
C-3 86.75%
C-4 76.50%
C-5 71.50%
C-6 55.75%
D-1 83.75%
D-2 78.00%
D-3 74.50%
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[Download Table]
MOODY'S MOODY'S AAA
ASSET CATEGORY ADVANCE RATE
D-4 70.00%
D-5 52.00%
D-6 48.00%
E-1 77.00%
E-2 72.50%
E-3 66.75%
E-4 63.70%
E-5 39.25%
E-6 39.25%
F-1 60.75%
F-2 57.75%
F-3 49.00%
F-4 49.00%
F-5 29.50%
F-6 29.50%
G-1 60.75%
G-2 52.00%
G-3 47.00%
G-4 34.25%
H-1 31.25%
H-2 28.50%
H-3 25.50%
H-4 21.50%
I-1 62.75%
I-2 45.00%
I-3 24.50%
J-1(A) 44.00%
J-1(B) 24.50%
J-2 20.50%
J-3 14.75%
J-4 27.00%
"Moody's Advance Amount" means the Moody's Senior Advance Amount or the
Moody's Total Advance Amount, as applicable.
Notwithstanding the foregoing or anything in the definitions of Moody's
Senior Advance Amount or Moody's Total Advance Amount, for purposes of
determining the Moody's Advance Amount,
(i) the Market Value of any Unhedged Foreign Investment shall be
95% of the Market Value thereof otherwise determined in
accordance with the above procedures; provided that, if the
Foreign Issuer of such Unhedged Foreign Investment is from a
country whose sovereign debt rating in a non-local currency is
not assigned a rating of "Aa2" or better by Moody's (and, if
rated "Aa2" by Moody's, such rating has not been placed on a
credit watch with negative implications by Moody's), the
Market Value of such Unhedged Foreign Investment shall be 85%
of the Market Value thereof otherwise determined in accordance
with the above procedures;
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(ii) the percentage applicable above to Cash in a currency other
than Dollars shall be 95% (and not 100%; provided that, if
such Cash is the currency of a country whose sovereign debt
rating in a non-local currency is not assigned a rating of
"Aa2" or better by Moody's (and, if rated "Aa2" by Moody's,
such rating has not been placed on a credit watch with
negative implications by Moody's), the applicable percentage
shall be 85%, unless such Cash is protected against currency
fluctuations as a result of Currency Hedging Transactions, in
which case, the percentage applicable shall be 100%;
(iii) the Market Value of any Structured Product Transaction, if
positive, shall be 95% of the Market Value thereof otherwise
determined in accordance with the above procedures and, in the
case of any Structured Product Transaction in which the Fund
purchases a CDS, the full amount of the premiums to be paid by
the Fund for the duration of such CDS will be deducted from
the Market Value of such Structured Product Transaction; and
(iv) with respect to any Fund Investments in any Foreign Issuer
from a country that becomes an Ineligible Country after the
Fund has invested in such Fund Investment (and such Fund
Investment does not have a guarantor located in a currently
Eligible Country), so long as such Fund Investment is not an
Excluded Investment under clause (viii) of the definition
thereof, the Market Value of such Fund Investment shall be 90%
of the Market Value thereof otherwise determined in accordance
with the above procedures.
For purposes of calculating the Moody's Advance Amount, the
Fund shall assign each Eligible Investment to one of the following categories
(each, a "Moody's Asset Category") commencing upon the initial acquisition
thereof (and, for purposes of this categorization, the Market Value Price of a
Fund Investment trading at par is equal to $1.00):
"Asset Category A-1 Investments" means (a) Cash and (b) Cash
Equivalents described in clause (vi) of the definition of such term and (c) Cash
Equivalents described in clauses (i), (ii), (iii) or (iv) of the definition of
such term that mature on the Business Day next following the date of acquisition
thereof or, in the case of any money market accounts, are payable on demand of
the holder or within one Business Day of demand.
"Asset Category A-2 Investments" means Cash Equivalents (other than
Cash in U.S. dollars, U.S. Government Securities and Cash Equivalents described
in clauses (b) or (c) of the definition of Asset Category A-1 Investments) and
U.S. Government Securities with maturities of less than or equal to 183 days.
"Asset Category A-3 Investments" means U.S. Government Securities with
final maturities more than 183 days but less than or equal to two (2) years.
"Asset Category A-4 Investments" means U.S. Government Securities with
final maturities more than two (2) years but less than or equal to ten (10)
years.
"Asset Category A-5 Investments" means U.S. Government Securities with
final maturities more than ten (10) years but less than or equal to twenty (20)
years.
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"Asset Category A-6 Investments" means U.S. Government Securities with
final maturities more than twenty (20) years but less than or equal to thirty
(30) years.
"Asset Category B-1 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.90 and
(iii) are rated "Ba3" or better by Moody's.
"Asset Category B-2 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.90 and
(iii) are rated "B1", "B2" or "B3" by Moody's.
"Asset Category B-3 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.90 and
(iii) are rated "Caa1" or lower by Moody's or are not rated by Moody's.
"Asset Category B-4 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.80 and
less than $0.90 and (iii) are rated "Ba3" or better by Moody's.
"Asset Category B-5 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.80 and
less than $0.90 and (iii) are rated "B 1", "B2" or "B3" by Moody's.
"Asset Category B-6 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.80 and
less than $0.90 and (iii) are rated "Caa1" or lower by Moody's or are not rated
by Moody's.
"Asset Category B-7 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.70 and
less than $0.80 and (iii) are rated "Ba3" or better by Moody's.
"Asset Category B-8 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.70 and
less than $0.80 and (iii) are rated "B1", "B2" or "B3" by Moody's.
"Asset Category B-9 Investments" means Bank Loans which (i) are
Performing, (ii) have a Market Value Price greater than or equal to $0.70 and
less than $0.80 and (iii) are rated "Caa1" or lower by Moody's or are not rated
by Moody's.
"Asset Category B-10 Investments" means Bank Loans which (i) are
Performing and (ii) have a Market Value Price less than $0.70.
"Asset Category C-1 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of five (5) years or less and (iv) are rated "Baa3" or better by
Moody's.
"Asset Category C-2 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing,
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(ii) pay interest at a fixed rate, (iii) have a final maturity of five (5) years
or less and (iv) are rated "Baa3" or better by Moody's.
"Asset Category C-3 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than five (5) years and less than or equal to ten (10)
years and (iv) are rated "Baa3" or better by Moody's.
"Asset Category C-4 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than five (5) years and less than or equal to ten (10)
years and (iv) are rated "Baa3" or better by Moody's.
"Asset Category C-5 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "Baa3" or better
by Moody's.
"Asset Category C-6 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "Baa3" or better
by Moody's.
"Asset Category D-1 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of five (5) years or less and (iv) are rated "Ba1", "Ba2" or
"Ba3" by Moody's.
"Asset Category D-2 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of five (5) years or less and (iv) are rated "Ba1", "Ba2" or
"Ba3" by Moody's.
"Asset Category D-3 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than five (5) years and less than or equal to ten (10)
years and (iv) are rated "Ba1", "Ba2" or "Ba3" by Moody's.
"Asset Category D-4 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than five (5) years and less than or equal to ten (10)
years and (iv) are rated "Ba1", "Ba2" or "Ba3" by Moody's.
"Asset Category D-5 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "Bal", "Ba2" or
"Ba3" by Moody's.
C-6
"Asset Category D-6 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "Bal", "Ba2" or
"Ba3" by Moody's.
"Asset Category E-1 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of five (5) years or less and (iv) are rated "B1", "B2" or "B3"
by Moody's.
"Asset Category E-2 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of five (5) years or less and (iv) are rated "B1", "B2" or "B3"
by Moody's.
"Asset Category E-3 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than five (5) years and less than or equal to ten (10)
years and (iv) are rated "B1", "B2" or "B3" by Moody's.
"Asset Category E-4 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than five (5) years and less than or equal to ten (10)
years and (iv) are rated "B1", "B2" or "B3" by Moody's.
"Asset Category E-5 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "B1", "B2" or "B3"
by Moody's.
"Asset Category E-6 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "B1", "B2" or "B3"
by Moody's.
"Asset Category F-1 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of five (5) years or less and (iv) are rated "Caa1" or lower by
Moody's or are not rated by Moody's.
"Asset Category F-2 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of five (5) years or less and (iv) are rated "Caa1" or lower by
Moody's or are not rated by Moody's.
"Asset Category F-3 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than five (5) years and less
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than or equal to ten (10) years and (iv) are rated "Caa1" or lower by Moody's or
are not rated by Moody's.
"Asset Category F-4 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than five (5) years and less than or equal to ten (10)
years and (iv) are rated "Caa1" or lower by Moody's or are not rated by Moody's.
"Asset Category F-5 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a floating rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "Caa1" or lower by
Moody's or are not rated by Moody's.
"Asset Category F-6 Investments" means High Yield Bonds and Mezzanine
Investments (other than Preferred Stock) which are not convertible securities
and which (i) are Performing, (ii) pay interest at a fixed rate, (iii) have a
final maturity of more than ten (10) years and (iv) are rated "Caa1" or lower by
Moody's or are not rated by Moody's.
"Asset Category G-1 Investments" means convertible High Yield Bonds and
convertible Mezzanine Investments (other than Preferred Stock) which (i) are
Performing and (ii) are rated "Baa3" or better by Moody's.
"Asset Category G-2 Investments" means convertible High Yield Bonds and
convertible Mezzanine Investments (other than Preferred Stock) which (i) are
Performing and (ii) are rated "Ba1", "Ba2" or "Ba3" by Moody's.
"Asset Category G-3 Investments" means convertible High Yield Bonds and
convertible Mezzanine Investments (other than Preferred Stock) which (i) are
Performing and (ii) are rated "B1", "B2" or "B3" by Moody's.
"Asset Category G-4 Investments" means all other convertible High Yield
Bonds and convertible Mezzanine Investments (other than Preferred Stock) which
are Performing.
"Asset Category H-1 Investments" means convertible Preferred Stock
which (i) is Performing and (ii) is publicly issued Preferred Stock.
"Asset Category H-2 Investments" means Preferred Stock which is not
convertible Preferred Stock and which (i) is Performing and (ii) is publicly
issued Preferred Stock.
"Asset Category H-3 Investments" means convertible Preferred Stock
which (i) is Performing and (ii) is privately issued Preferred Stock.
"Asset Category H-4 Investments" means Preferred Stock which is not
convertible Preferred Stock and which (i) is Performing and (ii) is privately
issued Preferred Stock.
"Asset Category I-1 Investments" means Bank Loans which (i) are
non-Performing and (ii) have a Market Value Price greater than or equal to
$0.85.
C-8
"Asset Category I-2 Investments" means Bank Loans which (i) are
non-Performing and (ii) have a Market Value Price less than
$0.85.
"Asset Category I-3 Investments" means High Yield Bonds and Mezzanine
Investments (convertible and non-convertible) and Preferred Stock, in each case,
which are non-Performing.
"Asset Category J-1(A) Investments" means Equity Securities that are
issued by companies that are included in the S&P 500.
"Asset Category J-1(B) Investments" means Equity Securities that are
issued by companies that are not included in the S&P 500.
"Asset Category J-2 Investments" means Private Equity Securities (other
than Preferred Stock).
"Asset Category J-3 Investments" means CDO Debt Securities and
Structured Product Transactions (other than Fully Collateralized Structured
Product Transactions) and Fund Investments (other than Preferred Stock) in
Mezzanine Investments not otherwise described in any of the preceding Asset
Categories.
"Asset Category J-4 Investments" means Fund Investments in Bank Loans
or High Yield Bonds not otherwise described in any of the preceding Asset
Categories.
Rating Procedures. References herein to any rating by Moody's or S&P
shall include ratings determined by such Rating Agency or in accordance with
guidelines approved by such Rating Agency (including, in the case of Moody's,
Moody's Rating Correlation Procedures) and shall also be deemed to include an
equivalent rating in a successor rating category of Moody's or S&P, as the case
may be, or if neither of Moody's or S&P is in the business of rating securities,
an equivalent rating from another Rating Agency. Notwithstanding the foregoing,
for so long as Moody's is in the business of rating securities, unless the
Rating Agency Condition with respect to Moody's shall have been satisfied or the
Fund Investment in question is issued by Moody's or any Affiliate of Moody's,
the Moody's Rating Correlation Procedures shall be applied.
Notwithstanding any other provision contained above:
(i) for purposes of determining whether a Fund Investment falls
within a specific Moody's Asset Category, to the extent that
any Fund Investment would fall in more than one of the Moody's
Asset Categories, such Fund Investment shall be deemed to fall
into the Moody's Asset Category with the lowest specified
Moody's Advance Rate unless the Insurer otherwise agrees and
the Rating Agency Condition with respect to Moody's has been
satisfied;
(ii) Fund Investments that are CDO Debt Securities will be assigned
to an Asset Category for High Yield Bonds using a rating that
is (i) one rating category (i.e., three rating subcategories)
below the Moody's rating, if such CDO Debt Security is rated
by Moody's, and (ii) two rating categories (i.e., six rating
subcategories) below the actual public S&P's rating, if such
CDO Debt Security is not rated by Moody's but is publicly
rated by S&P;
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(iii) any Fund Investments constituting Busted Convertible Bonds
shall be deemed to fall into the Moody's Asset Category into
which such Fund Investment would otherwise fall if it were not
a convertible security; provided that the Market Value of any
Busted Convertible Bonds shall be 95% of the Market Value
thereof otherwise determined in accordance with the valuation
procedures set forth herein;
(iv) for the purpose of determining the Moody's Advance Rate
applicable to a Fully Collateralized Structured Product
Transaction, such Fully Collateralized Structured Product
Transaction shall be deemed to fall into the Moody's Asset
Category of its reference obligation; all other Structured
Product Transactions shall be Moody's Asset Category J-3
Investments;
(v) for the purpose of determining the Moody's Advance Rate
applicable to Fund Investments that are Hedging and Short Sale
Transactions, at any time during the 60-day time period
described in clause (vii) of the definition of Excluded
Investments below, the Moody's Advance Rate will be 90% of the
Moody's Advance Rate calculated for such Fund Investment
pursuant to the Moody's Advance Rate table in the definition
of Moody's Advance Rate above; and
(vi) for the purpose of determining the Moody's Advance Rate
applicable to Fund Investments in Bank Loan Participations at
any time during the 60-day time period described in clause
(vii) of the definition of Excluded Investments below, the
Moody's Advance Rate will be 90% of the Moody's Advance Rate,
calculated for such Fund Investment pursuant to the Moody's
Advance Rate table above.
"Moody's Senior Advance Amount" as of any date of determination under
the Senior Over-Collateralization Test, means an amount equal to the sum of (i)
the aggregate for all Eligible Investments (other than Short Sale Transactions
and Warrant/Option Investments) determined for each such Eligible Investment by
multiplying (1) the Market Value (determined as described below) of such
Eligible Investment (determined as described below) by (2) the Moody's Senior
Advance Rate for the Moody's Asset Category applicable to such Eligible
Investment under the Senior Over-Collateralization Test, (ii) the aggregate
Secured Hedging Advance Amounts as of such date, (iii) the Defensive Hedge
Advance Amount as of such date, (iv) the Moody's Warrant/Option Advance Amount
as of such date, (v) the Moody's Net Accrual Amount as of such date and (vi) the
Aggregate Short Sale Advance Amount as of such date.
"Moody's Total Advance Amount" as of any date of determination under
the Total Over-Collateralization Test, means an amount equal to the sum of (i)
the aggregate for all Eligible Investments (other than Short Sale Transactions
and Warrant/Option Investments) determined for each such Eligible Investment by
multiplying (1) the Market Value (determined as described below) of such
Eligible Investment (determined as described below) by (2) the Moody's Total
Advance Rate for the Moody's Asset Category applicable to such Eligible
Investment under the Total Over-Collateralization Test, (ii) the aggregate
Secured Hedging Advance Amounts as of such date, (iii) the Defensive Hedge
Advance Amount as of such date, (iv) the Moody's Warrant/Option Advance Amount
as of such date, (v) the Moody's Net Accrual Amount as of such date and (vi) the
Aggregate Short Sale Advance Amount as of such date.
C-10
DETERMINATION OF FUND INVESTMENTS CONSTITUTING ELIGIBLE INVESTMENTS
"Eligible Investments" means, at any date, all Fund Investments in the
Collateral on such date other than Excluded Investments.
"Excluded Investments" means (without duplication):
(i) Fund Investments to the extent that they are (A) not subject to
a perfected security interest (subject in priority only to any
liens permitted under the Indenture) in favor of the Collateral
Agent for its benefit and the benefit of the other Secured
Parties (as defined in the Pledge and Intercreditor Agreement)
or (B) subject to any Liens other than Permitted Liens (the
terms "Liens" and "Permitted Liens" as used in this Appendix
have the meanings ascribed thereto under the Indenture);
provided, however, that Liens on Cash or other Fund Investments
held in a Short Sale Customer Account or a Short Sale Broker
Account shall not be Permitted Liens for purposes of this
definition and Cash or Fund Investments held in any Short Sale
Customer Account or Short Sale Broker Account shall be Excluded
Investments;
(ii) Excess Fund Investments;
(iii) Fund Investments that have been borrowed or lent;
(iv) Fund Investments denominated in any currency (A) that is not a
currency freely convertible into Dollars or (B) that is
subject to any currency exchange restrictions;
(v) Fund Investments denominated in any currency other than
Dollars or Eligible Foreign Currencies, unless at the time of
purchase of such Fund Investments denominated in any currency
other than Dollars or Eligible Foreign Currencies, at least
100% of the Market Value of such Fund Investments is protected
against currency fluctuations pursuant to Currency Hedging
Transactions;
(vi) Fund Investments in CDO Debt Securities unless the applicable
agreements governing such CDO Debt Securities do not permit
the issuer of such CDO Debt Securities to purchase a security
issued by a Foreign Issuer from a country whose unsupported
sovereign non-local currency debt obligations are not assigned
a rating of "Aa2" or better by Moody's if after giving effect
to such purchase more than 5% of the total funded debt and
contributed equity capitalization of the issuer of such CDO
Debt Securities would be invested in countries whose
unsupported sovereign non-local currency debt obligations are
not assigned a rating of "Aa2" or better by Moody's;
(vii) Fund Investments in any Bank Loan Participation held by the
Fund for more than 60 consecutive days during any period while
the participating entity has a long-term debt-rating of below
"A3" by Moody's (unless the obligation of such participating
entity is guaranteed by an entity whose long-term debt
obligations
C-11
are rated "A3" or better by Moody's (and, if rated "A3" by
Moody's, such rating has not been placed in a credit watch with
negative implications by Moody's);
(viii) Fund Investments in any Foreign Issuer from an Ineligible
Country (unless the applicable Fund Investment is
unconditionally and irrevocably guaranteed by a guarantor
located in a currently Eligible Country); provided, that if a
country becomes an Ineligible Country after the Fund has
invested in a Fund Investment relating to such country (and
such Fund Investment does not have a guarantor located in a
currently Eligible Country), such Fund Investment will not be
subject to this clause (viii) until such country has been an
Ineligible Country for 180 consecutive days;
(x) Fund Investments in CDO Debt Securities issued by an issuer
for which the Investment Manager or any of its Affiliates acts
as the collateral manager or investment manager or in any
comparable capacity;
(xi) Fund Investments in securities issued by the Fund;
(xii) Fund Investments in any Hedging and Short Sale Transaction
held by the Fund for more than 60 consecutive days during any
period while the counterparty to such Hedging and Short Sale
Transaction has a long-term debt-rating of lower than "A3" by
Moody's (unless the obligations of such counterparty are
guaranteed by an entity whose long-term debt rating is "A3" or
higher by Moody's) (in each case, if rated "A3" by Moody's,
such rating has not been placed in a credit watch with
negative implications by Moody's);
(xiii) Fund Investments in CDO Equity Securities;
(xiv) Fund Investments in catastrophe bonds and any other non-credit
risk securities; and
(xv) Fund Investments not otherwise expressly described in the
Asset Categories above.
Excluded Investments are excluded from the calculation of the Market
Value of the Collateral for purposes of the Moody's Valuation Procedures;
however, the Collateral may include Excluded Investments.
APPLICATION OF PORTFOLIO LIMITATIONS
"Portfolio Limitations" means, at any applicable date of determination
(determined without duplication):
(i) the aggregate Market Value of Fund Investments in any single
issuer in excess of 5% of Total Capitalization; provided,
however, that the foregoing 5% limit will be increased, up to
a maximum of 7.5% (not to include any Non-Cash Pay
Instruments, any Non-Performing Instruments or any Company
Investments
C-12
(other than Equity Securities) that are rated "Caal" or lower
by Moody's), for each of any three issuers;
(ii) the aggregate Market Value of Fund Investments in issuers in
any single Industry in excess of 15% of Total Capitalization;
provided, however, that the foregoing 15% limit will be
excepted, up to a maximum of 20%, for each of any two Industry
classifications;
(iii) the aggregate Market Value of Fund Investments in all
Semi-Liquid Investments, Illiquid Investments and Non-Cash Pay
Instruments in excess of 45% of Total Capitalization;
(iv) the aggregate Market Value of Fund Investments in all Illiquid
Investments in excess of 20% of Total Capitalization;
(v) the aggregate Market Value of Fund Investments consisting of
(a) Bank Loan Participations wherein the participating entities
(or the entities guaranteeing the obligations of such
participating entities) with the same rating by Moody's in
excess of the applicable percentage of Total Capitalization set
forth in the table below (or such greater percentage approved
by the Insurer and with respect to which the Rating Agency
Condition with respect to Moody's has been satisfied), and (c)
Bank Loan Participations wherein the total exposure to any
single participating entity is in excess of the applicable
percentage of Total Capitalization set forth in the table below
(or such greater percentage approved by the Insurer and with
respect to which the Rating Agency Condition with respect to
Moody's has been satisfied);
[Enlarge/Download Table]
LONG TERM RATING OF ANY SINGLE AGGREGATE
PARTICIPATING ENTITIES PARTICIPATING ENTITY LIMIT PARTICIPATING ENTITIES LIMIT
-------------------------------------------------------------------------------------------------------------------
Aaa 7.5% 20.0%
-------------------------------------------------------------------------------------------------------------------
Aa1 7.5% 20.0%
-------------------------------------------------------------------------------------------------------------------
Aa2 7.5% 20.0%
-------------------------------------------------------------------------------------------------------------------
Aa3 7.5% 15.0%
-------------------------------------------------------------------------------------------------------------------
A1 5.0% 15.0%
-------------------------------------------------------------------------------------------------------------------
A2 2.5% 10.0%
-------------------------------------------------------------------------------------------------------------------
A3* 2.5% 5.0%
-------------------------------------------------------------------------------------------------------------------
Baa1 or lower 0.0% 0.0%
-------------------------------------------------------------------------------------------------------------------
Notwithstanding the foregoing, in no event will the aggregate Market
Value of the Bank Loan Participations exceed 20% of Total Capitalization at any
time.
-------------------------
* The percentages in this row apply only if such rating is not on a credit watch
with negative implications by Moody's. If such rating is on a credit watch with
negative implications by Moody's, both the individual and the aggregate
percentage limits shall be zero.
(vi) the aggregate Market Value of Fund Investments consisting of
(a) Hedging and Short Sale Transactions wherein the
counterparties (or the entities guaranteeing the obligations of
such counterparties) with the same rating by Moody's in excess
C-13
of the applicable percentage of Total Capitalization set forth
below (or such greater percentage approved by the Insurer and
the Trustee and with respect to which the Rating Agency
Condition with respect to Moody's has been satisfied) and (b)
Hedging and Short Sale Transactions wherein the total exposure
to any single counterparty is in excess of the applicable
percentage of Total Capitalization set forth in the table below
(or such greater percentage approved by the Insurer and the
Trustee and with respect to which the Rating Agency Condition
with respect to Moody's has been satisfied);
[Enlarge/Download Table]
LONG TERM RATING OF ANY SINGLE AGGREGATE
COUNTERPARTIES COUNTERPARTY LIMIT COUNTERPARTIES LIMIT
-------------------------------------------------------------------------------------------------------------------
Aaa 7.5% 20.0%
-------------------------------------------------------------------------------------------------------------------
Aa1 7.5% 20.0%
-------------------------------------------------------------------------------------------------------------------
Aa2 7.5% 20.0%
-------------------------------------------------------------------------------------------------------------------
Aa3 7.5% 15.0%
-------------------------------------------------------------------------------------------------------------------
A1 5.0% 15.0%
-------------------------------------------------------------------------------------------------------------------
A2 2.5% 10.0%
-------------------------------------------------------------------------------------------------------------------
A3* 2.5% 5.0%
-------------------------------------------------------------------------------------------------------------------
Baa1 or lower 0.0% 0.0%
-------------------------------------------------------------------------------------------------------------------
Notwithstanding the foregoing, in no event will the aggregate Market Value of
Hedging and Short Sale Transactions exceed 20% of Total Capitalization at any
time.
-------------------------
* The percentages in this row apply only if such rating is not on a credit watch
with negative implications by Moody's. If such rating is on a credit watch with
negative implications by Moody's, both the individual and the aggregate
percentage limits shall be zero.
(vii) the aggregate Market Value of Fund Investments (calculated
using the absolute value of each Fund Investment) consisting
of Structured Product Transactions in excess of 10% of Total
Capitalization;
(viii) the aggregate Market Value of Fund Investments consisting of
Non-Performing Instruments in excess of 25% of Total
Capitalization;
(ix) the aggregate Market Value of Fund Investments consisting of
convertible securities in excess of 25% of Total
Capitalization;
(x) the aggregate Market Value of Fund Investments consisting of
CDO Debt Securities in excess of 5% of Total Capitalization;
(xi) the aggregate Market Value of Fund Investments that are
Preferred Stock in excess of 15% of Total Capitalization;
(xii) the aggregate Market Value of Fund Investments consisting of(A)
Private Equity Securities of any single issuer in excess of 3%
of Total Capitalization; provided that the foregoing 3% limit
will be increased, up to a maximum of 4%, for each of any two
issuers of Private Equity Securities; provided, further, that
the foregoing 4% limit will be increased, up to a maximum of
5%, for one of such two issuers
C-14
of Private Equity Securities; and (B) Private Equity Securities
in excess of 10% of Total Capitalization;
(xiii) the aggregate Market Value of Fund Investments that are
Asset-Backed Securities in excess of 5% of Total
Capitalization;
(xiv) the aggregate Market Value of Fund Investments that are
Dollar-denominated investments (A) in Foreign Issuers
domiciled in Designated Countries in excess of 10% of Total
Capitalization and (B) in any single Foreign Issuer domiciled
in a Designated Country in excess of 5% of Total
Capitalization;
(xv) the aggregate Market Value of Fund Investments that are
non-Dollar-denominated investments in excess of 10% of Total
Capitalization;
(xvi) the aggregate Market Value of Fund Investments that are Equity
Securities in excess of 20% of Total Capitalization; and
(xvii) the aggregate Market Value of Fund Investments that are
(determined without duplication) Non-Performing Instruments,
Equity Securities and Fund Investments that are rated "Caal"
or lower by Moody's in excess of 50% of Total Capitalization.
Notwithstanding the foregoing:
(A) in the event that a Fund Investment is reclassified after its
acquisition by the Fund, for purposes of calculating the
Moody's Advance Amount, the exclusions described above in
clauses (iii) and (iv), that would otherwise become applicable
following such reclassification will not apply to assets owned
by the Fund (or which the Fund had committed to purchase) on
or prior to the date of such reclassification until 30 days
after such reclassification but shall apply (on a pro forma
basis giving effect to such reclassification for all Fund
Investments) to any asset acquired by the Fund after the date
of such reclassification which the Fund had not committed to
purchase on or prior to the date of such reclassification;
(B) for purposes of clause (i) above, a Related Person of any
Person shall be considered the same "issuer" as such Person
unless such Person is a bankruptcy remote entity; and
(C) under no circumstances shall any Cash, Cash Equivalent or U.S.
Government Securities be excluded from Eligible Investments
based upon the Portfolio Limitations set forth above.
DETERMINATION OF THE MARKET VALUE OF FUND INVESTMENTS
The Fund shall calculate the Market Value (i) of each Fund Investment
that is not an Unquoted Investment on a weekly basis as of the Determination
Date for each calendar week and (ii) of each Fund Investment that is an Unquoted
Investment as set forth in the definition of "Market Value" below.
C-15
"Market Value" means
(a) with respect to Cash, the current balance thereof;
(b) with respect to any Cash Equivalent (x) of the type described in clause
(ii) of the definition thereof (excluding banker's acceptances), the
current balance thereof, (y) of a type described in clause (iii) of the
definition thereof (and banker's acceptances described in clause (ii)
thereof), the original purchase price thereof, and (z) of a type
described in clause (v) of the definition thereof, the aggregate
current net value thereof;
(c) with respect to any Fund Investment (other than Structured Product
Transactions, Unquoted Investments, Cash and Cash Equivalents described
in clause (b) above) at any date, an amount determined by the Fund that
is not in excess of the product of (x) the Market Value Price for each
unit of such Fund Investment on such date (and, with respect to any
Securities which have an amortizing principal amount, the then current
factor related thereto, if applicable) times (y) the number of units of
such Fund Investment held by the Fund; and
(d) with respect to any Fund Investment other than Cash and Cash
Equivalents which is an Unquoted Investment at any date, the value
thereof most recently determined by the Fund in accordance with the
procedures described below;
provided, however, (x) for purposes of making such determinations,
(1) the frequency of determination of the Market Value
of any Illiquid Investment will be at least quarterly as of each Quarterly Date
and, except as otherwise provided in the following clauses, the frequency of
determination of the Market Value of any Semi-Liquid Investment will be at least
monthly as of the last Business Day of each calendar month;
(2) for Semi-Liquid Investment positions with a Market
Value of $35 million or greater but less than $70 million (and all positions
subject to this clause (x)(2) by reason of clause (y) below), a quotation from
an Approved Investment Banking Firm or an Approved Third-Party Appraisal at
least monthly;
(3) for Semi-Liquid Investment positions with a Market
Value of $70 million or greater, a quotation from an Approved Investment Banking
Firm or an Approved Third-Party Appraisal at least monthly and an Approved
Third-Party Appraisal at least quarterly; and
(4) for Illiquid Investment positions with a Market
Value of $35 million or greater (and all positions subject to this clause (x)(4)
by reason of clause (y) below) an Approved Third-Party Appraisal at least
quarterly;
(y) notwithstanding the foregoing, the aggregate Market Value of
all Unquoted Investment positions whose value is determined by
the Fund without relying on the methodology set forth in
subclauses (2), (3) or (4) of clause (x) above (it being
understood that such methodology may be used for Unquoted
Investments with Market Values below the thresholds set forth
in such subclauses) may not exceed
C-16
5% of Total Capitalization and all such Unquoted Investment
positions (i.e., those in excess of such limit and as selected
by the Fund) will be subject to subclauses (2) or (4) of clause
(x) above depending upon whether any such Unquoted Investment
is a Semi-Liquid Investment or an Illiquid Investment; and
(z) in no event will the Market Value of any Unquoted Investment
exceed the lesser of (i) the most recently obtained quotation
or appraisal obtained as provided in clauses (x) or (y) above
and (2) the value most recently determined by the Fund.
Notwithstanding the foregoing, if the Investment Manager shall on any
day actually determine that (i) the Market Value of any Semi-Liquid Investment
determined as of the last Business Day of the preceding calendar month or (ii)
the Market Value of any Illiquid Investment determined as of the last Quarterly
Date has decreased since such last Business Day of the preceding calendar month
or last Quarterly Date, the Market Value of such Fund Investment shall be such
decreased value, and if the Investment Manager subsequently actually determines
on any day prior to the next determination of its Market Value that the value of
such Fund Investment has further decreased, the Market Value of such Fund
Investment shall be such decreased value. If, on the other hand, the Investment
Manager shall subsequently actually determine that the value of such Fund
Investment has increased, the Market Value of such Fund Investment shall be such
increased value; provided that in no event shall the Market Value of any such
Fund Investment whose value is so increased be greater than the Market Value of
such Fund Investment previously determined as of the last Business Day of the
preceding calendar month (in the case of Semi-Liquid Investments) or as of the
last Quarterly Date (in the case of Illiquid Investments). It is expressly
understood that the Investment Manager shall have no duty whatsoever to
specifically monitor or otherwise investigate any value changes described in
this paragraph.
Prior to the first available quotation or appraisal of any Unquoted
Investment obtained as provided above, the Market Value of such Unquoted
Investment will be the lower of the value thereof as most recently determined by
the Fund and cost. In the event that the Fund elects in its discretion to book,
for purposes of its own financial accounting records, any Unquoted Investment at
a value lower than that which would require a valuation by an Approved
Investment Banking Firm or an Approved Third-Party Appraisal, as the case may
be, then the Market Value of such Unquoted Investment shall be such lower value
used by the Fund for purposes of its own financial accounting records.
Notwithstanding the foregoing, the Market Value of any Structured
Product Transaction at any date will be equal to the net settlement amount, if
any, that the Fund would receive if such Structured Product Transaction was
terminated or liquidated early in accordance with its terms on such date as
determined by the Fund.
The Market Value of any CDO Debt Security shall be based upon a
quotation from an Approved Investment Banking Firm or an Approved Third-Party
Appraisal.
The Market Value of any Defensive Hedge Transaction where the related
Fund Investment is part of the Collateral shall be the amount, as determined by
the Fund, by which the Protected Market Value with respect to such Fund
Investment exceeds the product of the Market Value of the Fund Investment (or,
if less, the portion thereof that is an Eligible Investment), as
C-17
otherwise determined in accordance with these procedures, and the applicable
Advance Rate for such Fund Investment. The Market Value of any Defensive Hedge
Transaction where the Fund Investment is not part of the Collateral shall be the
Protected Market Value with respect to such Fund Investment.
For purposes of the definition of Market Value, (i) accrued interest on
any interest-bearing Eligible Investment shall be excluded in the determination
of Market Value by the party making such determination and (ii) the Market Value
of all non-Dollar Fund Investments shall be converted into Dollars at the then
current spot rate (after taking into account the effect of any Currency Hedging
Transactions with respect to such Fund Investment).
"Market Value Price" means with respect to any Fund Investment (other
than Cash, Structured Product Transactions and Unquoted Investments) at any
date, the price for each unit of such Fund Investment at such date obtained from
an Approved Source, including any of (a) in the case of an Approved Exchange,
the closing price as of the most recent Determination Date on such Approved
Exchange, or if such Approved Exchange is NASDAQ, the closing bid price at such
date (or if such Approved Exchange is closed for business at such date, then the
most recent available closing price or closing bid price, as the case may be),
provided that bonds may not be priced based upon the price on an Approved
Exchange pursuant to this clause (a), (i) prior to the termination (without
replacement) of the Indenture, without the consent of the Trustee and the
Insurer and (ii) after termination (without replacement) of the Indenture,
without the consent of the Insurer, (b) the average of the bid prices at such
date quoted by two Approved Dealers, or (c) the price obtained at such date from
an Approved Pricing Service.
For the purpose of this Schedule, any calculation or other
determination required to be made by the Fund shall be made by the Investment
Manager on behalf of the Fund, subject to the provisions of the Investment
Management Agreement.
CERTAIN DEFINITIONS
The following are definitions of certain terms used in this Schedule
and elsewhere in the Indenture. Terms used in this Schedule and not defined
below have the meanings given them elsewhere in this Schedule or in the
Indenture.
"Advance Rate" means the Moody's Advance Rate.
"Aggregate Short Sale Advance Amount" means as of any date of
determination, the aggregate of the Short Sale Advance Amount of all Short Sale
Transactions; provided, however, that if on any date the aggregate Market Value
(as determined as of the date each Bank Loan or Security was borrowed by the
Issuer in connection with any Short Sale Transaction) of the Bank Loans and
other Securities comprising all Short Sale Transactions exceeds the greater of
(A) 15% of Total Capitalization and (B) 15% of the Net Asset Value of the
Issuer, then the Aggregate Short Sale Advance Amount for that portion of the
Bank Loans or other Securities comprising such Short Sale Transactions, the
Market Value (as determined as of the date each Bank Loan or Security was
borrowed by the Issuer in connection with any Short Sale Transaction) of which
exceeds the greater of (A) or (B) above, shall be deemed to be zero.
C-18
"Approved Counterparty" means (i) any financial institutions, banks or
investment banking firms having a long term rating of at least "Al" by Moody's
and a short term rating of at least "P-1" by Moody's (and, if rated "Al" or
"P-1" by Moody's, then such rating has not been placed on a credit watch with
negative implications by Moody's) or (ii) any counterparty set forth in the
Indenture (or any successor to any such listed counterparty) or any other
counterparty designated by the Fund in writing and approved by the Insurer.
"Approved Dealer" means (a) in the case of any Fund Investment that is
not a U.S. Government Security, any bank or broker-dealer designated by the Fund
in writing and approved by the Insurer in its reasonable discretion and with
respect to which the Rating Agency Condition with respect to Moody's has been
satisfied, (b) in the case of a U.S. Government Security, any primary dealer in
U.S. Government Securities, as reported by the Federal Reserve Board, which as
of the date hereof maintains a website at http://www.ny.frb.org, or (c) in the
case of either of the foregoing, the banks and broker-dealers set forth on Annex
I hereto under "Approved Dealers."
"Approved Exchange" means, with respect to any Security, any (a) major
securities or options exchange, the NASDAQ or any other exchange or quotation
system providing regularly published securities prices designated by the Fund in
writing and approved by the Insurer in its reasonable discretion and with
respect to which the Rating Agency Condition with respect to Moody's has been
satisfied, or (b) the exchanges set forth on Annex I hereto under "Approved
Exchanges."
"Approved Investment Banking Firm" means (a) any investment banking
firm designated by the Fund in writing and approved by the Insurer in its
reasonable discretion and with respect to which the Rating Agency Condition with
respect to Moody's has been satisfied, or (b) the firms set forth on Annex I
hereto under "Approved Investment Banking Firms."
"Approved Pricing Service" means (a) a pricing or quotation service
designated by the Fund in writing and approved by the Insurer in its reasonable
discretion and with respect to which the Rating Agency Condition with respect to
Moody's has been satisfied, or (b) the services set forth on Annex I hereto
under "Approved Pricing Services."
"Approved Source" means any of (i) two Approved Dealers, (ii) an
Approved Exchange or (iii) an Approved Pricing Service, provided, that, for
purposes of the Over-Collateralization Tests, a Bank Loan, High Yield Bond or
Mezzanine Investment which is a Fund Investment shall be considered "quoted" or
"priced" by an Approved Source only if, in the reasonable judgment of the Fund,
such Approved Source will continue to provide quotations with respect to such
Bank Loan, High Yield Bond or Mezzanine Investment on an on-going basis in the
ordinary course of its business as a pricing service or dealer, as the case may
be.
"Approved Third-Party Appraisal" means an appraisal by an Approved
Third-Party Appraiser.
"Approved Third-Party Appraiser" means (a) a third-party appraiser that
is not an Affiliate of either the Fund or the Investment Manager (or subject to
an agreement to become such an Affiliate) designated by the Fund in writing and
approved by the Insurer in its reasonable discretion and with respect to which
the Rating Agency Condition with respect to Moody's has
C-19
been satisfied, or (b) the third-party appraisers set forth on Annex I hereto
under "Approved Third Party Appraisers."
"Asset-Backed Security" means any fixed income Security that is (i)
backed by and paid primarily from the proceeds (or payments or proceeds of a
disposition) of Eligible Assets, and (ii) issued in a transaction structured to
(A) isolate the Security and the Eligible Assets backing the Security from the
credit risk of the sponsor of the transaction and (B) result in the
creditworthiness of such Security being primarily dependent upon (x) the
creditworthiness of the Eligible Assets backing such Security and (y) any credit
support provided with respect to the creditworthiness of such Eligible Assets;
provided, however, that in no event shall an "Asset-Backed Security" include any
of the following: (a) a Security issued to provide debtor-in-possession
financing, (b) a Security issued in connection with a receivables financing, an
equipment trust certificate or similar Security, (c) an Equity Security
(including an Equity Security that is characterized as a note), (d) a Structured
Product Transaction, (e) a CDO Debt Security or (f) a Defensive Hedge
Transaction.
"Bank Loan Participation" means a Bank Loan in the form of a
participation.
"Bank Loans" means direct purchases of, assignments of, participations
in and other interests in senior debt (including term loans, revolving credit
lines and other similar loans and investments).
"Business Day" means each day other than a Saturday, Sunday or other
day on which banking institutions are not required by law or regulation to be
open in the State of New York.
"Busted Convertible Bond" means any convertible bond that, in the
Fund's determination, trades like a fixed income investment and has a negligible
option value.
"Capital Stock" of any Person means shares, equity interests (including
limited partnership interests and limited liability company interests),
participations or other equivalents (however designated) of corporate stock of
such Person.
"Cash" means any immediately available funds in U.S. dollars or any
currency other than U.S. dollars which is a freely convertible currency
(including amounts held in the Custodial Account or on deposit with the
Custodian pursuant to "sweep" arrangements linked to the Custodial Account).
"Cash Equivalents" means investments (other than Cash) that are one or
more of the following obligations or Securities:
(i) U.S. Government Securities;
(ii) certificates of deposit of, banker's acceptances issued by or
money market accounts in any depository institution or trust
company incorporated under the laws of the United States of
America or any state thereof and subject to supervision and
examination by Federal and/or state banking authorities, so
long as the deposits offered by such depository institution or
trust company at the time of such investment are rated and have
a rating of at least "P-1" if rated by
C-20
Moody's or "A-1+" if rated by S&P (and, if rated "P-1" by
Moody's, such rating has not been placed on a credit watch with
negative implications by Moody's) (or, in the case of the
principal depository institution in a holding company system
whose deposits are not so rated, the long term debt obligations
of such holding company are rated and such rating is at least
"Al" if rated by Moody's and "A+" if rated by S&P (or, if rated
"Al" by Moody's, such rating has not been placed on a credit
watch with negative implications by Moody's));
(iii) commercial paper issued by any depository institution or trust
company incorporated under the laws of the United States of
America or any state thereof and subject to supervision and
examination by Federal and/or state banking authorities, or
any corporation incorporated under the laws of the United
States of America or any state thereof, so long as the
commercial paper of such issuer is rated and has at the time
of such investment a short term rating of at least "P- l" if
rated by Moody's or "A-1" if rated by S&P (and, if rated "P-1"
by Moody's, such rating has not been placed on a credit watch
with negative implications by Moody's);
(iv) securities bearing interest or sold at a discount issued by
any corporation incorporated under the laws of the United
States of America or any state thereof the obligations of
which at the time of such investment are rated and that have a
credit rating of at least "P-1" if rated by Moody's and "A- l"
if rated by S&P (and, if rated "P-1" by Moody's, such rating
has not been placed on a credit watch with negative
implications by Moody's) either at the time of such investment
or the making of a contractual commitment providing for such
investment;
(v) shares of any money market fund or similar investment vehicle,
so long as such money market fund is rated and has at the time
of such investment a short-term rating of at least "Aaa" and
"MRl+" if rated by Moody's and "AAA" if rated by S&P (and, if
rated "Aaa" and "MRl+" by Moody's, such rating has not been
placed on a credit watch with negative implications by
Moody's);
(vi) unleveraged overnight repurchase obligations on customary
terms with respect to investments described in clauses (i)
through (v) above entered into with a depository institution,
trust company or corporation of the type described in clause
(iii) above or a Subsidiary of any such depository
institution, trust company or corporation if such depository
institution, trust company or corporation also has a rating of
at least "Al" and "P-1" if rated by Moody's or "A+" if rated
by S&P (and, if rated "Al" and "P-1" by Moody's, such rating
has not been placed on a credit watch with negative
implications by Moody's); and
(vii) preferred shares rated in the highest investment rating
category by Moody's and S&P or otherwise with respect to which
the Rating Agency Condition is satisfied;
provided, that: (i) in no event shall Cash Equivalents include any obligation
that provides for the payment of interest alone; (ii) Cash Equivalents referred
to in clauses (ii) and (iii) above shall mature within 183 days of issuance;
(iii) if any of Moody's or S&P changes its rating system, then any ratings
included in this definition shall be deemed to be an equivalent rating in a
C-21
successor rating category of Moody's or S&P, as the case may be; (iv) if any of
Moody's or S&P is not in the business of rating securities, then any ratings
included in this definition shall be deemed to be an equivalent rating from
another Rating Agency; (v) Cash Equivalents (other than U.S. Government
Securities or money market funds maintained by the Custodian) shall not include
any such investment of more than $100 million in any single issuer; (vi) in no
event shall Cash Equivalents include any obligation that is not denominated in
Dollars or Eligible Foreign Currencies; and (vii) none of the foregoing
obligations or securities will constitute Cash Equivalents (A) if all, or
substantially all, of the remaining amounts payable thereunder will consist of
interest and not principal payments, or (B) if such security has an assigned
rating from S&P with an "r" or "t" subscript, or (C) if such security is a
mortgage-backed security or (D) if such security is an inverse floater security.
"CDO Debt Securities" means any Securities that entitle the holders
thereof to receive payments that depend primarily on cash flow from, or proceeds
upon the sale of a pool of Securities serving as collateral for such Securities;
provided that if more than one class or other similar designation of such
Securities receive payments that depend primarily on cash flow from all or
substantially all of the underlying collateral Securities, then the class or
other similar designation the payment of which is most deeply subordinated
(other than any class or other similar designation constituting only nominal
capital) and any class or other similar designation that, as indicated in any
relevant offering documentation, is stated to be at least reasonably likely to
be treated as equity for U.S. Federal income tax purposes will be excluded from
"CDO Debt Securities"; provided, further that (x) CDO Debt Securities shall not
include any Structured Product Transaction and (y) CDO Debt Securities shall
only include CDO Debt Securities issued in a "cash-flow" or "market value"
collateralized debt obligation transactions.
"CDO Equity Securities" means any Securities (other than CDO Debt
Securities) that entitle the holders thereof to receive payments that depend
primarily on cash flow from, or proceeds upon sale of a pool of Securities
serving as collateral for such Securities (whether or not such Securities have
been rated by a nationally recognized statistical rating organization); provided
that CDO Equity Securities shall not include any Structured Product Transaction.
"CDS" means a credit default swap substantially in the form approved by
the Insurer which approval shall not be unreasonably withheld.
"Contributed Company Capital" means, at any date, the aggregate gross
amount of Cash contributed as equity capital (excluding, for the avoidance of
doubt, the Preferred Shares) to the Fund by the holders of the Common Shares on
or prior to such date (without regard to any other changes in Company Equity).
"Currency Hedging Transaction" means (i) any Swap Transaction entered
into by the Fund with an Eligible Counterparty intended to convert any payment
on a Debt or other obligation of the Fund or any Company Investment denominated
in one currency to another currency or to protect against fluctuations in the
exchange rate of a currency in which a payment to be made or received by the
Fund is denominated and (ii) any Swap Transaction entered into by the Fund
intended to convert any payment on a Debt or other obligation of the Fund or any
Company Investment denominated in one currency to another currency or to protect
against fluctuations in the exchange rate of a currency in which a payment to be
made or received by the Fund is denominated and pursuant to which the Fund has
no on-going payment obligations.
C-22
"Defensive Hedge Advance Amount" means, as of any date of
determination, 98% of the aggregate Market Value of all Defensive Hedge
Transactions; provided, however, that the Defensive Hedge Advance Amount shall
in no event exceed an amount equal to (x) 20% of the Total Capitalization as of
such date of determination less (y) the sum of the aggregate Market Value as of
such date of determination of all Fund Investments in Bank Loan Participations
and Structured Product Transactions and, if the Secured Hedging Advance Amount
is positive, the Secured Hedging Advance Amount.
"Defensive Hedge Transaction" means a Hedging and Short Sale
Transaction between the Fund and an Eligible Counterparty intended to protect
the Fund against fluctuations in the market value of a Fund Investment and
pursuant to which (i) the Eligible Counterparty has agreed for a period of time,
at the direction of the Fund, to (a) purchase the Fund Investment at an agreed
strike price or (b) pay to the Fund, at the Fund's election, an amount by which
an agreed strike price exceeds the current price of the Fund Investment; (ii)
the Eligible Counterparty does not have recourse to the Collateral or the Fund
for any amounts owing to such counterparty thereunder; and (iii) the Fund may
(a) pay a fee to the Eligible Counterparty in connection with the transaction,
(b) remove the Fund Investment from the Custodial Account (whereby it is no
longer part of the Collateral) and pledge the Fund Investment to the
counterparty as security for its obligations to the Eligible Counterparty and
(c) agree to deliver the Fund Investment to the Eligible Counterparty in
satisfaction of all of its obligations to the Eligible Counterparty in
connection with the transaction.
"Designated Country" means (i) each of Canada, Great Britain,
Australia, Denmark, New Zealand, Sweden, Switzerland, Luxembourg, The
Netherlands and any G-7 nation, (ii) any other country whose unsupported
sovereign debt obligations are rated at least Aa2 by Moody's and (iii) each
other country identified by the Fund from time to time and with respect to which
the Rating Agency Condition with respect to Moody's has been satisfied.
"Determination Date" means (a) with respect to any regularly scheduled
Valuation Statement prepared pursuant to the Indenture or the Operating
Agreement and any other Preferred Shares document, the related Reporting Date,
(b) for the purpose of determining the Market Value Price of a Fund Investment
at any date when the Fund is in compliance, or reasonably believes it is in
compliance, with the covenants relating to the Over-Collateralization Tests, the
last Business Day of the preceding calendar week ending prior to such date and
(c) for the purpose of determining the Market Value Price of a Fund Investment
at any date when the Fund is not, or reasonably believes that it is not, in
compliance with any covenant relating to the Over-Collateralization Tests, the
date on which the most current pricing information with respect to such Fund
Investment is reasonably available.
"Distressed Debt" means debt Securities and Bank Loans which are, in
the Investment Manager's reasonable business judgment, impaired in fundamental
ways due to credit, liquidity, interest rate or other issues, which may not be
performing or may be in default, and which are generally trading at a
substantial discount to par.
"Eligible Assets" means financial assets, either fixed or revolving,
that by their terms convert into cash within a finite time period plus any
rights or other assets designed to assure the servicing or timely distribution
of proceeds to security holders.
C-23
"Eligible Counterparty" means, with respect to any Hedging and Short
Sale Transaction (other than a CDS in which the Fund is the counterparty writing
or providing the protection with respect to the reference asset), (a) any
Approved Counterparty or (b) any Person (i) (x) in the case of a Currency
Hedging Transaction, having a long term rating of at least "Aa3" by Moody's and
a short term rating of at least "P-1" by Moody's (and, if rated "Aa3" or "P-1"
by Moody's, then such rating has not been placed on a credit watch with negative
implications by Moody's) and (y) in all other cases, having a long term rating
of at least "Al" by Moody's and a short term rating of at least "P-1" by Moody's
(and, if rated "Al" or "P-1" by Moody's, then such rating has not been placed on
a credit watch with negative implications by Moody's), (ii) if no short term
rating is available, (x) in the case of a Currency Hedging Transaction, having a
long term rating of "Aa2" or better by Moody's (and, if rated "Aa2" by Moody's,
such rating has not been placed on a credit watch with negative implications by
Moody's) and (y) all other cases, having a long term rating of "Aa3" or better
by Moody's (and, if rated "Aa3" by Moody's, such rating has not been placed on a
credit watch with negative implications by Moody's) or (iii) whose obligations
in respect of all Hedging and Short Sale Transactions entered into with the Fund
are absolutely and unconditionally guaranteed by an Affiliate of such Person
having (x) (A) in the case of a Currency Hedging Transaction, having a long term
rating of at least "Aa3" by Moody's and a short term rating of at least "P-1" by
Moody's (and, if rated "Aa3" or "P-1" by Moody's, then such rating has not been
placed on a credit watch with negative implications by Moody's) and (B) in all
other cases, having a long term rating of at least "Al" by Moody's and a short
term rating of at least "P-1" by Moody's (and, if rated "Al" or "P-1" by
Moody's, then such rating has not been placed on a credit watch with negative
implications by Moody's) or (y) if no short term rating is available, (A) in the
case of a Currency Hedging Transaction, having a long term rating of "Aa2" or
better by Moody's (and, if rated "Aa2" by Moody's, such rating has not been
placed on a credit watch with negative implications by Moody's) and (B) in all
other cases, having a long term rating of "Aa3" or better by Moody's (and, if
rated "Aa3" by Moody's, such rating has not been placed on a credit watch with
negative implications by Moody's); provided that with respect to any
counterparty with which the Fund has entered into a Hedging and Short Sale
Transaction, such counterparty that would qualify as an "Eligible Counterparty"
pursuant to clause (b) above but for the fact that such counterparty had
suffered a ratings downgrade shall be deemed to be an "Eligible Counterparty"
for thirty 30 days after the day it would otherwise have ceased to qualify as an
Eligible Counterparty.
"Eligible Country" means each country (i) whose unsupported sovereign
debt obligations are rated "Aa2" or better by Moody's (and, if rated "M1" by
Moody's, such rating has not been placed on a credit watch with negative
implications by Moody's) or (ii) that is a Designated Country whose unsupported
sovereign debt obligations are rated "A3" or better by Moody's (and, if rated
"A3" by Moody's, such rating has not been placed on a credit watch with negative
implications by Moody's).
"Eligible Foreign Currencies" means (i) Australian Dollars, Canadian
Dollars, Pounds Sterling and Euros and (ii) each other currency identified by
the Fund from time to time and confirmed in writing as acceptable by the
Trustee, the Insurer and with respect to which the Rating Agency Condition with
respect to Moody's has been satisfied.
"Eligible Investments" has the meaning assigned to such term in this
Schedule under "Determination of Fund Investments Constituting Eligible
Investments."
C-24
"Equity Securities" means equity securities (including, for the
avoidance of doubt, Private Equity Securities) that will generally consist of
common or preferred stock of small to medium capitalization companies that have
either (i) undergone leveraged buyouts or recapitalizations, yet are still
substantially leveraged, or (ii) been burdened by complex legal, financial or
ownership issues and are selling at a discount to the underlying asset or
business value.
"Excess Fund Investments" means any Fund Investments or portion thereof
having a Market Value in excess of the percentages of Total Capitalization set
forth in the definition of Portfolio Limitations (in each case determined by the
Fund using the most recent Market Value for the applicable Fund Investments).
"Excluded Investments" has the meaning assigned to such term in this
Schedule under "Determination of Fund Investments Constituting Eligible
Investments."
"Foreign Issuer" means any issuer of a Fund Investment that is
incorporated or otherwise formed or organized outside the United States unless
such Fund Investment is irrevocably and unconditionally guaranteed by any United
States corporation, company, trust or other business entity; provided, however,
that none of the following shall be a Foreign Issuer: (i) an offshore holding
company issuer whose operating subsidiaries principally do business, and hold
their assets, in the United States, or (ii) an issuer of a CDO Debt Security.
"Fully Collateralized Structured Product Transaction" means a
Structured Product Transaction relating to a single Bank Loan or High Yield Bond
pursuant to which the Fund is required to pledge collateral in an amount that is
not less than 100% of the notional amount of such transaction.
"Fund Investments" means all Cash, Cash Equivalents, Bank Loans,
Securities, Short Sale Transactions and Structured Product Transactions owned by
the Fund. Fund Investments which the Fund has contracted to purchase shall not
be deemed for purposes of the Indenture to be owned by the Fund until settlement
of such purchase and Fund Investments which the Fund has contracted to sell
shall not cease to be Fund Investments for purposes of the Indenture until
settlement of such sale.
"Hedging and Short Sale Transaction" means any transaction entered into
by the Fund with an Eligible Counterparty that is (i) a Swap Transaction; (ii)
an Interest Rate Hedging Transaction; (iii) a Currency Hedging Transaction; (iv)
a transaction under which the Fund borrows a Bank Loan or Security and sells or
otherwise disposes of such or any substantially similar Bank Loan or Security
prior to the date on which the same must be returned to the lender thereof (and
commonly known as a "short sale"), (v) a Securities Lending Transaction; (vi) a
credit derivative transaction (including, but not limited to, a CDS) or
repurchase agreement; (vii) an obligation to enter into any of the foregoing; or
(viii) any combination of any of the foregoing.
"High Yield Bonds" means debt Securities (including convertible debt
Securities) that are generally rated below "Baa3" by Moody's, (a) which are
issued pursuant to a public registration, Rule 144A or as a private placement
and (b) which are not Cash Equivalents, Bank Loans, Mezzanine Investments or CDO
Debt Securities.
C-25
"Illiquid Investments" means (a) Unquoted Investments that do not
qualify as Semi-Liquid Investments.
"Industry" means any industry category listed in Annex I hereto under
"Moody's Industry Classifications" or any other such industry category
designated by the Fund in writing and approved by the Insurer in its reasonable
discretion and with respect to which the Rating Agency Condition with respect to
Moody's has been satisfied.
"Ineligible Country" means any country other than the United States or
an Eligible Country.
"Interest Only Security" means any security that by its terms provides
for periodic payments of interest and does not provide for the repayment of a
stated principal amount.
"Interest Rate Hedging Transaction" means (i) any Swap Transaction
entered into by the Fund with an Eligible Counterparty intended to protect the
Fund against changes in the floating rate of interest payable on all or a
portion of any Debt or other obligation of the Fund or its subsidiaries or on
any Fund Investment or to protect against fluctuations in interest rates, or
(ii) any Swap Transaction or repurchase agreement entered into by the Fund, in
each case with an Eligible Counterparty, intended to protect against changes in
the market value of any Fund Investment resulting from fluctuations in interest
rates.
"Market Value" has the meaning assigned to such terms in this Schedule
under "Determination of Market Value of Fund Investments."
"Market Value Price" has the meaning assigned to such term in this
Schedule under "Determination of Market Value of Fund Investments."
"Mezzanine Investments" means (i) debt Securities or other obligations
of an issuer (including convertible debt Securities and obligations and
Securities backed by real estate collateral) that (A) are subordinated to other
debt of such issuer and (B) may be issued with equity participation features
such as convertibility, senior equity securities, common stock or warrants or
(ii) Preferred Stock issued in connection with management buyouts, acquisitions,
refinancings, recapitalizations and later stage growth capital financings.
"Moody's" means Moody's Investors Service, Inc., or any successor
thereto.
"Moody's Net Accrual Amount" means, as of any date, an amount, which
may be positive or negative, equal to (i) the aggregate amount of accrued
interest payable to the Fund on all interest-bearing Eligible Investments, all
declared but unpaid dividends payable on Eligible Investments that are Equity
Securities and all due and unpaid commitment fees payable to the Issuer in
respect of Eligible Investments in each case as of such date minus (ii) the
aggregate amount of accrued interest, dividends (including, without duplication,
any Company Tax Distribution), premiums, commitment fees and Unissued Share Fee
and accrued and unpaid Administrative Expenses, if any, payable by the Fund as
of such date in respect of Indebtedness issued pursuant to the Indenture and the
Preferred Shares, respectively; provided that until the earlier of two years
after the Closing Date or the date on which the Fund shall have drawn
C-26
$404.5 million of the Equity Capital Commitments, the Moody's Net Accrual Amount
shall not be less than zero.
"Moody's Rating Correlation Procedures" means the following procedures,
which shall be applied to any Fund Investment for which an Assigned Moody's
Rating is not otherwise required and does not have an Assigned Moody's Rating:
(i) if another security or obligation of the same issuer has an
Assigned Moody's Rating, then the applicable rating of such
Fund Investment shall be determined as follows: (a) if there
is an Assigned Moody's Rating of a security of the issuer of
the same priority, then the rating of such Fund Investment
shall be such rating; (b) if the Assigned Moody's Rating is on
a senior unsecured obligation of the issuer, then the
applicable rating of such Fund Investment (1) shall be one
subcategory above such Assigned Moody's Rating, if such Fund
Investment is a senior secured obligation of the issuer, with a
rating of "Aaa" remaining the same; (2) shall be two
subcategories below such Assigned Moody's Rating, if such
rating is "B1" or higher and if such Fund Investment is a
subordinated obligation of the issuer, (3) shall be one
subcategory below such Assigned Moody's Rating if such rating
is between "B2" and "Ca," inclusive, and if such Fund
Investment is a subordinated obligation of the issuer; and (4)
otherwise shall be "C" if such Fund Investment is a
subordinated obligation of the issuer; (c) if the Assigned
Moody's Rating is on a subordinated obligation of the issuer
and if such Fund Investment is a senior secured obligation of
the issuer, then the applicable rating of such Fund Investment
(1) shall be one subcategory above such Assigned Moody's Rating
if such rating is "Baa3" or higher, (2) shall be two
subcategories above such Assigned Moody's Rating if such rating
is "B2" or higher, but lower than "Baa3," (3) shall be one
subcategory above such Assigned Moody's Rating if such rating
is "B3" and (4) otherwise shall equal such rating; (d) if there
is an Assigned Moody's Rating on a subordinated obligation of
the issuer and if such Fund Investment is a senior unsecured
obligation of the issuer, then the applicable rating of such
Fund Investment (1) shall be one subcategory above such
Assigned Moody's Rating if such rating is "B3" or higher and
(2) otherwise shall equal such rating; and (e) if the Assigned
Moody's Rating is on a senior secured obligation of the issuer,
then the applicable rating of such Fund Investment (1) shall be
one subcategory below such Assigned Moody's Rating if such
rating is "Ca" or higher and such Fund Investment is a senior
unsecured obligation of the issuer; (2) shall be two
subcategories below such Assigned Moody's Rating if such rating
is "Caa2" or higher and such Fund Investment is a subordinated
obligation of the issuer; and (3) otherwise shall be "C"; and
(ii) if no other security or obligation of the same issuer has an
Assigned Moody's Rating, the applicable ratings of such Fund
Investment shall be determined using any one of the methods
below:
A. (1) if such Fund Investment has an Assigned S&P Rating, then the
applicable rating of such Fund Investment will be (a) one subcategory
below the Moody's equivalent of the Assigned S&P Rating if such Fund
Investment is rated "BBB-" or higher by S&P; and
C-27
(b) two subcategories below the Moody's equivalent of the Assigned S&P
Rating if such Fund Investment is rated "BB+" or lower by S&P; and
(2) if such Fund Investment does not have an Assigned S&P Rating but
another security or obligation of the issuer has an Assigned S&P Rating
("parallel security"), then the Fund may elect (x) to apply the Moody's
equivalent of the rating of such parallel security determined in
accordance with the methodology set forth in subclause (1) above, in
which case, the applicable rating of such Fund Investment will be
determined in accordance with the methodology set forth in clause (i)
above (for such purpose treating the parallel security as if it had an
Assigned Moody's Rating with the rating determined pursuant to this
subclause (2)) or (y) to present such Fund Investment to Moody's for an
estimate of such Fund Investment's rating factor as provided in clause
B below;
B. if such Fund Investment does not have an Assigned Moody's Rating or
Assigned S&P Rating and (x) no other security or obligation of the
issuer has an Assigned Moody's Rating or Assigned S&P Rating or (y)
another security or obligation of the issuer has an Assigned S&P
Rating, and the Fund so elects as provided in clause A(2)(y) above,
then the Fund may present such Fund Investment to Moody's for an
estimate of such Fund Investment's rating factor, from which its
corresponding Moody's rating may be determined, which shall be the
applicable rating; provided that pending receipt from Moody's of such
estimate, such Fund Investment shall have an applicable rating of "B3"
if the Fund certifies to the Trustee that the Fund believes that such
estimate will be at least "B3";
C. with respect to a Fund Investment issued by a U.S. issuer, if (1)
neither the issuer nor any of its Affiliates is subject to
reorganization or bankruptcy proceedings, (2) no debt securities or
obligations of the issuer are in default, (3) neither the issuer nor
any of its Affiliates have defaulted on the payment of any debt during
the past two years, (4) the issuer has been in existence for the past
four years, (5) the issuer is current on any cumulative dividends, (6)
the fixed-charge ratio for the issuer exceeds 120% for each of the past
two fiscal years (and for the most recent four quarters), (7) the
issuer had a net profit before tax in the past fiscal year and the most
recent quarter, and (8) the annual financial statements of the issuer
are unqualified and certified by a firm of independent accountants of
national reputation, and quarterly statements are unaudited but signed
by a corporate officer, the applicable rating of such Fund Investment
will be "B3" if such Fund Investment is a senior secured obligation and
"Caa1" if such Fund Investment is not a senior secured obligation;
D. with respect to a Fund Investment issued by a U.S. issuer, if (1)
neither the issuer nor any of its Affiliates is subject to
reorganization or bankruptcy proceedings, (2) no debt security or
obligation of the issuer has been in default in payment during the past
two years, and (3) such Fund Investment does not fall within the
immediately preceding paragraph (C), the applicable rating of such Fund
Investment will be "Caa2"; and
E. if a debt security or obligation of the issuer has been in default in
payment during the past two years, the applicable rating of such Fund
Investment will be "Ca".
C-28
For the purposes of this definition, "Assigned Moody's Rating" means the
publicly available rating or the monitored estimated rating expressly assigned
to a debt obligation (or facility) by Moody's that addresses the full amount of
the principal and interest promised, and "Assigned S&P Rating" means the
publicly available rating assigned to a debt obligation (or facility) by S&P
that includes no subscripts, asterisks or other qualifications, that is not
stated to be an unmonitored rating, and that addresses the full amount of the
principal and interest promised.
"Moody's Warrant/Option Advance Amount" means, as of any date of
determination, an amount equal to the sum for all Warrant/Option Investments of
the product of(i) the Warrant/Option Intrinsic Value of such Warrant/Option
Investment multiplied by (ii) the Moody's Advance Rate for the Moody's Asset
Category applicable to the Related Equity Securities of such Warrant/Option
Investment.
"NASDAQ" means the electronic inter-dealer quotation system operated by
NASDAQ, Inc., a subsidiary of the National Association of Securities Dealers,
Inc., or any successor thereto.
"Non-Cash Pay Instrument" means a High Yield Bond which falls in Asset
Category C, D, E, F or G that (a) does not provide for the payment of cash
interest or preferred dividends, or provides for the total deferral of interest
until the final maturity thereof, (b) is a debt security that has an initial
current yield on the date of purchase or acquisition thereof of less than 2.5%
per annum and provides for an increase in the rate of interest payable in
respect thereof at any time after the date it was purchased or acquired (other
than any increase resulting from (i) a change in a generally recognized floating
rate interest rate index, (ii) a change in the weighted average interest rate on
underlying collateral in the case of Securities the interest rate on which is
based on such weighted average interest rate or (iii) a change in an interest
rate spread or margin resulting from an announced change in the rating of the
issuer's debt obligations) or (c) is a debt security that provides for the
partial deferral of interest until the final maturity thereof and which has cash
interest payable without deferral at a rate per annum less than (x) with respect
to Fund Investments bearing interest at a fixed rate, 2.5% per annum and (y)
with respect to Fund Investments bearing interest at a floating rate, a
eurodollar rate plus 2% per annum. For purposes of clause (b) of this
definition, if the current yield is increased to 2.5% or more per annum, then at
the time of the increase of such interest rate, the Security will cease to be a
"Non-Cash Pay Instrument."
"Non-Credit Risk Security" means a security with respect to which an
institutional money manager would evaluate its value primarily by reference to
factors other than (a) the coupon (or the coupon as adjusted for any purchase
discount or premium) in relation to prevailing market yields, (b) the credit
worthiness of the issuing entity or (c) the adequacy of the underlying financial
assets supporting such security to ensure the repayment of the security
according to its terms (which adequacy may be measured by a credit analysis of
the likelihood of the obligors of such underlying assets to pay according to the
terms of such underlying assets and/or an analysis of the sufficiency of the
income streams thereon to meet the payment terms of the security).
"Non-Performing Instrument" means (i) any Fund Investment that is debt
and the issuer of which is in default of any principal or interest payment
obligations in respect thereof (without giving effect to any applicable grace
period or waiver), (ii) any Fund Investment that is Preferred
C-29
Stock and the issuer of which has failed to meet any scheduled redemption
obligations or to pay its latest declared cash dividend or (iii) any Fund
Investment that is a CDO Debt Security and the issuer of which has failed to pay
any current interest or principal in cash when due.
"Outstanding Principal Amount" means the outstanding aggregate
principal amount of the Notes under the Indenture at any given time.
"Performing" means, (i) with respect to any Fund Investment that is
Bank Loan or other debt, the issuer of such Fund Investment is not in default of
any payment obligations in respect thereof, (ii) with respect to any Fund
Investment that is Preferred Stock, the issuer of such Fund Investment has not
failed to meet any scheduled redemption obligations or to pay its latest
declared cash dividend or (iii) with respect to any Fund Investment that is a
CDO Debt Security, the issuer of such Fund Investment has not failed to pay any
current interest or principal in cash when due.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Pledge and Intercreditor Agreement" means the Pledge and Intercreditor
Agreement dated as of the Closing Date, among the Trustee, the Insurer, the
Custodian, the Fund and the Collateral Agent identified therein, as amended,
extended, restated, supplemented or modified from time to time in accordance
with the terms thereof.
"Portfolio Limitations" has the meaning assigned to such term in this
Schedule under "Application of Portfolio Limitations."
"Preferred Stock" means, as applied to the Capital Stock of any Person,
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to any shares (or other interests) of Capital Stock of such Person.
"Private Equity Securities" means, at any time of determination any
Equity Security which the Fund believes in good faith (based on the facts and
circumstances available to it) is (i) commonly regarded by investment
professionals as a "private equity security" and (ii) not traded or listed on
any national or regional securities exchange, any designated offshore Securities
market (as defined in Regulation S under the Securities Act) or on the NASDAQ
National Market and is not actively quoted or traded on any automated quotation
system or in the over-the-counter market; provided, however, that "Private
Equity Securities" shall not include (a) any Equity Securities convertible or
exchangeable for any Equity Securities traded or quoted in the markets described
in clause (ii) above, or (b) any equity Securities which may be resold under an
effective registration statement under the Securities Act at the time of
determination.
"Protected Market Value" means, with respect to any Fund Investment
that is the subject of a Defensive Hedge Transaction, the Protected Price of
such Fund Investment times the number of units of such Fund Investment that are
held by the Fund and are the subject of such Defensive Hedge Transaction.
C-30
"Protected Price" means, with respect to any Defensive Hedge
Transaction, (i) the agreed strike price at which the Eligible Counterparty to
such Defensive Hedge Transaction has agreed to purchase the Fund Investment that
is the subject of such Defensive Hedge Transaction or (ii) the agreed strike
price under a Defensive Hedge Transaction pursuant to which the Eligible
Counterparty has agreed to pay the Fund an amount equal to the excess of the
agreed strike price over the current price of the Fund Investment that is the
subject of such Defensive Hedge Transaction.
"Quarterly Date" means the last Business Day of each February, May,
August and November, commencing November 30, 2005.
"Related Person" means, with respect to any issuer, (a) any Person of
which such issuer is a Subsidiary, (b)any Person that is a Subsidiary of such
issuer, (c) with respect to a debt obligation, any Person that relies on, or is
relied upon for, the cash flows of such issuer to service debt obligations or
does not have a credit rating independent of such Person or (d) with respect to
a debt obligation, any Person that guarantees the issuer's payment of such debt
obligation; provided, however, that, in any such case, a Person shall not be a
Related Person of a second Person solely as a consequence of the common control
of such Persons by a single financial sponsor.
"Reporting Date" means the last Business Day of each calendar week,
commencing November 25, 2005.
"S&P" means Standard & Poor's Ratings Services, a Division of The
McGraw-Hill Companies, Inc., or any successor thereto.
"Secured Hedging Advance Amount" means as of any date of determination,
(i) if the Secured Hedging Net Exposure is greater than zero and the Secured
Hedging Transactions entered into, in the judgment of the Fund, hedge or
mitigate risks to which the Fund is exposed in the conduct of its business or
the management of its liabilities, 90% of the Secured Hedging Net Exposure, and
(ii) if the Secured Hedging Net Exposure is less than zero, 100% of the Secured
Hedging Net Exposure; provided that any Secured Hedging Transaction having a
Secured Hedging Net Exposure greater than zero and a counterparty with a rating
of less than "A3" by Moody's shall be deemed, for purposes of calculating the
Secured Hedging Advance Amount, to have a Secured Hedging Net Exposure of zero.
"Secured Hedging Net Exposure" as of any date, as to any Secured
Hedging Transaction for which a determination thereof is required to be made,
shall be determined as follows: (i) each Eligible Counterparty party to each
Secured Hedging Transaction shall determine, with respect to the Secured Hedging
Transactions entered into by it with the Fund, an amount (the "Secured Net
Exposure Component") equal to the net current market value on the bid side of
the market if the position is long and on the ask/offer side of the market if
the position is short to the Fund on such date of determination of each such
Secured Hedging Transaction and (ii) for each Secured Hedging Transaction, the
"Secured Hedging Net Exposure" will, as of any date, be equal to the sum of all
applicable Secured Net Exposure Components as of such date and may, for purposes
of this calculation, be less than zero.
C-31
"Secured Hedging Transaction" means any Interest Rate Hedging
Transaction or Currency Hedging Transaction entered into by the Fund with any
Person that is an Eligible Counterparty which is secured by Collateral pursuant
to the Pledge and Intercreditor Agreement and for avoidance of doubt shall
exclude Structured Product Transactions.
"Securities" means common and preferred stock, partnership units and
participations, member interests in limited liability companies, notes, bonds,
debentures, trust receipts and other obligations, instruments or evidences of
indebtedness, including debt instruments of public and private issuers and
tax-exempt securities (including, without limitation, warrants, rights, put and
call options and other options and rights relating thereto, or any combination
thereof), guarantees of indebtedness, choses in action, trade claims, other
property or interests commonly regarded as securities or any form of interest or
participation therein, but not including Bank Loans or Hedging and Short Sale
Transactions.
"Securities Lending Counterparty" means any bank, broker-dealer or
other financial institution (other than an insurance company) that has:
(i) in the case of a loan with a term of 90 days or less,
short-term senior unsecured debt ratings of "P-1" from Moody's
(or a guarantor with such ratings);
(ii) in the case of a loan with a term of longer than 90 days but
less than a year, either (x) a long-term senior unsecured debt
rating of at least "Al" by Moody's or (y) both a long term
senior unsecured debt rating of "A2" by Moody's and a short
term rating of "P-1" by Moody's; and
(iii) in the case of a loan for a one year term or more, a long-term
senior unsecured debt rating that, individually and together
with all other Securities Lending Counterparties' ratings, is
consistent with the limits set forth in the table below (or a
guarantor with such ratings).
No more than 50% of Total Capitalization may be loaned pursuant to Securities
Lending Transactions regardless of duration. At the time a Securities Lending
Transaction for a term of one year or more is entered into by the Fund, the
percentage of the Fund Investments loaned to a single counterparty shall not
exceed the individual percentage set forth below for the credit rating of such
counterparty, and the percentage of the Fund Investments loaned by the Fund to
counterparties having the same credit rating shall not exceed the aggregate
percentage set forth below for such credit rating:
[Enlarge/Download Table]
---------------------------------------- -------------------------------------- --------------------------------------
LONG-TERM SENIOR UNSECURED INDIVIDUAL AGGREGATE
DEBT RATING OF SECURITIES SECURITIES LENDING SECURITIES LENDING
LENDING COUNTERPARTY COUNTERPARTY LIMIT COUNTERPARTY LIMIT
---------------------------------------- -------------------------------------- --------------------------------------
Aaa 10% 20%
---------------------------------------- -------------------------------------- --------------------------------------
Aa1 10% 20%
---------------------------------------- -------------------------------------- --------------------------------------
Aa2 10% 20%
---------------------------------------- -------------------------------------- --------------------------------------
Aa3 10% 15%
---------------------------------------- -------------------------------------- --------------------------------------
A1 10% 10%
---------------------------------------- -------------------------------------- --------------------------------------
A2* 5% 5%
---------------------------------------- -------------------------------------- --------------------------------------
A3 or lower 0% 0%
---------------------------------------- -------------------------------------- --------------------------------------
C-32
---------------------------
* The percentages in this row apply only if such rating is not on a credit watch
with negative implications by Moody's. If such rating is on a credit watch with
negative implications by Moody's, both the individual and the aggregate
percentage limits shall be zero.
provided, that the Fund may enter into a Securities Lending Transaction with a
Securities Lending Counterparty having, at such time, a long-term senior
unsecured debt rating below "A2" by Moody's, so long as the Rating Agency
Condition with respect to Moody's has been satisfied.
"Securities Lending Transactions" means all obligations of the Fund (i)
to purchase investments which arise out of or in connection with the sale of the
same or substantially similar investments or other similar transactions having
the same economic effect (excluding Swap Transactions); and (ii) incurred in
connection with any security lending transactions described in clause (i) with a
Securities Lending Counterparty.
"Semi-Liquid Investments" means (i) Unquoted Investments that are debt
Securities rated "B3" or better by Moody's; (ii) Unquoted Investments that are
not subject to any enforceable agreement containing a material condition to, or
material restriction on, the ability of the holder of such Unquoted Investment
or an assignee of such holder to sell, assign, transfer or otherwise liquidate
the investment in a commercially reasonable time and manner (other than in any
such agreement contained in the Collateral Documents and customary securities
law arrangements or restrictions); (iii) solely for purposes of the definition
of Portfolio Limitations, Unquoted Investments which are High Yield Bonds or
Mezzanine Investments and are part of an issue that is greater or equal to $40
million in original principal amount; or (iv) solely for purposes of the
definition of Portfolio Limitations, Unquoted Investments which are High Yield
Bonds that are held by ten or more holders or the issuer thereof has a total
capitalization in excess of $150.0 million.
"Short Sale Advance Amount" means, as of any date of determination with
respect to any Short Sale Transaction for which a determination thereof is
required to be made, an amount calculated as follows:
(i) If the Security borrowed by the Fund in connection with such
Short Sale Transaction is a Non-Fixed Income Investment:
Short Sale Advance Amount = S minus M minus X
Where:
S= The aggregate value of the
net proceeds from the sale of
the Non-Fixed Income
Investment in the Short Sale
Transaction that are not
included in clause (i) of
Moody's Senior Advance Amount
or clause (i) of Moody's
Total Advance Amount,
determined as of the date of
such sale.
C-33
M= The lesser of (a) the Market
Value of such Non-Fixed
Income Investment as of the
date of determination and (b)
the original price of such
Non-Fixed Income Investment
on the date it was borrowed.
X= The product of (a) the Market
Value of such Non-Fixed
Income Investment as of the
date of determination,
multiplied by (b) one minus
the Moody's Advance Rate
applicable to such Non-Fixed
Income Investment as of the
date of determination;
provided, however, that in no
event shall X be less then 0.
(ii) If the Bank Loan or Security borrowed by the Fund in
connection with such Short Sale Transaction is a Fixed Income Investment:
Short Sale Advance Amount = S minus M minus Y
Where:
S= The aggregate value of the
net proceeds from the sale of
such Fixed Income Investment
in the Short Sale Transaction
that are not included in
clause (i) of Moody's Senior
Advance Amount or clause (i)
of Moody's Total Advance
Amount, determined as of the
date of such sale.
M= The lesser of (a) the Market
Value of such Fixed Income
Investment as of the date of
determination and (b) the
original price of such Fixed
Income Investment on the date
it was borrowed.
Y= The lesser of (a) the product
of (i) the Market Value of
such Fixed Income Investment
as of the date of
determination, multiplied by
(ii) one minus the Moody's
Advance Rate applicable to
such Fixed Income Investment
as of the date of
determination, and (b) (i)
110% of the par value of such
Fixed Income Investment,
minus (ii) the Market Value
of such Fixed Income
Investment as of the date of
determination; provided,
however that in no event
shall Y be less then 0.
C-34
(iii) For purposes of this definition:
(A) "Fixed Income Investment" means any Bank Loan or Security that (i)
provides a return in the form of fixed periodic payments and/or a
return of a fixed principal amount at maturity, which return is fixed
at the time of purchase of such security, and (ii) at the time of
determination constitutes indebtedness of the issuer.
(B) "Non-Fixed Income Investment" means any Security that is borrowed by
the Fund in a Short Sale Transaction that is not a Fixed Income
Investment.
"Short Sale Transaction" means a transaction under which the Fund
borrows a Bank Loan or Security and sells or otherwise disposes of such or any
substantially similar Bank Loan or Security prior to the date on which the same
must be returned to the lender thereof (and commonly known as a "short sale").
"Specified Foreign Country" means each Designated Country other than
(x) a country whose sovereign debt rating in a non-local currency is rated "Aaa"
by Moody's or (y) a country whose sovereign debt rating in a non-local currency
is rated "Aa2" or better by Moody's (and, if rated "Aa2" by Moody's, such rating
has not been placed on a credit watch with negative implications by Moody's) and
in the case of(y) which is (a) a member of the European Union that has adopted
the Euro as its lawful currency, (b) Canada, (c) Great Britain or (d) Australia.
"Structured Product Transaction" means a Hedging and Short Sale
Transaction between the Fund and a counterparty in which either, (i) the Fund is
the counterparty to a CDS purchasing protection from an Eligible Counterparty
with respect to a reference asset or an index that refers to or is based upon a
number of reference assets, or (ii) the Fund is the counterparty writing or
providing the protection with respect to a CDS relating to a reference asset or
an index that refers to or is based upon a number of reference assets.
"Swap Transaction" means: (i) any rate, basis, debt or equity swap;
(ii) any put, cap, collar or floor agreement; (iii) any rate, basis, debt or
equity futures or forward contract; (iv) any rate, basis, debt or equity option
representing an obligation to buy or sell a security, debt or equity; and (v)
any other similar agreement.
"Total Capitalization" means the sum of (a) Contributed Company Capital
plus aggregate undistributed net income of the Fund (as determined quarterly in
accordance with GAAP and set forth in the Fund's financial statements) minus net
loss of the Fund (determined quarterly in accordance with GAAP and set forth in
the Fund's financial statements), in each case excluding any reduction in
Company Equity as a result of placement or structuring fees and organizational
expenditures, (b) the aggregate outstanding liquidation preference of the
Preferred Shares plus the aggregate liquidation preference of fully subscribed
but unissued Preferred Shares and (c) the aggregate Outstanding Principal Amount
plus the amount, if any, by which the Total Maximum Commitment exceeds the
Outstanding Principal Amount; provided, however, until June 30, 2007, for
purpose of clauses (i) through (vi) of the Portfolio Limitations, "Total
Capitalization" will be the greater of (1) the amount determined pursuant to
clauses (a), (b) and (c) above and (ii) $404.5 million; provided, further, that,
for purposes of the definition of Portfolio Limitations, Total Capitalization
shall not exceed $809.0 million.
C-35
"Unhedged Foreign Investment" means any portion of any Fund Investment
denominated in a currency other than Dollars which is not protected against
currency fluctuations as a result of Currency Hedging Transactions.
"Unquoted Investments" means Fund Investments other than Cash or Cash
Equivalents for which the Market Value has not been obtained from an Approved
Source.
"U.S. Government Securities" means Securities that are direct
obligations of, or obligations the timely payment of principal and interest on
which is fully guaranteed by, the United States of America or any agency or
instrumentality of the United States of America the obligations of which are
backed by the full faith and credit of the United States of America and in the
form of conventional bills, bonds and notes. In no event shall U.S. Government
Securities include: (i) any security providing for the payment of interest only;
(ii) any Swap Transaction; or (iii) any obligation on which all or any portion
of the payments thereunder is based, directly or indirectly, on any Swap
Transaction.
"Warrant/Option Intrinsic Value" means, with respect to any
Warrant/Option Investment, the product of (x) an amount by which the current
price (based on the price from an Approved Source or an Approved Investment
Banking Firm) of the applicable Related Equity Securities exceeds the agreed
strike price of the Related Equity Securities with respect to such
Warrant/Option Investment, multiplied by (y) the number of shares of the Related
Equity Securities. For the avoidance of doubt, the Warrant/Option Intrinsic
Value shall always be zero if, in the case of a call Warrant/Option Investment,
the agreed strike price of the applicable Related Equity Securities for such
Warrant/Option Investment is equal to or greater than the current price of the
applicable Related Equity Securities for such Warrant/Option Investment or, in
the case of a put Warrant/Option Investment, the agreed strike price of the
applicable Related Equity Securities for such Warrant/Option Investment is equal
to or less than the current price of the applicable Related Equity Securities
for such Warrant/Option Investment.
"Warrant/Option Investments" means any Fund Investments held by the
Fund that are warrants or call options or similar rights with respect to Equity
Securities (the "Related Equity Securities').
"Yield to Worst" means, in respect of any High Yield Bond or other debt
security, the lesser of (a) the yield-to-maturity and (b) the lowest
yield-to-call calculated on each scheduled call date.
C-36
ANNEX I
MOODY'S INDUSTRY CLASSIFICATIONS
1. Aerospace and Defense
2. Automobile
3. Banking
4. Beverage, Food and Tobacco
5. Buildings and Real Estate
6. Chemicals, Plastics and Rubber
7. Containers, Packaging and Glass
8. Diversified/Conglomerate Manufacturing
9. Diversified/Conglomerate Service
10. Diversified Natural Resources, Precious Metals and Minerals
11. Ecological
12. Electronics
13. Finance
14. Farming and Agriculture
15. Grocery
16. Healthcare, Education and Childcare
17. Home and Office Furnishings, Housewares and Durable Consumer Products
18. Hotels, Motels, Inns and Gaming
19. Insurance
20. Leisure, Amusement, Motion Pictures
21. Machinery (Non-Agriculture, Non-Construction and Non-Electronic)
22. Mining, Steel, Iron and Nonprecious Metals
23. Oil and Gas
24. Personal and Non-Durable Consumer Products (Manufacturing Only)
25. Personal, Food and Miscellaneous Services
26. Printing and Publishing
27. Cargo Transport
28. Retail Stores
29. Telecommunications
30. Textiles and Leather
31. Personal Transportation
32. Utilities
33. Broadcasting and Entertainment
34. Structured Finance Obligations
C-37
APPROVED DEALERS
A.G. Edwards & Sons, Inc. Liberty Brokerage
ABN AMRO Bank Libra Securities
Allen & Co. Lincoln Partners
Amroc Investments, LLC M.J. Whitman, LLC
APS Financial Corporation McDonald & Company
B. Riley & Co. Merrill Lynch
Bank of America Mesirow Financial
Bank of Montreal Miller Tabak & Co., LLC
Barclays Capital Morgan Joseph & Co.
Bear Stearns Morgan Stanley
BMO Nesbitt Bums Prudential Securities
BNP Paribas Raymond James
BNY Capital RBC Dain Rauscher
Brown Gibbons Lang & Company Robert W. Baird & Co
Cantor Fitzgerald Roth Capital
Chanin Capital Partners Salomon Smith Barney
Chicago Corporation Schroder Wertheim
CIBC World Markets Scotia Capital Markets
CIT Group Seidler Companies, The
Citigroup SG Cowen
Citimark Partners Societe Generale
Commerzbank Spear, Leeds & Kellogg
Credit Lyonnais SunTrust Robinson-Humphrey Company
Credit Research & Trading Swiss Bank Corporation
CS First Boston TD Securities
Delaware Bay, Inc. The Blackstone Group
Deutsche Bank Alex Brown U. S. Bancorp
First Chicago Trust Company UBS Warburg
First Security Van Kasper Union Bank of California
Fleet Wachovia Securities
General Electric Wedbush Morgan
Goldman Sachs & Co. Wells Fargo
Hellmond & Associates William Blair & Company
Houlihan Lokey Howard & Zukin
Imperial Capital
Indosuez Capital
ING (Baring Furman Selz)
J.P. Morgan Chase
Jefferies & Company, Inc.
Ladenburg Thalmann
Lazard Freres & Co., LLC
Lehman Brothers
C-38
APPROVED EXCHANGES
AFRICAN STOCK EXCHANGES
Johannesburg Stock Exchange, South Africa
The South African Futures Exchange(SAFEX), South Africa
ASIAN STOCK EXCHANGES
Sydney Futures Exchange, Australia
Australian Stock Exchanges, Australia
Shenzhen Stock Exchange, China
Stock Exchange of Hong Kong,Hong Kong
Hong Kong Futures Exchange,Hong Kong
National Stock Exchange of India,India
Bombay Stock Exchange, India
Jakarta Stock Exchange, Indonesia
Indonesia NET Exchange,Indonesia
Nagoya Stock Exchange,Japan
Osaka Securities Exchange, Japan
Tokyo Grain Exchange, Japan
Tokyo International Financial Futures Exchange (TIFFE), Japan
Tokyo Stock Exchange, Japan
Korea Stock Exchange, Korea
Kuala Lumpur Stock Exchange, Malaysia
New Zealand Stock Exchange, New Zealand
Karachi Stock Exchange, Pakistan
Lahore Stock Exchange, Pakistan
Stock Exchange of Singapore (SES), Singapore
Singapore International Monetary Exchange Ltd. (SIMEX), Singapore
Colombo Stock Exchange, Sri Lanka
Sri Lanka Stock Closings, Sri Lanka
Taiwan Stock Exchange, Taiwan
The Stock Exchange of Thailand, Thailand
EUROPEAN STOCK EXCHANGES
Vienna Stock Exchange, Austria
EASDAQ, Belgium
Zagreb Stock Exchange, Croatia
Prague Stock Exchange, Czech Republic
Copenhagen Stock Exchange, Denmark
Helsinki Stock Exchange, Finland
Paris Stock Exchange, France
NouveauMarche, France
MATIF, France
Frankfurt Stock Exchange, Germany
Athens Stock Exchange, Greece
Budapest Stock Exchange, Hungary
C-39
Italian Stock Exchange, Italy
National Stock Exchange of Lithuania,Lithuania
Macedonian Stock Exchange, Macedonia
Amsterdam Stock Exchange, The Netherlands
Oslo Stock Exchange, Norway
Warsaw Stock-Exchange, Poland
Lisbon Stock Exchange, Portugal
Bucharest Stock Exchange, Romania
Russian Securities Market News, Russia
Ljubljana Stock Exchange,Inc., Slovenia
Barcelona Stock Exchange, Spain
Madrid Stock Exchange, Spain
MEFF: (Spanish Financial Futures & Options Exchange), Spain
Stockholm Stock Exchange, Sweden
Swiss Exchange, Switzerland
Istanbul Stock Exhange, Turkey
FTSE International (London Stock Exchange), United Kingdom
London Stock Exchange: Daily Price Summary, United Kingdom
Electronic Share Information, UnitedKingdom
London Metal Exchange,United Kingdom
London InternationalFinancial Futures and Options Exchange, United
Kingdom
MIDDLE EASTERN STOCK EXCHANGES
Tel Aviv Stock Exchange, Israel
Amman Financial Market, Jordan
Istanbul Stock Exhange, Turkey
NORTH AMERICAN STOCK EXCHANGES
Alberta Stock Exchange, Canada
Montreal Stock Exchange, Canada
Toronto Stock Exchange, Canada
Vancouver Stock Exchange, Canada
Winnipeg Stock Exchange, Canada
Mexican Stock Exchange, Mexico
AMEX, United States
New York Stock Exchange (NYSE),United States
NASDAQ, United States
Chicago Stock Exchange, United States
Chicago Board Options Exchange, United States
Chicago Board of Trade, United States
Chicago Mercantile Exchange, United States
Pacific Stock Exchange, United States
Philadelphia Stock Exchange, United States
SOUTH AMERICAN STOCK EXCHANGES
Bermuda Stock Exchange, Bermuda
Rio de Janeiro Stock Exchange, Brazil
C-40
Sao Paulo Stock Exchange, Brazil
Cayman Islands Stock Exchange, Cayman Islands
Chile Electronic Stock Exchange, Chile
Santiago Stock Exchange, Chile
Bogota stock exchange, Colombia
Lima Stock Exchange, Peru
Caracas Stock Exchange, Venezuela
Venezuela Electronic Stock Exchange, Venezuela
C-41
APPROVED INVESTMENT BANKING FIRMS
A.G. Edwards & Sons, Inc. Lehman Brothers
ABN AMRO Bank Liberty Brokerage
Allen & Co. Lincoln Partners
Amroc Investments M.J. Whitman
Bank of America McDonald & Company
Bank of Montreal Merrill Lynch
Bank One Mesirow Financial
Barclays Capital Miller Tabak & Hirsch
Bear Stearns Morgan Stanley
BMO Nesbitt Burns Prudential Securities
Brown, Gibbons, Lang RBC Dain Rauscher
Cantor Fitzgerald Raymond James
Chanin Capital Partners Robert W. Baird & Co
JPMorgan Chase Manhattan Roth Capital
Chicago Corporation Solomon Smith Barney
CIBC World Markets Schroder Wertheim
CIT Group Scotia Capital Markets
Citibank Group Seidler Companies
Citimark Partners SG Cowen
Credit Research & Trading Sun Trust Robinson-Humphrey Company
CS First Boston Sutro & Co.
Dabney Flannigan TD Securities
Delaware Bay, Inc. The Blackstone Group
Deutsche Bank Alex Brown Union Bank of California
EVEREN Securities US Bancorp Libra
First Security Van Kasper US Bancorp Piper Jaffray
Fleet National Bank USB Warburg
Goldman Sachs & Co. Wachovia Securities
Grantchester Holdings Wasserstein Perella Securities Inc.
Greenwich NatWest Wedbush Morgan
Gruntal Wells Fargo
Hambrecht & Quist William Blair & Company
Hellmold & Associates
Houlihan Lokey Howard & Zukin
Imperial Capital
ING (Baring Furman Selz)
Jefferies & Company, Inc.
JPMorgan Chase
Ladenburg Thalmann
Lazard Freres
C-42
APPROVED PRICING SERVICES
Advantage Data, Inc.
Bloomberg
Bridge Information Systems, Inc.
Data Resources Inc.
Fixed Income Pricing System
Interactive Data Corp
International Securities Market Association
JJ Kenney
KDP
Loan Pricing Corp.
Merrill Lynch Securities Pricing Service
Muller Data Corp.
Reuters (only for pricing Foreign Issuer Securities)
Societe Generale
Standard & Poor's
Telerate
Wood Gundy (only for pricing Securities issued by the Canadian federal or
Canadian provincial governments)
C-43
APPROVED THIRD PARTY APPRAISERS
A.G. Edwards & Sons, Inc. J.P. Morgan Chase
ABN AMRO Bank Jefferies & Company, Inc.
Allen & Co. KPMG International
Amroc Investments Ladenburg Thalmann
Bank of America Lazard Freres
Barclays Capital Lehman Brothers
Bear Stearns Liberty Brokerage
BMO Nesbitt Burns M.J. Whitman
Brown, Gibbons, Lang McDonald & Company
Cantor Fitzgerald Merrill Lynch
Chanin Capital Mesirow Financial
Citimark Partners Miller Tabak
Chicago Corporation Morgan Stanley
CIBC World Markets PriceWaterhouseCoopers
CIT World Markets Raymond James
Citigroup RBC Dain Rauscher Robert W. Barry
Credit Research & Trading Schroder Wertheim
CS First Boston Scotia Capital Markets
Dabney Flannigan Seidler Companies
Delaware Bay, Inc. Sun Trust Robinson-Humphrey Company
Deloitte & Touche Sutro & Co.
Deutsche Bank Swiss Bank Corporation
Dresdner Kelinwort Wasserstein TD Securities
Ernst & Young The Blackstone Group
EVEREN Securities UBS Warburg
First Chicago Trust Company Union Bank
First Security Van Kasper US Bancorp Piper Jaffray
Goldman Sachs & Co. US Bancorp Libra
Grantchester Holdings Wachovia Securities
Greenwich NatWest Wedbush Morgan
Hambrecht & Quist Wells Fargo
Hellmold & Associates William Blair & Company
Houlihan Lokey Howard & Zukin
Imperial Capital
C-44
APPENDIX D: S&P COLLATERAL VALUATION SCHEDULE
CALCULATION OF S&P ADVANCE AMOUNT
"S&P Advance Rate" means the S&P Senior Advance Rate or the S&P Total
Advance Rate, as applicable.
"S&P Senior Advance Rate" means, for purposes of determining the Senior
Over-Collateralization Test, for each S&P Asset Category, the percentage
specified in the table below opposite such S&P Asset Category; provided that:
(i) so long as the aggregate number of issuers (without
duplication) of the Eligible Investments is equal to or
greater than 30 and the aggregate number of Industries
(without duplication) in which the Eligible Investments are
invested is equal to or greater than 9, the percentage
specified in the column entitled "S&P Advance Rate -- 30/9" in
the table below opposite such S&P Asset Category; and
(ii) for all other cases, the percentage specified in the column
entitled "S&P Advance Rate -- Others" in the table below
opposite such S&P Asset Category;
provided that, for purposes of this definition only, each $7.0 million in Cash
or Cash Equivalents held by the Fund or each $7.0 million in available unfunded
amount under the Indenture shall be treated as one issuer and one Industry;
provided, further, that a Related Person of any Person shall be considered the
same "issuer" as such Person unless such Person is a bankruptcy remote entity;
provided, further, that during the first 365 days following the Closing Date
only, the S&P Senior Advance Rate for each S&P Asset Category may be, at the
election of the Investment Manager, the percentage specified in the column
entitled "S&P Advance Rate --30/9" in the table below opposite such S&P Asset
Category regardless of the aggregate number of issuers of the Eligible
Investments or the aggregate number of Industries in which the Eligible
Investments are invested:
[Enlarge/Download Table]
S&P ASSET S&P ADVANCE S&P ADVANCE
CATEGORY RATE -- 30/9 RATE -- OTHERS
----------------------------------------------------------------------------------------------------------------------
A-1 100.00% 100.00%
A-2 99.00% 99.00%
A-3 96.00% 96.00%
A-4 92.00% 92.00%
A-5 82.20% 82.20%
A-6 68.20% 68.20%
A-7 53.20% 53.20%
B-1 85.99% 81.36%
B-2 81.14% 74.82%
C-1 83.92% 81.84%
C-2 82.86% 80.63%
C-3 81.64% 79.18%
D-1 78.31% 74.90%
D-2 74.92% 70.79%
D-3 71.69% 66.92%
E-1 65.64% 59.02%
E-2 61.10% 53.58%
E-3 56.59% 48.21%
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S&P ASSET S&P ADVANCE S&P ADVANCE
CATEGORY RATE -- 30/9 RATE -- OTHERS
----------------------------------------------------------------------------------------------------------------------
F-1 50.34% 41.46%
F-2 41.97% 31.64%
F-3 31.26% 18.35%
G-1 76.92% 74.84%
G-2 75.86% 73.63%
G-3 74.64% 72.18%
G-4 71.31% 67.90%
G-5 67.92% 63.79%
G-6 64.69% 59.92%
G-7 58.64% 52.02%
G-8 54.10% 46.58%
G-9 49.59% 41.21%
G-10 24.26% 11.35%
H 35.54% 27.56%
I-1 66.94% 57.54%
I-2 58.57% 47.15%
I-3 24.39% 9.71%
J-1 36.10% 14.52%
J-2 5.90% 8.25%
"S&P Total Advance Rate" means, for purposes of determining the Total
Over-Collateralization Test, for each S&P Asset Category, the percentage
specified in the table below opposite such S&P Asset Category; provided that:
(iii) so long as the aggregate number of issuers (without
duplication) of the Eligible Investments is equal to or
greater than 30 and the aggregate number of Industries
(without duplication) in which the Eligible Investments are
invested is equal to or greater than 9, the percentage
specified in the column entitled "S&P Advance Rate -- 30/9" in
the table below opposite such S&P Asset Category; and
(iv) for all other cases, the percentage specified in the column
entitled "S&P Advance Rate -- Others" in the table below
opposite such S&P Asset Category;
provided that, for purposes of this definition only, each $7.0 million in Cash
or Cash Equivalents held by the Fund or each $7.0 million in available unfunded
amount under the Indenture shall be treated as one issuer and one Industry;
provided, further, that a Related Person of any Person shall be considered the
same "issuer" as such Person unless such Person is a bankruptcy remote entity;
provided, further, that during the first 365 days following the Closing Date
only, the S&P Total Advance Rate for each S&P Asset Category may be, at the
election of the Investment Manager, the percentage specified in the column
entitled "S&P Advance Rate --30/9" in the table below opposite such S&P Asset
Category regardless of the aggregate number of issuers of the Eligible
Investments or the aggregate number of Industries in which the Eligible
Investments are invested:
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S&P ASSET S&P ADVANCE S&P ADVANCE
CATEGORY RATE -- 30/9 RATE -- OTHERS
----------------------------------------------------------------------------------------------------------------------
A-1 100.00% 100.00%
A-2 98.00% 99.00%
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S&P ASSET S&P ADVANCE S&P ADVANCE
CATEGORY RATE -- 30/9 RATE -- OTHERS
----------------------------------------------------------------------------------------------------------------------
A-3 97.00% 97.00%
A-4 92.00% 94.00%
A-5 84.60% 84.60%
A-6 72.40% 72.40%
A-7 59.40% 59.40%
B-1 88.42% 84.60%
B-2 84.41% 79.18%
C-1 86.75% 85.02%
C-2 85.86% 84.03%
C-3 84.86% 82.83%
D-1 82.11% 79.30%
D-2 79.31% 75.90%
D-3 76.64% 72.71%
E-1 71.62% 66.16%
E-2 67.86% 61.67%
E-3 64.14% 57.23%
F-1 58.91% 51.59%
F-2 51.99% 43.46%
F-3 43.10% 32.45%
G-1 79.75% 78.02%
G-2 78.86% 77.03%
G-3 77.86% 75.83%
G-4 75.11% 72.30%
G-5 72.31% 68.90%
G-6 69.64% 65.71%
G-7 64.62% 59.16%
G-8 60.86% 54.67%
G-9 57.14% 50.23%
G-10 36.10% 25.45%
H 49.00% 38.00%
I-1 72.63% 64.87%
I-2 65.68% 56.26%
I-3 37.44% 25.32%
J-1 47.45% 29.65%
J-2 22.90% 16.50%
"S&P Advance Amount" means the S&P Senior Advance Amount or the S&P
Total Advance Amount, as applicable.
Notwithstanding the foregoing or the definition of S&P Senior Advance
Amount or S&P Total Advance Amount, for purposes of determining the S&P Advance
Amount,
(i) the Market Value of any Unhedged Foreign Investment shall be
95% of the Market Value thereof otherwise determined in
accordance with the above procedures; provided that, if the
Foreign Issuer of such Unhedged Foreign Investment is from a
country whose sovereign debt rating in a non-local currency is
not assigned an S&P OC Test Rating of "AA" or better, the
Market Value of such Unhedged Foreign Investment shall be 85%
of the Market Value thereof otherwise determined in accordance
with the above procedures;
(ii) the percentage applicable above to Cash in a currency other
than Dollars shall be (a) with respect to Cash in a currency
other than Dollars, held for a period of five
D-3
(5) Business Days or less, 95% (and not 100%) and (b) with
respect to Cash in a currency other than Dollars, held for a
period of more than five (5) Business Days, 0%, unless in
either case such Cash is protected against currency
fluctuations as a result of Currency Hedging Transactions, in
which case, the percentage applicable shall be 100%;
(iii) the Market Value of any Preferred Stock or Structured Product
Transaction shall be 95% of the Market Value thereof otherwise
determined in accordance with the above procedures and, in the
case of any Structured Product Transaction in which the Fund
purchases a CDS, the full amount of the premiums to be paid by
the Fund for the duration of such CDS will be deducted from
the Market Value of such Structured Product Transaction;
(iv) the Market Value of any CDO Debt Security that is not assigned
an S&P OC Test Rating of "CCC" or better shall be zero; and
(v) the Market Value of any Non-Cash Pay Instrument that is not a
U.S. Government Security shall be 95% of the Market Value
thereof otherwise determined in accordance with the above
procedures.
For purposes of the S&P Advance Amount, the Fund shall assign each Fund
Investment to one of the following categories (each, an "S&P Asset Category")
commencing upon the initial acquisition thereof (and, for purposes of this
categorization, the Market Value Price of a Fund Investment trading at par is
equal to $1.00):
"Asset Category A-1 Investments" means (a) Cash and (b) Cash
Equivalents described in clause (vi) of the definition of such term and (c) Cash
Equivalents described in clauses (i), (ii), (iii) or (iv) of the definition of
such term that mature on the Business Day next following the date of acquisition
thereof or are payable on demand of the holder or within one Business Day of
demand.
"Asset Category A-2 Investments" means Cash Equivalents (other than
Cash in U.S. dollars, U.S. Government Securities and Cash Equivalents described
in clauses (b) or (c) of the definition of Asset Category A-1 Investments) and
U.S. Government Securities with maturities of less than or equal to 183 days.
"Asset Category A-3 Investments" means U.S. Government Securities with
final maturities more than 183 days but less than or equal to two (2) years.
"Asset Category A-4 Investments" means U.S. Government Securities with
final maturities more than two (2) years but less than or equal to five (5)
years.
"Asset Category A-5 Investments" means U.S. Government Securities with
final maturities more than five (5) years but less than or equal to ten (10)
years.
"Asset Category A-6 Investments" means U.S. Government Securities with
final maturities more than ten (10) years but less than or equal to twenty (20)
years.
D-4
"Asset Category A-7 Investments" means U.S. Government Securities with
final maturities more than twenty (20) years but less than or equal to thirty
(30) years.
"Asset Category B-1 Investments" means Bank Loans which (i) are
Performing and (ii) have a Market Value Price greater than or equal to $0.90.
"Asset Category B-2 Investments" means Bank Loans which (i) are
Performing and (ii) have a Market Value Price greater than or equal to $0.85 but
less than $0.90.
"Asset Category C-1 Investments" means High Yield Bonds and Mezzanine
Investments which (i) are Performing and (ii) have an S&P OC Test Rating of
"BBB+" or better.
"Asset Category C-2 Investments" means High Yield Bonds and Mezzanine
Investments which (x) (i) are Performing and (ii) have an S&P OC Test Rating of
"BBB" or (y) Securities (other than securities issued by a Foreign Issuer) which
are fully defeased.
"Asset Category C-3 Investments" means High Yield Bonds and Mezzanine
Investments which (i) are Performing and (ii) have an S&P OC Test Rating of
"BBB-".
"Asset Category D-1 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "BB+".
"Asset Category D-2 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "BB".
"Asset Category D-3 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "BB-".
"Asset Category E-1 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "B+".
"Asset Category E-2 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "B".
"Asset Category E-3 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "B-".
"Asset Category F-1 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "CCC+".
D-5
"Asset Category F-2 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (a) are Performing and
(b) have an S&P OC Test Rating of "CCC".
"Asset Category F-3 Investments" means High Yield Bonds (other than
convertible Securities) and Mezzanine Investments which (i) are Performing and
(ii) have an S&P OC Test Rating of "CCC-" or lower or are not rated.
"Asset Category G-1 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of at least "BBB+".
"Asset Category G-2 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "BBB".
"Asset Category G-3 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "BBB-".
"Asset Category G-4 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "BB+".
"Asset Category G-5 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "BB".
"Asset Category G-6 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "BB-".
"Asset Category G-7 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "B+".
"Asset Category G-8 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "B".
"Asset Category G-9 Investments" means convertible bonds which (i) are
Performing and (ii) have an S&P OC Test Rating of "B-".
"Asset Category G-10 Investments" means convertible bonds (not covered
by Asset Categories G-1 through 0-9) which are Performing.
"Asset Category H Investments" means Preferred Stock which is
Performing.
"Asset Category I-1 Investments" means Bank Loans which (i) are
non-Performing and (ii) have a Market Value Price equal to or greater than
$0.85.
"Asset Category I-2 Investments" means (i) Bank Loans which have a
Market Value Price less than $0.85 and (ii) Bank Loans described in Asset
Categories B-1, B-2 or I-1 above that have an S&P OC Test Rating below "B-"
(including Bank Loans with an S&P OC Test Rating of "NR") to the extent that the
aggregate Market Value of such Bank Loans is in excess of 15% of Total
Capitalization; (iii) Bank Loans that would otherwise fall in Asset Categories
B-1, B-2 or I-1 above that are originated under a credit agreement that provided
for aggregate
D-6
credit facilities at origination of less than $150,000,000 to the extent that
the aggregate Market Value of such Bank Loans is in excess of 15% of Total
Capitalization; and (iv) Bank Loans that are unsecured or subordinated.
"Asset Category I-3 Investments" means non-Performing High Yield Bonds,
Mezzanine Investments, convertible bonds and Preferred Stock.
"Asset Category J-1 Investments" means Equity Securities which are not
Private Equity Securities.
"Asset Category J-2 Investments" means Fund Investments in Bank Loans,
High Yield Bonds, Mezzanine Investments, Private Equity Securities or CDO Debt
Securities not otherwise described in any of the preceding Asset Categories and
Structured Product Transactions (other than Fully Collateralized Structured
Product Transactions).
Rating Procedures. References herein to any rating by Moody's or S&P
shall include shadow ratings and shall also be deemed to include an equivalent
rating in a successor rating category of Moody's or S&P, as the case may be, or
if neither Moody's nor S&P is in the business of rating securities, an
equivalent rating from another Rating Agency.
Notwithstanding any other provision contained in this Schedule:
(i) with respect to Fund Investments that are Preferred Stock, if
such Preferred Stock does not have a public rating by S&P,
then such Preferred Stock shall be assigned a rating for
purposes hereof that is (a) two rating sub-categories below
the S&P OC Test Rating of the issuer if rated above "BB+" and
(b) one rating category (i.e., three rating sub-categories)
below the S&P OC Test Rating if the issuer is rated below
"BBB-";
(ii) Fund Investments that are CDO Debt Securities will be assigned
to an Asset Category for High Yield Bonds using a rating that
is (i) one rating category (i.e., three rating subcategories)
below the S&P rating, if such CDO Debt Security is rated by
S&P, and (ii) two rating categories (i.e., six rating
subcategories) below the actual public Moody's rating (and not
the rating assigned pursuant to the S&P OC Test Rating), if
such CDO Debt Security is not rated by S&P but is publicly
rated by Moody's;
(iii) Fund Investments that are Busted Convertible Bonds will be
assigned to an S&P Asset Category into which such Fund
Investments would otherwise fall if they were not convertible
securities provided that the Market Value of any Busted
Convertible Bonds shall be 95% of the Market Value thereof
otherwise determined in accordance with valuation procedures
set forth herein;
(iv) the determination of the S&P Advance Rate applicable to a
Structured Product Transaction shall be subject to the
following: (A) each Fully Collateralized Structured Product
Transaction shall be deemed to fall into the S&P Asset
Category of its reference obligation; (B) each Single Asset
Structured Product Transaction (other than a Fully
Collateralized Structured Product Transaction) in
D-7
which the reference obligation has an S&P OC Test Rating of
"BBB-" or better shall be deemed to fall into the S&P Asset
Category of its reference obligation and shall have an S&P
Advance Rate equal to 95% of the S&P Advance Rate applicable
to such reference obligation; (C) each Single Asset Structured
Product Transaction (other than a Fully Collateralized
Structured Product Transaction) in which the reference
obligation has an S&P OC Test Rating of less than "BBB-"
shall be deemed to fall into the S&P Asset Category of its
reference obligation and shall have an S&P Advance Rate equal
to 90% of the S&P Advance Rate applicable to such reference
obligation; (D) each Indexed Structured Product Transaction
(other than a Fully Collateralized Structured Product
Transaction) comprised primarily of reference obligations that
have an S&P OC Test Rating of "BBB-" or better shall be deemed
to fall into the S&P Asset Category for High Yield Bonds
having an S&P OC Test Rating of "BBB-" and shall have an S&P
Advance Rate equal to 95% of the S&P Advance Rate applicable
to High Yield Bonds having such a rating; and (E) each Indexed
Structured Product Transaction (other than a Fully
Collateralized Structured Product Transaction) comprised
primarily of reference obligations that have an S&P OC Test
Rating of less than "BBB-" shall be deemed to fall into the
S&P Asset Category for High Yield Bonds having an S&P OC Test
Rating of "CCC" and shall have an S&P Advance Rate equal to
90% of the S&P Advance Rate applicable to High Yield Bonds
having such a rating.
(v) for the purpose of determining the S&P Advance Rate applicable
to Fund Investments that are Hedging and Short Sale
Transactions, at any time during the 60-day time period or
30-day time period, as the case may be, described in clause
(xvii) of the definition of Excluded Investments below, the
S&P Advance Rate will be 90% of the S&P Advance Rate
calculated for such Fund Investment pursuant to the S&P
Advance Rate table in the definition of S&P Advance Rate
above;
(vi) for the purpose of determining the S&P Advance Rate applicable
to Fund Investments in Bank Loan Participations, at any time
during the 60-day time period described in clause (viii) of
the definition of Excluded Investments below, the S&P Advance
Rate will be 90% of the S&P Advance Rate calculated for such
Fund Investment pursuant to the S&P Advance Rate table in the
definition of S&P Advance Rate above;
(vii) for the purpose of determining the S&P Advance Rate applicable
to Fund Investments in any Foreign Issuer, at any time during
the 180-day time period described in clause (ix) of the
definition of Excluded Investments below, the S&P Advance Rate
will be 85% of the S&P Advance Rate calculated for such Fund
Investment pursuant to the S&P Advance Rate table in the
definition of S&P Advance Rate above;
(viii) for the purpose of determining the S&P Advance Rate applicable
to Fund Investments (other than Asset Category 1-3
Investments) that are not priced by an Approved Source, the
S&P OC Test Rating of such Fund Investments will be one
D-8
rating category (i.e., three rating sub-categories) below the
S&P OC Test Rating determined without giving effect to this
clause (viii); and
(ix) Fund Investments that are Asset-Backed Securities will be
assigned to an S&P Asset Category for High Yield Bonds using a
rating that is (i) one rating category (i.e., three rating
sub-categories) below the S&P rating if such Asset-Backed
Security is rated by S&P, and (ii) two rating categories
(i.e., six rating sub-categories) below the actual public
Moody's rating (and not the rating assigned pursuant to the
S&P OC Test Rating), if such Asset-Backed Security is not
rated by S&P but is publicly rated by Moody's.
"S&P Senior Advance Amount", as of any date of determination under the
Senior Over-Collateralization Test, means an amount equal to the sum of (i) the
aggregate for all Eligible Investments (other than Warrant/Option Investments)
determined for each such Eligible Investment by multiplying (1) the Market Value
(determined as described below) of such Eligible Investment (determined as
described below) by (2) the S&P Senior Advance Rate for the S&P Asset Category
applicable to such Eligible Investment under the Senior Over-Collateralization
Test, (ii) the aggregate Secured Hedging Advance Amounts as of such date, (iii)
the Defensive Hedge Advance Amount as of such date, (iv) the S&P Warrant/Option
Advance Amount as of such date, (v) the S&P Net Accrual Amount as of such date,
and (vi) the Aggregate Short Sale Advance Amount as of such date.
"S&P Total Advance Amount", as of any date of determination under the
Total Over-Collateralization Test, means an amount equal to the sum of (i) the
aggregate for all Eligible Investments (other than Warrant/Option Investments)
determined for each such Eligible Investment by multiplying (1) the Market Value
(determined as described below) of such Eligible Investment (determined as
described below) by (2) the S&P Total Advance Rate for the S&P Asset Category
applicable to such Eligible Investment under the Total Over-Collateralization
Test, (ii) the aggregate Secured Hedging Advance Amounts as of such date, (iii)
the Defensive Hedge Advance Amount as of such date, (iv) the S&P Warrant/Option
Advance Amount as of such date, (v) the S&P Net Accrual Amount as of such date,
and (vi) the Aggregate Short Sale Advance Amount as of such date.
DETERMINATION OF FUND INVESTMENTS CONSTITUTING ELIGIBLE INVESTMENTS
"Eligible Investments" means, at any date, all Fund Investments in the
Collateral on such date other than Excluded Investments.
"Excluded Investments" means (without duplication):
(i) Fund Investments to the extent that they are (A) not subject
to a perfected security interest (subject in priority only to
any Liens permitted under the Indenture) in favor of the
Collateral Agent for its benefit and the benefit of the other
Secured Parties (as defined in the Pledge and Intercreditor
Agreement) or (B) subject to any Liens (other than Permitted
Liens); provided, however, that Liens on Cash or other Fund
Investments held in a Short Sale Customer Account or Short
Sale Broker Account shall not be Permitted Liens for purposes
of this definition and
D-9
Cash or Fund Investments held in any Short Sale Customer
Account or Short Sale Broker Account shall
be Excluded Investments;
(ii) Excess Fund Investments;
(iii) Fund Investments that have been borrowed or lent;
(iv) Fund Investments denominated in any currency (A) that is not a
currency freely convertible into Dollars or (B) that is
subject to any currency exchange restrictions;
(v) Fund Investments denominated in any currency other than
Dollars or Eligible Foreign Currencies, unless at the time of
purchase of such Fund Investments denominated in any currency
other than Dollars or Eligible Foreign Currencies, at least
95% of the Market Value of such Fund Investments is protected
against currency fluctuations pursuant to Currency Hedging
Transactions;
(vi) Fund Investments in CDO Debt Securities unless the applicable
agreements governing such CDO Debt Securities deny borrowing
base credit to the issuer of such CDO Debt Securities to the
extent that more than 7.5% of the total funded debt and equity
capitalization of the issuer of such CDO Debt Securities is
invested in Foreign Issuers located in Ineligible Countries
(other than investments which are fully guaranteed by a
guarantor located in an Eligible Country);
(vii) Fund Investments in CDO Debt Securities unless the applicable
agreements governing such CDO Debt Securities deny borrowing
base credit to the issuer of such CDO Debt Securities to the
extent that more than 15% of the total funded debt and
contributed equity capitalization of the issuer of such CDO
Debt Securities would be invested in Foreign Issuers located
in countries whose unsupported sovereign non-local currency
debt obligations are not assigned a rating of "AA-" or better
from S&P (other than investments which are fully guaranteed by
an entity located in a country whose unsupported sovereign
non-local currency debt obligations are assigned a rating of
"AA-" or better by S&P);
(viii) (A) Fund Investments in any Bank Loan Participation held by
the Fund for more than 60 consecutive days during any period
while any bank or other institution that sold such Bank Loan
Participation has a long-term debt-rating of below an S&P OC
Test Rating of "A-" (unless the obligation of such bank or
other institution are guaranteed by an entity whose long-term
debt obligations are assigned an S&P OC Test Rating of "A-" or
better); and (B) Fund Investments in any Bank Loan
Participation if at the date of acquisition of such Bank Loan
Participation the bank or other institution that sold such
Bank Loan Participation had a long-term debt rating of below
an S&P OC Test Rating of "A-" (unless the obligations of such
bank or other institution are guaranteed by an entity whose
long-term debt obligations are assigned an S&P OC Test Rating
of "A-" or better);
D-10
(ix) Fund Investments in any Foreign Issuer from an Ineligible
Country (unless the applicable Fund Investment is fully
guaranteed by a guarantor located in a currently Eligible
Country), provided that if a country becomes an Ineligible
Country after the Fund has invested in a Fund Investment
relating to such country (and such Fund Investment does not
have a guarantor located in a currently Eligible Country),
such Fund Investment will not be subject to this clause (ix)
until such country has been an Ineligible Country for 180
consecutive days;
(xi) Fund Investments in CDO Debt Securities issued by an issuer
for which the Investment Manager or any Affiliate of the
Investment Manager acts as the collateral manager or
investment manager or in any comparable capacity;
(xii) Fund Investments in securities issued by the Fund;
(xiii) Fund Investments in Asset-Backed Securities which are neither
rated by S&P nor publicly rated by Moody's;
(xiv) Fund Investments in Bank Loans that obligate the Fund, whether
currently or upon the happening of any contingency, to make
any revolving extensions of credit to a borrower;
(xv) Fund Investments in any Hedging and Short Sale Transaction
held by the Fund for more than (i) 60 consecutive days during
any period while the counterparty to such Hedging and Short
Sale Transaction has a long-term debt-rating of lower than
"A-" by S&P (unless the obligations of such counterparty are
guaranteed by an entity whose long-term debt rating is "A-" or
higher by S&P) or has a short-term debt-rating of "A-2" by S&P
(unless the obligations of such counterparty are guaranteed by
an entity whose short-term debt rating is "A-1" or higher by
S&P) or (ii) 30 consecutive days during any period while the
counterparty to such Hedging and Short Sale Transaction has a
short-term debt-rating of lower than "A-2" by S&P (unless the
obligations of such counterparty are guaranteed by an entity
whose short-term debt rating is "A-1" or higher by S&P);
(xvi) Fund Investments that do not fall into any S&P Asset Category
as provided herein; and
(xvii) Fund Investments in CDO Equity Securities; and
(xviii) Fund Investments in catastrophe bonds and any other non-credit
risk securities.
Excluded Investments are excluded from the calculation of the Market
Value of the Collateral for purposes of the S&P Valuation Procedures; however,
the Collateral may include Excluded Investments.
APPLICATION OF PORTFOLIO LIMITATIONS
"Portfolio Limitations" means, at any applicable date of determination
(determined without duplication):
D-11
(i) the aggregate Market Value of Fund Investments in any single
issuer in excess of 5% of Total Capitalization, provided,
however, that the foregoing 5% limit will be increased up to a
maximum of 7.5% (not to include any Non-Cash Pay Instruments,
any Non-Performing Instruments or any Fund Investments (other
than Equity Securities) that are rated CCC or lower by S&P)
for each of any three issuers;
(ii) the aggregate Market Value of Fund Investments in issuers in
any single Industry in excess of 25% of Total Capitalization;
(iii) the aggregate Market Value of Fund Investments in all
Semi-Liquid Investments, Illiquid Investments and Non-Cash Pay
Instruments in excess of 45% of Total Capitalization;
(iv) the aggregate Market Value of Fund Investments in all Illiquid
Investments in excess of 20% of Total Capitalization;
(v) the aggregate Market Value of Fund Investments consisting of
(a) Bank Loan Participations in excess of 20% of Total
Capitalization, (b) Bank Loan Participations wherein the
participating entities are rated "A-" or lower by S&P in
excess of 5% (or such greater percentage approved by the
Insurer and with respect to which Rating Agency Condition with
respect to S&P has been satisfied) of Total Capitalization,
(c) Bank Loan Participations wherein the total exposure to any
one participating entity is in excess of 5% (or such greater
percentage approved by the Insurer and with respect to which
Rating Agency Condition with respect to S&P has been
satisfied) of Total Capitalization; (d) Hedging and Short Sale
Transactions wherein the counterparties have a long term debt
rating of lower than "A-" by S&P (unless the obligations of
such counterparty are guaranteed by an entity whose long term
debt rating is "A-" or higher by S&P) in excess of 7.5% (or
such greater percentage approved by the Insurer and with
respect to which Rating Agency Condition with respect to S&P
has been satisfied) of Total Capitalization; (e) Hedging and
Short Sale Transactions wherein the total exposure to any one
counterparty is in excess of 7.5% (or such greater percentage
approved by the Insurer and with respect to which Rating
Agency Condition with respect to S&P has been satisfied) of
Total Capitalization; and (1) Hedging and Short Sale
Transactions of the kind described in clause (iv) of the
definition of "Hedging and Short Sale Transactions" wherein
the counterparties have a short term debt rating of "A-l" by
S&P (unless the obligations of such counterparty are
guaranteed by an entity whose short term debt rating is higher
than "A-1" by S&P) in excess of 25% (or such greater
percentage approved by the Insurer and with respect to which
Rating Agency Condition with respect to S&P has been
satisfied) of Total Capitalization;
(vi) the aggregate Market Value of Fund Investments (calculated
using the absolute value of each Fund Investment) consisting
of Structured Product Transactions in excess of 5% of Total
Capitalization;
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(vii) the aggregate Market Value of Fund Investments consisting of
Non-Performing Instruments in excess of 20% of Total
Capitalization;
(viii) the aggregate Market Value of Fund Investments consisting of
convertible securities in excess of 25% of Total
Capitalization;
(ix) the aggregate Market Value of Fund Investments consisting of
CDO Debt Securities in excess of 5% of Total Capitalization;
(x) the aggregate Market Value of Fund Investments that are
Preferred Stock in excess of 15% of Total Capitalization;
(xi) the aggregate Market Value of Fund Investments consisting of
(A) Private Equity Securities of any single issuer in excess
of 3% of Total Capitalization; provided that the foregoing 3%
limit will be increased, up to a maximum of 4%, for each of
any two issuers of Private Equity Securities; provided,
further, that the foregoing 4% limit will be increased, up to
a maximum of 5%, for one of such two issuers of Private Equity
Securities; and (B) Private Equity Securities in excess of 10%
of Total Capitalization;
(xii) the aggregate Market Value of Fund Investments that are
Asset-Backed Securities in excess of 5% of Total
Capitalization;
(xiii) the aggregate Market Value of Fund Investments that are
Dollar-denominated investments (A) in Foreign Issuers
domiciled in Designated Countries in excess of 10% of Total
Capitalization, and (B) in any single Foreign Issuer domiciled
in a Designated Country in excess of 5% of Total
Capitalization;
(xiv) the aggregate Market Value of Fund Investments that are
non-Dollar-denominated investments in excess of 10% of Total
Capitalization;
(xv) the aggregate Market Value of Fund Investments that are Equity
Securities in excess of 20% of Total Capitalization;
(xvi) the aggregate Market Value of Fund Investments that are
(determined without duplication) Non-Performing Instruments,
Equity Securities and Fund Investments that are rated "CCC" or
lower by S&P in excess of 50% of Total Capitalization;
(xvii) the aggregate Market Value of Unhedged Foreign Investments in
excess of 5% of Total Capitalization.
Notwithstanding the foregoing:
(A) in the event that a Fund Investment is reclassified after its
acquisition by the Fund, for purposes of calculating the S&P
Advance Amount, the exclusions described above in clauses
(iii) and (iv), that would otherwise become applicable
following such reclassification will not apply to assets owned
by the Fund (or which the Fund had committed to purchase) on
or prior to the date of such
D-13
reclassification until 30 days after such reclassification but
shall apply (on a pro forma basis giving effect to such
reclassification for all Fund Investments) to any asset
acquired by the Fund after the date of such reclassification
which the Fund had not committed to purchase on or prior to
the date of such reclassification;
(B) for purposes of clause (i) above, a Related Person of any
Person shall be considered the same "issuer" as such Person
unless such Person is a bankruptcy remote entity; and
(C) under no circumstances shall any Cash, Cash Equivalent or U.S.
Government Securities be excluded from Eligible Investments
based upon the Portfolio Limitations set forth above.
DETERMINATION OF THE MARKET VALUE OF FUND INVESTMENTS
The Fund shall calculate the Market Value (i) of each Fund Investment
that is not an Unquoted Investment on a weekly basis as of the Determination
Date for each calendar week and (ii) of each Fund Investment that is an Unquoted
Investment as set forth in the definition of "Market Value" below.
"Market Value" means
(a) with respect to Cash, the current balance thereof;
(b) with respect to any Cash Equivalent (x) of the type described in clause
(ii) of the definition thereof (excluding banker's acceptances), the
current balance thereof, (y) of a type described in clause (iii) of the
definition thereof (and banker's acceptances described in clause (ii)
thereof), the original purchase price thereof, and (z) of a type
described in clause (v) of the definition thereof, the aggregate
current net value thereof;
(c) with respect to any Fund Investment (other than Unquoted Investments,
Structured Product Transactions, Cash and Cash Equivalents described in
clause (b) above) at any date, an amount determined by the Fund that is
not in excess of the product of (x) the Market Value Price for each
unit of such Fund Investment on such date (and, with respect to any
Securities which have an amortizing principal amount, the then current
factor related thereto, if applicable) times (y) the number of units of
such Fund Investment held by the Fund; and
(d) with respect to any Fund Investment other than Cash and Cash
Equivalents which is an Unquoted Investment at any date, the value
thereof most recently determined by the Fund in accordance with the
procedures described below;
provided, however, (x) for purposes of making such determinations,
(1) the frequency of determination of the Market
Value of any Illiquid Investment will be at least quarterly as of each Quarterly
Date and, except as otherwise provided in the following clauses, the frequency
of determination of the Market Value of any Semi-Liquid Investment will be at
least monthly as of the last Business Day of each calendar month;
D-14
(2) for Semi-Liquid Investment positions with a
Market Value of $35 million or greater but less than
$70 million (and all positions subject to this clause (x)(2) by reason of clause
(y) below), a quotation from an Approved Investment Banking Firm or an Approved
Third-Party Appraisal at least monthly;
(3) for Semi-Liquid Investment positions with a
Market Value of $70 million or greater, a quotation from an Approved Investment
Banking Firm or an Approved Third-Party Appraisal at least monthly and an
Approved Third-Party Appraisal at least quarterly; and
(4) for Illiquid Investment positions with a
Market Value of $35 million or greater (and all positions subject to this clause
(x)(4) by reason of clause (y) below) an Approved Third-Party Appraisal at least
quarterly;
(y) notwithstanding the foregoing, the aggregate Market Value of
all Unquoted Investment positions whose value is determined by
the Fund without relying on the methodology set forth in
subclauses (2), (3) or (4) of clause (x) above (it being
understood that such methodology may be used for Unquoted
Investments with Market Values below the thresholds set forth
in such subclauses) may not exceed 5% of Total Capitalization,
and all such Unquoted Investment positions (i.e., those in
excess of such limit and as selected by the Fund) will be
subject to subclauses (2) or (4) of clause (x) above depending
upon whether any such Unquoted Investment is a Semi-Liquid
Investment or an Illiquid Investment; and
(z) in no event will the Market Value of any Unquoted Investment
exceed the lesser of (1) the most recently obtained quotation
or appraisal obtained as provided in clauses (d)(x) or (d)(y)
above and (2) the value most recently determined by the Fund.
Notwithstanding the foregoing, if the Investment Manager shall on any
day actually determine that (i) the Market Value of any Semi-Liquid Investment
determined as of the last Business Day of the preceding calendar month or (ii)
the Market Value of any Illiquid Investment determined as of the last Quarterly
Date has decreased since such last Business Day of the preceding calendar month
or last Quarterly Date, the Market Value of such Fund Investment shall be such
decreased value, and if the Investment Manager subsequently actually determines
on any day prior to the next determination of its Market Value that the value of
such Fund Investment has further decreased, the Market Value of such Fund
Investment shall be such decreased value. If, on the other hand, the Investment
Manager shall subsequently actually determine that the value of such Fund
Investment has increased, the Market Value of such Fund Investment shall be such
increased value; provided that in no event shall the Market Value of any such
Fund Investment whose value is so increased be greater than the Market Value of
such Fund Investment previously determined as of the last Business Day of the
preceding calendar month (in the case of Semi-Liquid Investments) or as of the
last Quarterly Date (in the case of Illiquid Investments). It is expressly
understood that the Investment Manager shall have no duty, in the absence of
actual knowledge on its part, to implement any value changes described in this
paragraph.
D-15
Prior to the first available quotation or appraisal of any Unquoted
Investment obtained as provided above, the Market Value of such Unquoted
Investment will be the lower of the value thereof as most recently determined by
the Fund and cost. In the event that the Fund elects in its discretion to book,
for purposes of its own financial accounting records, any Unquoted Investment at
a value lower than that which would require a valuation by an Approved
Investment Banking Firm or an Approved Third-Party Appraisal, as the case may
be, then the Market Value of such Unquoted Investment shall be such lower value
used by the Fund for purposes of its own financial accounting records.
Notwithstanding the foregoing, the Market Value of any Structured
Product Transaction at any date will be equal to the net settlement amount, if
any, that the Fund would receive if such Structured Product Transaction was
terminated or liquidated early in accordance with its terms on such date, as
determined by the Fund.
The Market Value of any CDO Debt Security will be based upon a
quotation from an Approved Investment Banking Firm or an Approved Third-Party
Appraisal, as applicable.
The Market Value of any Defensive Hedge Transaction where the related
Fund Investment is part of the Collateral shall be the amount, as determined by
the Fund, by which the Protected Market Value with respect to such Fund
Investment exceeds the product of the Market Value of the Fund Investment (or,
if less, the portion thereof that is an Eligible Investment), as otherwise
determined in accordance with these procedures, and the applicable Advance Rate
for such Fund Investment. The Market Value of any Defensive Hedge Transaction
where the Fund Investment is not part of the Collateral shall be the Protected
Market Value with respect to such Fund Investment.
For purposes of the definition of Market Value, (i) accrued interest on
any interest-bearing Eligible Investment shall be excluded in the determination
of Market Value by the party making such determination and (ii) the Market Value
of all non-Dollar Fund Investments shall be converted into Dollars at the then
current spot rate (after taking into account the effect of any Currency Hedging
Transaction with respect to such Fund Investment).
"Market Value Price" means with respect to any Fund Investment (other
than Cash, Structured Product Transactions and Unquoted Investments) at any
date, the price for each unit of such Fund Investment at such date obtained from
an Approved Source, including any of:
(a) in the case of an Approved Exchange, the closing price as of the most
recent Determination Date on such Approved Exchange, or if such
Approved Exchange is NASDAQ, the closing bid price at such date (or if
such Approved Exchange is closed for business at such date, then the
most recent available closing price or closing bid price, as the case
may be), provided that bonds may not be priced based upon the price on
an Approved Exchange pursuant to this clause (a), (i) prior to the
termination (without replacement) of the Indenture, without the consent
of the Trustee and the Insurer and (ii) after termination (without
replacement) of the Indenture, without the consent of the Insurer;
(b) the lower of the bid prices at such date quoted by two Approved
Dealers;
D-16
(c) the average of the bid prices at such date quoted by three Approved
Dealers;
(d) the average of the bid prices at such date quoted by two Approved
Dealers; provided that the Market Value Price of any Fund Investment
may be determined pursuant to this clause (d) only if the following
four conditions are met: (1) such Fund Investment is a Special
Situations Investment, (2) using the lower bid price of the two bid
prices for such Fund Investment, the Over-Collateralization Tests would
be satisfied, (3) other than the Fund's initial determination of the
Market Value Price for such Fund Investment, the lower bid price of
such Fund Investment must be greater than 85% of, and less than 115%
of, the immediately previous lowest bid price obtained by the Fund from
the Approved Dealers for such Fund Investment, and (4) the aggregate
Market Value of Fund Investments the Market Value Prices of which are
determined by applying this clause(d) shall not exceed 10% of Total
Capitalization; or
(e) the price obtained at such date from an Approved Pricing Service.
CERTAIN DEFINITIONS
The following are definitions of certain terms used in this Schedule
and elsewhere in the Indenture. Terms used in this Schedule and not defined
below have the meanings given them elsewhere in this Schedule or in the
Indenture.
"Advance Rate" means the S&P Advance Rate.
"Aggregate Short Sale Advance Amount" means as of any date of
determination, the aggregate of the Short Sale Advance Amount of all Short Sale
Transactions.
"Approved Counterparty" means (i) any financial institutions, banks or
investment banking firms having a long term rating of at least "A+" by S&P and a
short term rating of at least "A-1" by S&P or (ii) any counterparty set forth in
the Indenture (or any successor to any such listed counterparty) or any other
counterparty designated by the Fund in writing and approved by the Insurer in
its reasonable discretion.
"Approved Dealer" means (a) in the case of any Fund Investment that is
not a U.S. Government Security, any bank or broker-dealer designated by the Fund
in writing and approved by the Insurer in its reasonable discretion and with
respect to which the Rating Agency Condition with respect to S&P has been
satisfied and (b) in the case of a U.S. Government Security, any primary dealer
in U.S. Government Securities, as reported by the Federal Reserve Board, which
as of the date hereof maintains a website at http://www.ny.frb.org, or (c) in
the case of either of the foregoing, the banks and broker-dealers set forth on
Annex I hereto under "Approved Dealers."
"Approved Exchange" means, with respect to any Security, (a) any major
securities or options exchange, the NASDAQ or any other exchange or quotation
system providing regularly published securities prices designated by the Fund in
writing and approved by the Insurer in its reasonable discretion, and with
respect to which the Rating Agency Condition with respect to S&P has been
satisfied, or (b) the exchanges set forth on Annex I hereto under "Approved
Exchanges."
D-17
"Approved Investment Banking Firm" means any investment banking firm
designated by the Fund in writing and approved by the Insurer in its reasonable
discretion and with respect to which the Rating Agency Condition with respect to
S&P has been satisfied, or (b) the firms set forth on Annex I hereto under
"Approved Investment Banking Firms."
"Approved Pricing Service" means a pricing or quotation service
designated by the Fund in writing and approved by the Insurer in its reasonable
discretion and with respect to which the Rating Agency Condition with respect to
S&P has been satisfied, or (b) the services set forth on Annex I hereto under
"Approved Pricing Services."
"Approved Source" means any of (i) two Approved Dealers (so long as the
lower of two bid prices is being used and three Approved Dealers (if the average
of three bid prices is being used), (ii) an Approved Exchange or (iii) an
Approved Pricing Service, provided, that, for purposes of the
Over-Collateralization Tests, a Bank Loan, High Yield Bond or Mezzanine
Investment which is a Fund Investment shall be considered "quoted" or "priced"
by an Approved Source only if, in the reasonable judgment of the Fund, such
Approved Source will continue to provide quotations with respect to such Bank
Loan, High Yield Bond or Mezzanine Investment on an on-going basis in the
ordinary course of its business as a pricing service or dealer, as the case may
be.
"Approved Third-Party Appraisal" means an appraisal by an Approved
Third-Party Appraiser.
"Approved Third-Party Appraiser" means (a) a third-party appraiser that
is not an Affiliate of either the Fund or the Investment Manager (or subject to
an agreement to become such an Affiliate) designated by the Fund in writing and
approved by the Insurer in its reasonable discretion and with respect to which
the Rating Agency Condition with respect to S&P has been satisfied,or (b) the
third-party appraisers set forth on Annex I hereto under "Approved Third-Party
Appraisers."
"Asset-Backed Security" means any fixed income Security that is (i)
backed by and paid primarily from the proceeds (or payments or proceeds of a
disposition) of Eligible Assets, and (ii) issued in a transaction structured to
(A) isolate the Security and the Eligible Assets backing the Security from the
credit risk of the sponsor of the transaction and (B) result in the
creditworthiness of such Security being primarily dependent upon (x) the
creditworthiness of the Eligible Assets backing such Security and (y) any credit
support provided with respect to the creditworthiness of such Eligible Assets;
provided, however, that in no event shall an "Asset-Backed Security" include any
of the following: (a) a Security issued to provide debtor-in-possession
financing, (b) a Security issued in connection with a receivables financing, an
equipment trust certificate or similar Security, (c) an Equity Security
(including an Equity Security that is characterized as a note), (d) a Structured
Product Transaction, (e) a CDO Debt Security or (f) a Defensive Hedge
Transaction.
"Bank Loan Participation" means a Bank Loan in the form of a
participation.
"Bank Loans" means direct purchases of, assignments of, participations
in and other interests in senior debt (including term loans, revolving credit
lines and other similar loans and investments).
D-18
"Business Day" means each day other than a Saturday, Sunday or other
day on which banking institutions are not required by law or regulation to be
open in the State of New York.
"Busted Convertible Bond" means any convertible bond that trades like a
fixed income investment.
"Capital Stock" of any Person means shares, equity interests (including
limited partnership interests and limited liability company interests),
participations or other equivalents (however designated) of corporate stock of
such Person.
"Cash" means any immediately available funds in U.S. dollars or any
currency other than U.S. dollars which is a freely convertible currency
(including amounts held in the Custodial Account or on deposit with the
Custodian pursuant to "sweep" arrangements linked to the Custodial Account).
"Cash Equivalents" means investments (other than Cash) that are one or
more of the following obligations or Securities:
(i) U.S. Government Securities;
(ii) certificates of deposit of, banker's acceptances issued by or
money market accounts in any depository institution or trust
company incorporated under the laws of the United States of
America or any state thereof and subject to supervision and
examination by Federal and/or state banking authorities, so
long as the deposits offered by such depository institution or
trust company at the time of such investment are rated and
have a rating of at least "A-1+" if rated by S&P (or, in the
case of the principal depository institution in a holding
company system whose deposits are not so rated, the long term
debt obligations of such holding company are rated and such
rating is at least "A+" if rated by S&P);
(iii) commercial paper issued by any depository institution or trust
company incorporated under the laws of the United States of
America or any state thereof and subject to supervision and
examination by Federal and/or state banking authorities, or
any corporation incorporated under the laws of the United
States of America or any state thereof, so long as the
commercial paper of such issuer is rated and has at the time
of such investment a short term rating of at least "A-1+" if
rated by S&P;
(iv) securities bearing interest or sold at a discount issued by
any corporation incorporated under the laws of the United
States of America or any state thereof the obligations of
which at the time of such investment are rated and that have a
credit rating of at least "P-1" if rated by Moody's and "A-1"
if rated by S&P either at the time of such investment or the
making of a contractual commitment providing for such
investment;
(v) shares of any money market fund or similar investment vehicle,
so long as such money market fund is rated and has at the time
of such investment a short-term
D-19
rating of at least "Aaa" and "MR1+" if rated by Moody's and
"AAAm" or "AAAg" if rated by S&P;
(vi) unleveraged overnight repurchase obligations on customary
terms with respect to investments described in clauses (i)
through (iv) above entered into with a depository institution,
trust company or corporation that has a rating of at least
"P-1" by Moody's and at least "A+" by S&P;
(vii) preferred shares with a maturity of not more than 35 days and
rated in the highest investment rating category by Moody's and
S&P or otherwise with respect to which the Rating Agency
Condition is satisfied; and
(viii) investments in Qualifying Short-Term Debt;
provided, that: (i) in no event shall Cash Equivalents include any obligation
that provides for the payment of interest alone; (ii) Cash Equivalents referred
to in clauses (i), (ii) and (iii) above shall mature within 183 days of
issuance; (iii) if any of Moody's or S&P changes its rating system, then any
ratings included in this definition shall be deemed to be an equivalent rating
in a successor rating category of Moody's or S&P, as the case may be; (iv) if
any of Moody's or S&P is not in the business of rating securities, then any
ratings included in this definition shall be deemed to be an equivalent rating
from another Rating Agency; (v) Cash Equivalents (other than U.S. Government
Securities or money market funds maintained by the Custodian) shall not include
any such investment of more than $100 million in any single issuer; (vi) in no
event shall Cash Equivalents include any obligation that is not denominated in
Dollars or Eligible Foreign Currencies; and (vii) none of the foregoing
obligations or securities will constitute Cash Equivalents (A) if all, or
substantially all, of the remaining amounts payable thereunder will consist of
interest and not principal payments, or (B) if such security has an assigned
rating from S&P with an "r" or "t" subscript, or (C) if such security is a
mortgage-backed security or (D) if such security is an inverse floater security.
"CDO Debt Securities" means any Securities that entitle the holders
thereof to receive payments that depend primarily on cash flow from, or proceeds
upon the sale of a pool of Securities serving as collateral for such Securities;
provided that if more than one class or other similar designation of such
Securities receive payments that depend primarily on cash flow from all or
substantially all of the underlying collateral Securities, then the class or
other similar designation the payment of which is most deeply subordinated
(other than any class or other similar designation constituting only nominal
capital) and any class or other similar designation that, as indicated in any
relevant offering documentation, is stated to be at least reasonably likely to
be treated as equity for U.S. Federal income tax purposes will be excluded from
"CDO Debt Securities"; provided, further that (x) CDO Debt Securities shall not
include any Structured Product Transaction and (y) CDO Debt Securities shall
only include CDO Debt Securities issued in a "cash-flow" or "market value"
collateralized debt obligation transactions.
"CDO Equity Securities" means any Securities (other than CDO Debt
Securities) that entitle the holders thereof to receive payments that depend
primarily on cash flow from, or proceeds upon sale of a pool of Securities
serving as collateral for such Securities (whether or not such Securities have
been rated by a nationally recognized statistical rating organization); provided
that CDO Equity Securities shall not include any Structured Product Transaction.
D-20
"CDS" means a credit default swap substantially in the form approved by
the Insurer, which approval shall not be unreasonably withheld.
"Contributed Company Capital" means, at any date, the aggregate gross
amount of Cash contributed as equity capital (excluding, for the avoidance of
doubt, the Preferred Shares) to the Fund by the holders of the Common Shares on
or prior to such date (without regard to any other changes in Company Equity).
"Currency Hedging Transaction" means (i) any Swap Transaction entered
into by the Fund with an Eligible Counterparty intended to convert any payment
on a Debt or other obligation of the Fund or any Company Investment denominated
in one currency to another currency or to protect against fluctuations in the
exchange rate of a currency in which a payment to be made or received by the
Fund is denominated and (ii) any Swap Transaction entered into by the Fund
intended to convert any payment on a Debt or other obligation of the Fund or any
Company Investment denominated in one currency to another currency or to protect
against fluctuations in the exchange rate of a currency in which a payment to be
made or received by the Fund is denominated and pursuant to which the Fund has
no on-going payment obligations.
"Defensive Hedge Advance Amount" means, as of any date of
determination, 98% of the aggregate Market Value of all Defensive Hedge
Transactions; provided, however, that the Defensive Hedge Advance Amount shall
in no event exceed an amount equal to (x) 20% of the Total Capitalization as of
such date of determination less (y) the sum of the aggregate Market Value as of
such date of determination of all Fund Investments in Bank Loan Participations
and Structured Product Transactions and, if the Secured Hedging Advance Amount
is positive, the Secured Hedging Advance Amount.
"Defensive Hedge Transaction" means a Hedging and Short Sale
Transaction between the Fund and an Eligible Counterparty intended to protect
the Fund against fluctuations in the market value of a Fund Investment and
pursuant to which (i) the Eligible Counterparty has agreed for a period of time,
at the direction of the Fund, to (a) purchase the Fund Investment at an agreed
strike price or (b) pay to the Fund, at the Fund's election, an amount by which
an agreed strike price exceeds the current price of the Fund Investment; (ii)
the Eligible Counterparty does not have recourse to the Collateral or the Fund
for any amounts owing to such counterparty thereunder; and (iii) the Fund may
(a) pay a fee to the Eligible Counterparty in connection with the transaction,
(b) remove the Fund Investment from the Custodial Account (whereby it is no
longer part of the Collateral) and pledge the Fund Investment to the
counterparty as security for its obligations to the Eligible Counterparty and
(c) agree to deliver the Fund Investment to the Eligible Counterparty in
satisfaction of all of its obligations to the Eligible Counterparty in
connection with the transaction.
"Designated Country" shall mean (i) each of Canada, Great Britain,
Australia, Denmark, New Zealand, Sweden, Switzerland, Luxembourg, The
Netherlands and any G-7 nation and (ii) each other country identified by the
Fund from time to time and confirmed as acceptable by S&P.
"Determination Date" means (a) with respect to any regularly scheduled
Valuation Statement prepared pursuant to the Indenture or the Operating
Agreement and any other Preferred Shares document, the related Reporting Date,
(b) for the purpose of determining the
D-21
Market Value Price of a Fund Investment at any date when the Fund is in
compliance, or reasonably believes it is in compliance, with the covenants
relating to the Over-Collateralization Tests, the last Business Day of the
preceding calendar week ending prior to such date and (c) for the purpose of
determining the Market Value Price of a Fund Investment at any date when the
Fund is not, or reasonably believes that it is not, in compliance with any
covenant relating to the Over-Collateralization Tests, the date on which the
most current pricing information with respect to such Fund Investment is
reasonably available.
"Distressed Debt" means debt Securities and Bank Loans which are, in
the Investment Manager's reasonable business judgment, impaired in fundamental
ways due to credit, liquidity, interest rate or other issues, which may not be
performing or may be in default, and which are generally trading at a
substantial discount to par.
"Eligible Assets" means financial assets, either fixed or revolving,
that by their terms convert into cash within a finite time period plus any
rights or other assets designed to assure the servicing or timely distribution
of proceeds to security holders.
"Eligible Counterparty" means, with respect to any Hedging and Short
Sale Transaction (other than a CDS in which the Fund is the counterparty writing
or providing the protection with respect to the reference asset), (a) any
Approved Counterparty or (b) any person (i) having an unsecured, unguaranteed
and unsupported long-term debt rating of "AA-" or better under the S&P OC Test
Rating or (ii) whose obligations in respect of all Hedging and Short Sale
Transactions entered into with the Fund are absolutely and unconditionally
guaranteed by an Affiliate of such Person having an unsecured, unguaranteed and
unsupported long-term debt rating of "AA-" or better under the S&P OC Test
Rating; provided that with respect to any Eligible Counterparty with which the
Fund has entered into a Hedging and Short Sale Transaction, any counterparty
that would qualify as an "Eligible Counterparty" pursuant to clause (b) above
but for the fact that such counterparty had suffered a ratings downgrade shall
be deemed to be an "Eligible Counterparty" for thirty 30 days after the day it
would otherwise have ceased to qualify as an Eligible Counterparty.
"Eligible Country" shall mean each country (i) whose unsupported
sovereign debt obligations are rated "AA+" or better by S&P or (ii) that is a
Designated Country whose unsupported sovereign debt obligations are rated "A-"
or better by S&P.
"Eligible Foreign Currencies" means (i) Australian Dollars, Canadian
Dollars, Pounds Sterling and Euros and (ii) each other currency identified by
the Fund from time to time and confirmed in writing as acceptable by the
Trustee, the Insurer and with respect to which Rating Agency Condition with
respect to S&P has been satisfied.
"Eligible Investments" has the meaning assigned to such term in this
Schedule under "Determination of Fund Investments Constituting Eligible
Investments."
"Equity Securities" means equity securities (including, for the
avoidance of doubt, Private Equity Securities) that will generally consist of
common or preferred stock of small to medium capitalization companies that have
either (i) undergone leveraged buyouts or recapitalizations, yet are still
substantially leveraged, or (ii) been burdened by complex legal,
D-22
financial or ownership issues and are selling at a discount to the underlying
asset or business value.
"Excess Fund Investments" means any Fund Investments or portion thereof
having a Market Value in excess of the percentages of Total Capitalization set
forth in the definition of Portfolio Limitations (in each case determined by the
Fund using the most recent Market Value for the applicable Fund Investments).
"Excluded Investments" has the meaning assigned to such term in this
Schedule under "Determination of Fund Investments Constituting Eligible
Investments."
"Foreign Issuer" means any issuer of a Fund Investment that is
incorporated or otherwise formed or organized outside the United States unless
such Fund Investment is irrevocably and unconditionally guaranteed by any United
States corporation, company, trust or other business entity; provided, however,
that none of the following shall be a Foreign Issuer: (i) an offshore holding
company issuer whose operating subsidiaries principally do business, and hold
their assets, in the United States, or (ii) an issuer of a CDO Debt Security.
"Fully Collateralized Structured Product Transaction" means a
Structured Product Transaction relating to a single Bank Loan or High Yield Bond
pursuant to which the Fund is required to pledge collateral in an amount that is
not less than 100% of the notional amount of such transaction.
"Fund Investments" means all Cash, Cash Equivalents, Bank Loans,
Securities, Short Sale Transactions and Structured Product Transactions owned by
the Fund. Fund Investments which the Fund has contracted to purchase shall not
be deemed for purposes of the Indenture to be owned by the Fund until settlement
of such purchase and Fund Investments which the Fund has contracted to sell
shall not cease to be Fund Investments for purposes of the Indenture until
settlement of such sale.
"Hedging and Short Sale Transaction" means any transaction entered into
by the Fund with an Eligible Counterparty that is (i) a Swap Transaction; (ii)
an Interest Rate Hedging Transaction; (iii) a Currency Hedging Transaction; (iv)
a transaction under which the Fund borrows a Bank Loan or Security and sells or
otherwise disposes of such or any substantially similar Bank Loan or Security
prior to the date on which the same must be returned to the lender thereof (and
commonly known as a "short sale"), (v) a Securities Lending Transaction; (vi) a
credit derivative transaction (including, but not limited to, a CDS) or
repurchase agreement; (vii) an obligation to enter into any of the foregoing; or
(viii) any combination of any of the foregoing.
"High Yield Bonds" means debt Securities (including convertible debt
Securities) that are generally rated below "BBB-" by S&P, (a) which are issued
pursuant to a public registration, Rule 144A or as a private placement and (b)
which are not Cash Equivalents, Bank Loans, Mezzanine Investments or CDO Debt
Securities.
"Illiquid Investments" means (a) Unquoted Investments that do not
qualify as Semi-Liquid Investments; (b) Bank Loan Participations (other than (x)
Bank Loan Participations that qualify as Semi-Liquid Investments and (y) Bank
Loan Participations which may be converted into a Bank Loan assignment at the
option of the Issuer); and (c) Private Equity Securities.
D-23
"Indexed Structured Product Transaction" means a Structured Product
Transaction in which the reference obligation is an index, including, without
limitation, Dow Jones CDX North American High Yield Composite Index, Dow Jones
CDX North American BB, Dow Jones CDX North American B, and Dow Jones CDX North
American Investment Grade Composite.
"Industry" means any industry category listed in Annex I hereto under
"S&P Industry Classifications" or any other such industry category designated by
the Fund in writing and approved by the Insurer in its reasonable discretion and
with respect to which the Rating Agency Condition with respect to S&P has been
satisfied.
"Ineligible Country" shall mean any country other than the United
States or an Eligible Country.
"Interest Rate Hedging Transaction" means (i) any Swap Transaction
entered into by, the Fund with an Eligible Counterparty intended to protect the
Fund against changes in the floating rate of interest payable on all or a
portion of any Debt or other obligation of the Fund or its subsidiaries or on
any Fund Investment or to protect against fluctuations in interest rates, or
(ii) any Swap Transaction or repurchase agreement entered into by the Fund, in
each case with an Eligible Counterparty, intended to protect against changes in
the market value of any Fund Investment resulting from fluctuations in interest
rates.
"Market Value" has the meaning assigned to such terms in this Schedule
under "Determination of Market Value of Fund Investments."
"Market Value Price" has the meaning assigned to such term in this
Schedule under "Determination of Market Value of Fund Investments."
"Mezzanine Investments" means (i) debt Securities or other obligations
of an issuer (including convertible debt Securities and obligations, and
Securities back by real estate collateral) that (A) are subordinated to other
debt of such issuer and (B) may be issued with equity participation features
such as convertibility, senior equity securities, common stock or warrants or
(ii) Preferred Stock issued in connection with management buyouts, acquisitions,
refinancings, recapitalizations and later stage growth capital financings.
"Moody's" means Moody's Investors Service, Inc., or any successor
thereto.
"NASDAQ" means the electronic inter-dealer quotation system operated by
NASDAQ, Inc., a subsidiary of the National Association of Securities Dealers,
Inc., or any successor thereto.
"Non-Cash Pay Instrument" means a High Yield Bond which falls in Asset
Category C, D, E, F or G that (a) does not provide for the payment of cash
interest or preferred dividends, or provides for the total deferral of interest
until the final maturity thereof, (b) is a debt security that has an initial
current yield on the date of purchase or acquisition thereof of less than 2.5%
per annum and provides for an increase in the rate of interest payable in
respect thereof at any time after the date it was purchased or acquired (other
than any increase resulting from (i) a change in a generally recognized floating
rate interest rate index, (ii) a change in the weighted average interest rate on
underlying collateral in the case of Securities the interest rate on which is
based
D-24
on such weighted average interest rate or (iii) a change in an interest
rate spread or margin resulting from an announced change in the rating of the
issuer' s debt obligations) or (c) is a debt security that provides for the
partial deferral of interest until the final maturity thereof and which has cash
interest payable without deferral at a rate per annum less than (x) with respect
to Fund Investments bearing interest at a fixed rate, 2.5% per annum and (y)
with respect to Fund Investments bearing interest at a floating rate, a
eurodollar rate plus 2% per annum. For purposes of clause (b) of this
definition, if the current yield is increased to 2.5% or more per annum, then at
the time of the increase of such interest rate, the Security will cease to be a
"Non-Cash Pay Instrument."
"Non-Credit Risk Security" means a security with respect to which an
institutional money manager would evaluate its value primarily by reference to
factors other than (a) the coupon (or the coupon as adjusted for any purchase
discount or premium) in relation to prevailing market yields, (b) the credit
worthiness of the issuing entity or (c) the adequacy of the underlying financial
assets supporting such security to ensure the repayment of the security
according to its terms (which adequacy may be measured by a credit analysis of
the likelihood of the obligors of such underlying assets to pay according to the
terms of such underlying assets and/or an analysis of the sufficiency of the
income streams thereon to meet the payment terms of the security).
"Non-Performing Instrument" means (i) any Fund Investment that is debt
and the issuer of which is in default of any principal or interest payment
obligations in respect thereof (without giving effect to any applicable grace
period or waiver), (ii) any Fund Investment that is Preferred Stock and the
issuer of which has failed to meet any scheduled redemption obligations or to
pay its latest declared cash dividend or (iii) any Fund Investment that is a CDO
Debt Security and the issuer of which has failed to pay any current interest or
principal in cash when due.
"Outstanding Principal Amount" means the outstanding aggregate
principal amount of the Notes under the Indenture at any given time.
"Performing" means, (i) with respect to any Fund Investment that is a
Bank Loan or other debt, the issuer of such Fund Investment is not in default of
any payment obligations in respect thereof, (ii) with respect to any Fund
Investment that is Preferred Stock, the issuer of such Fund Investment has not
failed to meet any scheduled redemption obligations or to pay its latest
declared cash dividend or (iii) with respect to any Fund Investment that is a
CDO Debt Security, the issuer of such Fund Investment has not failed to pay any
current principal or interest in cash when due.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Pledge and Intercreditor Agreement" means the Pledge and Intercreditor
Agreement dated as of the Closing Date, among the Trustee, the Insurer, the
Custodian, the Fund and the Collateral Agent identified therein, as amended,
extended, restated, supplemented or modified from time to time in accordance
with the terms thereof.
D-25
"Portfolio Limitations" has the meaning assigned to such term in this
Schedule under "Application of Portfolio Limitations."
"Preferred Stock" means, as applied to the Capital Stock of any Person,
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to any shares (or other interests) of Capital Stock of such Person.
"Private Equity Securities" means, at any time of determination, any
Equity Security which the Fund believes in good faith (based on the facts and
circumstances available to it) is (i) commonly regarded by investment
professionals as a "private equity security" and (ii) not traded or listed on
any national or regional securities exchange, any designated offshore Securities
market (as defined in Regulation S under the Securities Act) or on the NASDAQ
National Market and is not actively quoted or traded on any automated quotation
system or in the over-the-counter market; provided, however, that "Private
Equity Securities" shall not include (a) any Equity Securities convertible or
exchangeable for any Equity Securities traded or quoted in the markets described
in clause (ii) above, or (b)any equity Securities which may be resold under an
effective registration statement under the Securities Act at the time of
determination.
"Protected Market Value" means, with respect to any Fund Investment
that is the subject of a Defensive Hedge Transaction, the Protected Price of
such Fund Investment times the number of units of such Fund Investment that are
held by the Fund and are the subject of such Defensive Hedge Transaction.
"Protected Price" means, with respect to any Defensive Hedge
Transaction, (i) the agreed strike price at which the Eligible Counterparty to
such Defensive Hedge Transaction has agreed to purchase the Fund Investment that
is the subject of such Defensive Hedge Transaction or (ii) the agreed strike
price under a Defensive Hedge Transaction pursuant to which the Eligible
Counterparty has agreed to pay the Fund an amount equal to the excess of the
agreed strike price over the current price of the Fund Investment that is the
subject of such Defensive Hedge Transaction.
"Qualifying Short-Term Debt" means short-term debt of issuers rated
"A-1" by S&P that (i) does not have an "r" suffix attached to their ratings,
(ii) has a predetermined fixed dollar amount of principal due at maturity that
cannot vary, (iii) does not constitute more than 20% of the rated issue's
outstanding principal amount, (iv) does not mature beyond 30 days, and (v) if
the debt may be liquidated prior to its maturity, the interest thereon should be
tied to a single interest rate index plus a single fixed spread (if any) and
should move proportionately with that index. For purposes of this definition,
"short-term debt" includes commercial paper, federal funds, repurchase
agreements, unsecured certificates of deposit, time deposits and banker's
acceptances.
"Quarterly Date" means the last Business Day of each February, May,
August and November, commencing November 30, 2005.
"Related Person" means, with respect to any issuer, (a) any Person of
which such issuer is a Subsidiary, (b) any Person that is a Subsidiary of such
issuer, (c) with respect to a debt
D-26
obligation, any Person that relies on, or is relied upon for, the cash flows of
such issuer to service debt obligations or does not have a credit rating
independent of such Person or (d) with respect to a debt obligation, any Person
that guarantees the issuer's payment of such debt obligation; provided, however,
that, in any such case, a Person shall not be a Related Person of a second
Person solely as a consequence of the common control of such Persons by a single
financial sponsor.
"Reporting Date" means the last Business Day of each calendar week,
commencing November 25, 2005.
"S&P" means Standard & Poor's Ratings Services, a Division of The
McGraw-Hill Companies, Inc., or any successor thereto.
"S&P Net Accrual Amount" shall mean, as of any date, an amount, which
may be positive or negative, equal to (i) the aggregate amount of accrued
interest payable to the Fund on all interest-bearing Eligible Investments, all
declared but unpaid dividends payable on Eligible Investments that are Equity
Securities and all due and unpaid commitment fees payable to the Issuer in
respect of Eligible Investments in each case as of such date minus (ii) the
aggregate amount of accrued interest and dividends payable by the Fund as of
such date in respect of the Drawn Amount (as defined in the Indenture) and the
Preferred Shares, respectively, minus (iii) the amount of other anticipated
expenses of the Fund for the 90 days subsequent to such date, minus (iv) any
other current liabilities of the Fund payable as of such date; provided that
until the earlier of two years after the Closing Date or the date on which the
Fund shall have drawn $404.5 million of the Equity Capital Commitments, the S&P
Net Accrual Amount shall not be less than zero.
"S&P Warrant/Option Advance Amount" means, as of any date of
determination, an amount equal to the sum for all Warrant/Option Investments of
the product of (i) the Warrant/Option Intrinsic Value of such Warrant/Option
Investment multiplied by (ii) the S&P Advance Rate for the S&P Asset Category
applicable to the Related Equity Securities of such Warrant/Option Investment.
"Secured Hedging Advance Amount" means as of any date of determination,
(i) if the Secured Hedging Net Exposure is greater than zero and the Secured
Hedging Transactions entered into, in the judgment of the Fund, hedge or
mitigate risks to which the Fund is exposed in the conduct of its business or
the management of its liabilities, 90% of the Secured Hedging Net Exposure, and
(ii) if the Secured Hedging Net Exposure is less than zero, 100% of the Secured
Hedging Net Exposure; provided that any Secured Hedging Transaction having a
Secured Hedging Net Exposure greater than zero and a counterparty with a rating
of less than "A-" by S&P shall be deemed, for purposes of calculating the
Secured Hedging Advance Amount, to have a Secured Hedging Net Exposure of zero.
"Secured Hedging Net Exposure" as of any date, as to any Secured
Hedging Transaction for which a determination thereof is required to be made,
shall be determined as follows: (i) each Eligible Counterparty party to each
Secured Hedging Transaction shall determine, with respect to the Secured Hedging
Transactions entered into by it with the Fund, an amount (the "Secured Net
Exposure Component") equal to the net current market value on the bid side of
the market if the position is long and on the ask/offer side of the market if
the position is short to the
D-27
Fund on such date of determination of each such Secured Hedging Transaction and
(ii) for each Secured Hedging Transaction, the "Secured Hedging Net Exposure"
will, as of any date, be equal to the sum of all applicable Secured Net Exposure
Components as of such date and may, for purposes of this calculation, be less
than zero.
"Secured Hedging Transaction" means any Interest Rate Hedging
Transaction or Currency Hedging Transaction entered into by the Fund with any
Person that is an Eligible Counterparty, which is secured by Collateral pursuant
to the Pledge and Intercreditor Agreement and for avoidance of doubt shall
exclude Structured Product Transactions.
"Securities" means common and preferred stock, partnership units and
participations, member interests in limited liability companies, notes, bonds,
debentures, trust receipts and other obligations, instruments or evidences of
indebtedness, including debt instruments of public and private issuers and
tax-exempt securities (including, without limitation, warrants, rights, put and
call options and other options and rights relating thereto, or any combination
thereof), guarantees of indebtedness, choses in action, trade claims, other
property or interests commonly regarded as securities or any form of interest or
participation therein, but not including Bank Loans or Hedging and Short Sale
Transactions.
"Securities Lending Transactions" means all obligations of the Fund (i)
to purchase investments which arise out of or in connection with the sale of the
same or substantially similar investments or other similar transactions having
the same economic effect (excluding Swap Transactions); and (ii) incurred in
connection with any security lending transactions described in clause (i).
"Semi-Liquid Investments" means (i) Unquoted Investments that are debt
Securities rated "B-" or better by S&P; (ii) Unquoted Investments that are not
subject to any enforceable agreement containing a material condition to, or
material restriction on, the ability of the holder of such Unquoted Investment
or an assignee of such holder to sell, assign, transfer or otherwise liquidate
the investment in a commercially reasonable time and manner (other than in any
such agreement contained in the Collateral Documents and customary securities
law arrangements or restrictions); (iii) Bank Loan Participations (other than
Bank Loan Participations which may be converted into a Bank Loan assignment at
the option of the Issuer) for which the Market Value has been obtained from an
Approved Source that "quoted" or "priced" the participation interest in the Bank
Loan and not merely the Bank Loan itself; (iv) solely for purposes of the
definition of Portfolio Limitations, Unquoted Investments which are High Yield
Bonds or Mezzanine Investments and are part of an issue that is greater or equal
to $40 million in original principal amount; or (v) solely for purposes of the
definition of Portfolio Limitations, Unquoted Investments which are High Yield
Bonds that are held by ten or more holders or the issuer thereof has a total
capitalization in excess of $150.0 million.
"Short Sale Advance Amount" means, as of any date of determination with
respect to any Short Sale Transaction for which a determination thereof is
required to be made, an amount calculated as follows:
Short Sale Advance Amount = CP+SP-(MV*(2-AR))
Where:
D-28
CP= The Market Value of the Cash
or U.S. Government
Securities held in a Short
Sale Customer Account or
Short Sale Broker Account as
security for the obligations
of the Issuer with respect
to such Short Sale
Transaction.
SP= The original price of the
Bank Loan or Security
borrowed in such Short Sale
Transaction, determined as
of the date it was borrowed.
MV= The Market Value of the Bank
Loan or Security borrowed in
such Short Sale Transaction
as of the date of
determination.
AR= The S&P Advance Rate
applicable to the Bank Loan
or Security borrowed in
connection with such Short
Sale Transaction.
"Short Sale Transaction" means a transaction under which the Fund
borrows a Bank Loan or Security and sells or otherwise disposes of such or any
substantially similar Bank Loan or Security prior to the date on which the same
must be returned to the lender thereof (and commonly known as a "short sale").
"Single Asset Structured Product Transaction" means a Structured
Product Transaction in which the reference obligation is a single debt security.
"Special Situations Investments" means, as determined in the reasonable
judgment of the Fund, any Securities or Loans issued by (i) an out-of-favor
company with visible potential operating cash flows and/or liquidation values,
and with businesses that are understandable, but may have complex legal,
operational and financial issues, or (ii) a fundamentally sound operating
company with sustainable margins that may have a poorly conceived capital
structure that, in general, the Fund has purchased substantial positions in such
Securities or Loans, often with the goal of influencing the values of
investments through active management.
"Specified Foreign Country" shall mean each Designated Country other
than (x) a country whose sovereign debt rating in a non-local currency is rated
"AAA" by S&P or (y) a country whose sovereign debt rating in a non-local
currency is rated "AA" or better by S&P and in the case of (y) which is (a) a
member of the European Union that has adopted the Euro as its lawful currency,
(b) Canada, (c) Great Britain or (d) Australia.
"Structured Product Transaction" means a Hedging and Short Sale
Transaction between the Fund and a counterparty in which either (i) the Fund is
the counterparty to a CDS purchasing protection from an Eligible Counterparty
with respect to a reference asset or an index that refers to or is based upon a
number of reference assets, or (ii) the Fund is the counterparty writing or
providing the protection with respect to a CDS relating to a reference asset or
an index that refers to or is based upon a number of reference assets.
"Swap Transaction" means: (i) any rate, basis, debt or equity swap;
(ii) any put, cap, collar or floor agreement; (iii) any rate, basis, debt or
equity futures or forward contract; (iv) any rate, basis, debt or equity option
representing an obligation to buy or sell a security, debt or equity; and (v)
any other similar agreement.
D-29
"Total Capitalization" means the sum of (a) Contributed Company Capital
plus aggregate undistributed net income of the Fund (as determined quarterly in
accordance with GAAP and set forth in the Fund's financial statements) minus net
loss of the Fund (determined quarterly in accordance with GAAP and set forth in
the Fund's financial statements), in each case excluding any reduction in
Company Equity as a result of placement or structuring fees and organizational
expenditures, (b) the aggregate outstanding liquidation preference of the
Preferred Shares plus the aggregate liquidation preference of fully subscribed
but unissued Preferred Shares and (c) the aggregate Outstanding Principal Amount
plus the amount, if any, by which the Total Maximum Commitment exceeds the
Outstanding Principal Amount; provided, however, that until June 30, 2007, for
purpose of clauses (i) through (v) of the Portfolio Limitations, "Total
Capitalization" will be the greater of (i) the amount determined pursuant to
clauses (a), (b) and (c) above and (ii) $404.5 million; provided, further, that,
for purposes of the definition of Portfolio Limitations, Total Capitalization
shall not exceed $809.0 million.
"Unhedged Foreign Investment" means any portion of any Fund Investment
denominated in a currency other than Dollars which is not protected against
currency fluctuations as a result of Currency Hedging Transactions; provided,
however, that if 95% or more of the Market Value of a Fund Investment
denominated in a currency other than Dollars is so protected against currency
fluctuations, all of such Fund Investment shall be deemed to be protected
against currency fluctuations for purposes of this definition and the
calculation of the Over-Collateralization Tests.
"Unquoted Investments" means Fund Investments other than Cash or Cash
Equivalents for which the Market Value has not been obtained from an Approved
Source.
"US. Government Securities" means Securities that are direct
obligations of, or obligations the timely payment of principal and interest on
which is fully guaranteed by, the United States of America or any agency or
instrumentality of the United States of America the obligations of which are
backed by the full faith and credit of the United States of America and in the
form of conventional bills, bonds and notes. In no event shall U.S. Government
Securities include: (i) any security providing for the payment of interest only;
(ii) any Swap Transaction; or (iii) any obligation on which all or any portion
of the payments thereunder is based, directly or indirectly, on any Swap
Transaction.
"Warrant/Option Intrinsic Value" means, with respect to any
Warrant/Option Investment, the product of (x) an amount by which the current
price (based on the price from an Approved Source or an Approved Investment
Banking Firm) of the applicable Related Equity Securities exceeds the agreed
strike price of the Related Equity Securities with respect to such
Warrant/Option Investment, multiplied by (y) the number of shares of the Related
Equity Securities. For the avoidance of doubt, the Warrant/Option Intrinsic
Value shall always be zero if, in the case of a call Warrant/Option Investment,
the agreed strike price of the applicable Related Equity Securities for such
Warrant/Option Investment is equal to or greater than the current price of the
applicable Related Equity Securities for such Warrant/Option Investment or, in
the case of a put Warrant/Option Investment, the agreed strike price of the
applicable Related Equity Securities for such Warrant/Option Investment is equal
to or less than the current price of the applicable Related Equity Securities
for such Warrant/Option Investment.
D-30
"Warrant/Option Investments" means any Fund Investments held by the
Fund that are warrants or call options or similar rights with respect to Equity
Securities (the "Related Equity Securities").
"Yield to Worst" means, in respect of any High Yield Bond or other debt
security, the lesser of (a) the yield-to-maturity and (b) the lowest
yield-to-call calculated on each scheduled call date.
D-31
ANNEX I
S&P INDUSTRY CLASSIFICATIONS
INDUSTRY CODE DESCRIPTION
------------- -----------
0 Zero Default Risk
1 Aerospace & Defense
2 Air transport
3 Automotive
4 Beverage & Tobacco
5 Radio & Television
6 Brokers, Dealers & Investment
houses
7 Building & Development
8 Business equipment & services
9 Cable & satellite television
10 Chemicals & plastics
11 Clothing/textiles
12 Conglomerates
13 Containers & glass products
14 Cosmetics/toiletries
15 Drugs
16 Ecological services & equipment
17 Electronics/electrical
18 Equipment leasing
19 Farming/agriculture
20 Financial intermediaries
21 Food/drug retailers
22 Food products
23 Food service
24 Forest products
25 Health care
26 Home furnishings
27 Lodging & casinos
28 Industrial equipment
29 Insurance
30 Leisure goods/activities/movies
31 Nonferrous metals/minerals
32 Oil & gas
33 Publishing
34 Rail industries
35 Retailers (except food & drug)
36 Steel
37 Surface transport
38 Telecommunications/cellular
39 Utilities
49 Project Finance
50 CDO
51 ABS Consumer
52 ABS Commercial
53 CMBS Diversified (Conduit and CTL)
54 CMBS (Large Loan, Single
Borrower, and Single Property)
55 REITs and REOCs
56 RMBS A
57 RMBS B&C, HELs, HELOCs, and Tax
Lien
58 Manufactured Housing
59 U.S. Agency (Explicitly
Guaranteed)
60 Monoline/FER Guaranteed
61 Non-FER Company Guaranteed
62 FFELP Student Loans (Over 70%
FFELP)
D-32
APPROVED DEALERS
A.G. Edwards & Sons, Inc. Liberty Brokerage
ABN AMRO Bank Libra Securities
Allen & Co. McDonald & Company
APS Financial Corporation Merrill Lynch
B. Riley & Co. Mesirow Financial
Bank of America Miller Tabak & Co., LLC
Bank of Montreal Morgan Joseph & Co.
Barclays Capital Morgan Stanley
Bear Stearns Prudential Securities
BMO Nesbitt Bums Raymond James
BNP Paribas RBC Dain Rauscher
BNY Capital Robert W. Baird & Co
Brown Gibbons Lang & Company Salomon Smith Barney
Cantor Fitzgerald Schroder Wertheim
Chanin Capital Partners Scotia Capital Markets
Chicago Corporation Seidler Companies, The
CIBC World Markets SG Cowen
CIT Group Societe Generale
Citigroup Spear, Leeds & Kellogg
Commerzbank SunTrust Robinson-Humphrey Company
Credit Lyonnais Swiss Bank Corporation
Credit Research & Trading TD Securities
CS First Boston The Blackstone Group
Delaware Bay, Inc. U. S. Bancorp
Deutsche Bank Alex Brown UBS Warburg
First Chicago Trust Company Union Bank of California
Fleet Wachovia Securities
General Electric Wedbush Morgan
Goldman Sachs & Co. Wells Fargo
Houlihan Lokey Howard & Zukin William Blair & Company
Imperial Capital
Indosuez Capital
ING (Baring Furman Selz)
J.P. Morgan Chase
Jefferies & Company, Inc.
Ladenburg Thalmann
Lazard Freres & Co., LLC
Lehman Brothers
D-33
APPROVED EXCHANGES
AFRICAN STOCK EXCHANGES
Johannesburg Stock Exchange, South Africa
The South African Futures Exchange(SAFEX), South Africa
ASIAN STOCK EXCHANGES
Sydney Futures Exchange, Australia
Australian Stock Exchanges, Australia
Shenzhen Stock Exchange, China
Stock Exchange of Hong Kong,Hong Kong
Hong Kong Futures Exchange,Hong Kong
National Stock Exchange of India,India
Bombay Stock Exchange, India
Jakarta Stock Exchange, Indonesia
Indonesia NET Exchange,Indonesia
Nagoya Stock Exchange,Japan
Osaka Securities Exchange, Japan
Tokyo Grain Exchange, Japan
Tokyo International Financial Futures Exchange (TIFFE), Japan
Tokyo Stock Exchange, Japan
Korea Stock Exchange, Korea
Kuala Lumpur Stock Exchange, Malaysia
New Zealand Stock Exchange, New Zealand
Karachi Stock Exchange, Pakistan
Lahore Stock Exchange, Pakistan
Stock Exchange of Singapore (SES), Singapore
Singapore International Monetary Exchange Ltd. (SIMEX), Singapore
Colombo Stock Exchange, Sri Lanka
Sri Lanka Stock Closings, Sri Lanka
Taiwan Stock Exchange, Taiwan
The Stock Exchange of Thailand, Thailand
EUROPEAN STOCK EXCHANGES
Vienna Stock Exchange, Austria
EASDAQ, Belgium
Zagreb Stock Exchange, Croatia
Prague Stock Exchange, Czech Republic
Copenhagen Stock Exchange, Denmark
Helsinki Stock Exchange, Finland
Paris Stock Exchange, France
NouveauMarche, France
MATIF, France
Frankfurt Stock Exchange, Germany
Athens Stock Exchange, Greece
Budapest Stock Exchange, Hungary
D-34
Italian Stock Exchange, Italy
National Stock Exchange of Lithuania,Lithuania
Macedonian Stock Exchange, Macedonia
Amsterdam Stock Exchange, The Netherlands
Oslo Stock Exchange, Norway
Warsaw Stock-Exchange, Poland
Lisbon Stock Exchange, Portugal
Bucharest Stock Exchange, Romania
Russian Securities Market News, Russia
Ljubljana Stock Exchange,Inc., Slovenia
Barcelona Stock Exchange, Spain
Madrid Stock Exchange, Spain
MEFF: (Spanish Financial Futures & Options Exchange), Spain
Stockholm Stock Exchange, Sweden
Swiss Exchange, Switzerland
Istanbul Stock Exhange, Turkey
FTSE International (London Stock Exchange), United Kingdom
London Stock Exchange: Daily Price Summary, United Kingdom
Electronic Share Information, UnitedKingdom
London Metal Exchange,United Kingdom
London InternationalFinancial Futures and Options Exchange, United
Kingdom
MIDDLE EASTERN STOCK EXCHANGES
Tel Aviv Stock Exchange, Israel
Amman Financial Market, Jordan
Istanbul Stock Exhange, Turkey
NORTH AMERICAN STOCK EXCHANGES
Alberta Stock Exchange, Canada
Montreal Stock Exchange, Canada
Toronto Stock Exchange, Canada
Vancouver Stock Exchange, Canada
Winnipeg Stock Exchange, Canada
Mexican Stock Exchange, Mexico
AMEX, United States
New York Stock Exchange (NYSE),United States
NASDAQ, United States
Chicago Stock Exchange, United States
Chicago Board Options Exchange, United States
Chicago Board of Trade, United States
Chicago Mercantile Exchange, United States
Pacific Stock Exchange, United States
Philadelphia Stock Exchange, United States
SOUTH AMERICAN STOCK EXCHANGES
Bermuda Stock Exchange, Bermuda
Rio de Janeiro Stock Exchange, Brazil
D-35
Sao Paulo Stock Exchange, Brazil
Cayman Islands Stock Exchange, Cayman
Islands Chile Electronic Stock Exchange, Chile
Santiago Stock Exchange, Chile
Bogota stock exchange, Colombia
Lima Stock Exchange, Peru
Caracas Stock Exchange, Venezuela
Venezuela Electronic Stock Exchange, Venezuela
D-36
APPROVED INVESTMENT BANKING FIRMS
A.G. Edwards & Sons, Inc. Lehman Brothers
ABN AMRO Bank Liberty Brokerage
Allen & Co. Lincoln Partners
Amroc Investments M.J. Whitman
Bank of America McDonald & Company
Bank of Montreal Merrill Lynch
Bank One Mesirow Financial
Barclays Capital Miller Tabak & Hirsch
Bear Stearns Morgan Stanley
BMO Nesbitt Burns Prudential Securities
Brown, Gibbons, Lang RBC Dain Rauscher
Cantor Fitzgerald Raymond James
Chanin Capital Partners Robert W. Baird & Co
JPMorgan Chase Manhattan Roth Capital
Chicago Corporation Solomon Smith Barney
CIBC World Markets Schroder Wertheim
CIT Group Scotia Capital Markets
Citibank Group Seidler Companies
Citimark Partners SG Cowen
Credit Research & Trading Sun Trust Robinson-Humphrey Company
CS First Boston Sutro & Co.
Dabney Flannigan TD Securities
Delaware Bay, Inc. The Blackstone Group
Deutsche Bank Alex Brown Union Bank of California
EVEREN Securities US Bancorp Libra
First Security Van Kasper US Bancorp Piper Jaffray
Fleet National Bank USB Warburg
Goldman Sachs & Co. Wachovia Securities
Grantchester Holdings Wasserstein Perella Securities Inc.
Greenwich NatWest Wedbush Morgan
Gruntal Wells Fargo
Hambrecht & Quist William Blair & Company
Hellmold & Associates
Houlihan Lokey Howard & Zukin
Imperial Capital
ING (Baring Furman Selz)
Jefferies & Company, Inc.
JPMorgan Chase
Ladenburg Thalmann
Lazard Freres
D-37
APPROVED PRICING SERVICES
Advantage Data, Inc.
Bloomberg
Bridge Information Systems, Inc.
Data Resources Inc.
Fixed Income Pricing System
Interactive Data Corp
International Securities Market Association
JJ Kenney
KDP
Loan Pricing Corp.
Merrill Lynch Securities Pricing Service
Muller Data Corp.
Reuters (only for pricing Foreign Issuer Securities)
Societe Generale
Standard & Poor's
Telerate
Wood Gundy (only for pricing Securities issued by the Canadian federal or
Canadian provincial governments)
D-38
APPROVED THIRD PARTY APPRAISERS
A.G. Edwards & Sons, Inc. J.P. Morgan Chase
ABN AMRO Bank Jefferies & Company, Inc.
Allen & Co. KPMG International
Amroc Investments Ladenburg Thalmann
Bank of America Lazard Freres
Barclays Capital Lehman Brothers
Bear Stearns Liberty Brokerage
BMO Nesbitt Burns M.J. Whitman
Brown, Gibbons, Lang McDonald & Company
Cantor Fitzgerald Merrill Lynch
Chanin Capital Mesirow Financial
Citimark Partners Miller Tabak
Chicago Corporation Morgan Stanley
CIBC World Markets PriceWaterhouseCoopers
CIT World Markets Raymond James
Citigroup RBC Dain Rauscher Robert W. Barry
Credit Research & Trading Schroder Wertheim
CS First Boston Scotia Capital Markets
Dabney Flannigan Seidler Companies
Delaware Bay, Inc. Sun Trust Robinson-Humphrey Company
Deloitte & Touche Sutro & Co.
Deutsche Bank Swiss Bank Corporation
Dresdner Kelinwort Wasserstein TD Securities
Ernst & Young The Blackstone Group
EVEREN Securities UBS Warburg
First Chicago Trust Company Union Bank
First Security Van Kasper US Bancorp Piper Jaffray
Goldman Sachs & Co. US Bancorp Libra
Grantchester Holdings Wachovia Securities
Greenwich NatWest Wedbush Morgan
Hambrecht & Quist Wells Fargo
Hellmold & Associates William Blair & Company
Houlihan Lokey Howard & Zukin
Imperial Capital
D-39
APPENDIX E: PERFORMANCE INFORMATION
The historical performance of the offshore and feeder funds of York's domestic
hedge fund strategies is included below:
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
COMPOUNDED ANNUAL RETURN
FUND INCEPTION FROM INCEPTION* THROUGH
OCTOBER 31, 2005**,***
------------------------------------------------------------------------------------------------
YORK INVESTMENT LIMITED March 1994 17.0%
o a diversified event-driven strategy
------------------------------------------------------------------------------------------------
YORK SELECT UNIT TRUST January 2001 22.2%
o a concentrated "select" event-driven
strategy
------------------------------------------------------------------------------------------------
YORK CREDIT OPPORTUNITIES UNIT TRUST April 2001 24.8%
o a strategy focusing on opportunities
across the distressed debt and
credit spectrum
------------------------------------------------------------------------------------------------
YORK GLOBAL VALUE UNIT TRUST October 2003 24.1%
o a value-oriented strategy
------------------------------------------------------------------------------------------------
YORK EUROPEAN OPPORTUNITIES UNIT TRUST February 2005 20.3%
o a European event-driven and
value-oriented strategy
------------------------------------------------------------------------------------------------
* In order to provide the most comparable presentation of data, the
"compounded annual return from inception" calculations set forth in the table
above reflect the performance of the named fund since its inception, and the
performance of the corresponding domestic fund of such named fund for the period
in time from its inception. For example, the annual return from inception of
York Investment Limited of 18.0% reflects the performance of York Investment
Limited from March 1994 through December 2004, and the performance of York
Capital Management LP, its corresponding domestic fund, from October 1991 (its
inception date) through February 1994.
** The "Compounded Annual Return" represents the cumulative compounded
monthly returns expressed on an annualized basis for each fund set forth above.
*** These returns include actual returns from inception through September
30, 2005, and an estimate of such funds' performance from October 1, 2005
through October 31, 2005.
NOTE: Performance figures are net after all expenses, management fees and
incentive allocations for an investment in each fund's Class A
interests, if applicable, and include all income from interest,
dividends and other distributions on securities held by the Fund.
Actual investor results may vary depending upon different fee
arrangements, the class of shares involved, liquidity considerations
and the timing of investment. Returns for each fund may not be
indicative of actual returns for investments in the Company for any
individual investor. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE
PERFORMANCE. Actual returns for the Company may be greater or less than
the returns shown above.
E-1
The following chart sets forth the annual investment performance of the offshore
and feeder funds managed by York from October 1991 through October 31, 2005.
[Enlarge/Download Table]
================================================================================================================================
York York Select York Credit York Global European
FUND Investment Unit Trust Opportunities Unit Value Unit Trust Opportunities S&P 500(3) CSFB HY
Limited Trust Fund Unit Trust INDEX(3)
================================================================================================================================
DOMICILE Offshore Offshore Offshore Offshore Offshore
================================================================================================================================
INCEPTION 3/1/1994 1/1/2001 4/1/2001 10/1/2003 2/1/2005
================================================================================================================================
1991(4) 7.37% 8.96% 4.90%
1992 36.38% 7.63% 16.66%
1993 33.84% 10.08% 18.91%
1994 9.61% 1.32% -0.98%
1995 26.45% 37.56% 17.39%
1996 12.30% 24.76% 22.96% 12.42%
1997 31.52% 43.06% 33.38% 12.63%
1998 5.65% 5.66% 28.58% 0.58%
1999 27.36% 67.28% 21.04% 3.29%
2000 11.96% 18.30% -9.10% -5.21%
2001 5.14% 10.01% 32.89% -11.88% 5.81%
2002 -8.55% -6.62% -2.91% 7.27% -22.11% 3.10%
2003 31.42% 40.07% 52.39% 46.79% 28.68% 27.94%
2004 17.66% 31.55% 38.59% 22.45% - 10.87% 11.95%
10/31/2005 1.56% 1.35% 5.03% 6.41% 10.76% 1.05% 0.94%
(5)
================================================================================================================================
NOTES:
1. The statistics set forth in the table above reflect the performance
since the named fund's inception, and the performance of the corresponding
domestic fund of such named fund prior thereto. The presentation of the
performance of a corresponding domestic fund for at least part of the year in
the above table is indicated with gray shading.
2. Performance figures are net after all expenses, management fees and
incentive allocations for an investment in each fund's Class A interests, if
applicable, and include all income from interest, dividends and other
distributions on the securities held by the fund. Actual investor results may
vary depending upon different fee arrangements, the class of shares involved,
liquidity considerations and timing of investments. The S&P 500 Index and the
CSFB HY Index are unmanaged indices. Comparisons made between an unmanaged index
and a York Capital fund may be of limited value. Both the S&P 500 Index and the
CSFB HY Index were selected due to the diverse characteristics of the asset
classes expected to be held by the Company. The S&P 500 Index reflects
reinvestment of dividends. This data is intended to depict portfolio
performance, and is not indicative of the returns that might be expected by a
purchaser of Common Shares. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE
PERFORMANCE.
3. Source: Standard & Poor's, with respect to the data relating to the S&P
500 index, and CS First Boston, as reported on Bloomberg LP, with respect to the
data relating to the CSFB HY Index.
4. S&P 500 Index returns and CSFB HY Index returns are presented for a
period from October 1, 1991 through December 31, 1991.
5. With respect to the performance of York Investment Limited, York Select
Unit Trust, York Credit Opportunities Unit Trust, York Global Value Unit Trust
and York European Opportunities Unit Trust, the returns for the period from
January 1, 2005 through October 31, 2005 include the actual results of such
funds from January 1, 2005 through September 30, 2005, and an estimate of such
funds' performance from October 1, 2005 through October 31, 2005.
E-2
PRIVATE PLACEMENT MEMORANDUM SUPPLEMENT
TO THE
PRIVATE PLACEMENT MEMORANDUM
YORK ENHANCED STRATEGIES FUND, LLC
a Delaware Limited Liability Company
$325,000,000 of
Common Shares
YORK
ENHANCED STRATEGIES
MANAGEMENT, LLC
MORGAN STANLEY & CO. INCORPORATED
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
Placement and Structuring Agent and Sole Bookrunners
Private Placement Memorandum Supplement, dated November 15, 2005, to the
Private Placement Memorandum, dated November 2, 2005
THIS PRIVATE PLACEMENT MEMORANDUM SUPPLEMENT TO THE PRIVATE PLACEMENT MEMORANDUM
IS SUBMITTED TO YOU SOLELY IN CONNECTION WITH YOUR CONSIDERATION OF AN
INVESTMENT IN THE COMMON SHARES OF YORK ENHANCED STRATEGIES FUND, LLC (THE
"COMPANY"). IN ADDITION, NO PERSON OTHER THAN THE COMPANY, YORK ENHANCED
STRATEGIES MANAGEMENT, LLC, MORGAN STANLEY & CO. INCORPORATED AND MORGAN STANLEY
& CO. INTERNATIONAL LIMITED HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE
ANY INFORMATION WITH RESPECT TO THE COMMON SHARES, EXCEPT THE INFORMATION
CONTAINED HEREIN, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN OR
OTHERWISE SUPPLIED BY THE COMPANY MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
YORK ENHANCED STRATEGIES FUND, LLC
$325,000,000 OF
COMMON SHARES
The information contained herein supplements the Private Placement
Memorandum, dated November 2, 2005 (the "PPM"), of York Enhanced Strategies
Fund, LLC, relating to the offer and sale of Common Shares. Terms used herein
but not otherwise defined herein have the meaning as set forth in the PPM.
The following information used throughout the PPM is superceded and
replaced in its entirety with the following information:
The $404.5 million amount of Common Shares is superseded and replaced with
$325.0 million.
The $268.5 million amount of Notes is superseded and replaced with $216.0
million.
The $136.0 million amount of Term Preferred Shares is superseded and
replaced with $109.0 million.
The $809.0 million amount of Total Available Capital is superseded and
replaced with $650.0 million.
The Anticipated Capitalization Table is superseded and replaced with the
following table:
Anticipated Capitalization Table
--------------------------------------------------------------------------------
Term
Common Preferred Aggregate Total
Shares Notes Shares ($ millions)
--------------------------------------------------------------------------------
Closing 50% 0% 0% $162.5
--------------------------------------------------------------------------------
End of Month 3 25% 25% 25% $325.0
--------------------------------------------------------------------------------
End of Month 6 25% 25% 25% $487.5
--------------------------------------------------------------------------------
End of Month 9 0% 50% 50% $650.0
--------------------------------------------------------------------------------
The Company will pay the Investment Manager the Management Fee, which will
be equal to 0.75% per annum of the Committed Capital during the Initial Draw
Period, and 0.75% per annum of the NAV of the Company during the period
commencing on January 1, 2007 and ending on December 31, 2007. Thereafter, the
Management Fee will equal 1.0% per annum of the NAV of the Company. In addition,
the Company will pay the Placement Agent, as a portion of its placement fee, an
amount which will be equal to 0.25% per annum of the Committed Capital during
the Initial Draw Period, and 0.25% per annum of the NAV of the Company during
the period commencing on January 1, 2007 and ending on December 31, 2007. Each
Management Fee and each such portion of the placement fee will generally be
payable on a quarterly basis in arrears. After the Initial Draw Period, each
Management Fee and each such portion of the placement fee will be calculated
using the applicable quarter-end NAV (without reduction for any dividends
accrued on the Common Shares or the Carried Interest).
1
The following sentence replaces and supersedes in its entirety the
disclosure contained in the first sentence of the fifth paragraph in the PPM in
"Summary of Material Terms of the Company -- Drawdowns":
The Company may hold the initial Drawdown Date at any time after
subscriptions for Common Shares exceed $162.5 million.
The following information replaces and supersedes in its entirety text
appearing in the third bullet point on page 12 and the third bullet point on
page A-2:
o The Term Preferred Shares will pay dividends and other payments at a
rate of LIBOR plus 60 basis points. In addition, aggregate unissued
share fees of 20 basis points will be paid in respect of unissued
Term Preferred Shares. Any such unpaid dividends or payments will be
compounded at the same rate.
The following information replaces and supersedes in its entirety the
disclosure contained in the PPM in "Summary of Material Terms of the Company --
Insurance Agreement."
Insurance Agreement: The Company will enter into the Insurance
Agreement, which will provide, among other
things, for certain covenants, as well as other
obligations and restrictions imposed on the
Company by the Credit Enhancer. In addition,
the total annual cost of funds (excluding
organizational fees and expenses and any fees
and expenses that may be incurred in connection
with any amendments, waivers or remedies under
the Indenture, the Statement or the Insurance
Agreement or commitment or unissued share fees)
in connection with the Notes and the Term
Preferred Shares is expected to be approximately
LIBOR plus 47 basis points plus the Additional
Amount.
The following information replaces and supersedes in its entirety the
disclosure contained in "Appendix A: Company Targeted Return Analysis --
Assumption of the Investment Manager -- Leveraged Structure":
o Leveraged Structure: Assuming that the Term Preferred Shares will
represent approximately 16.8% of the Company's capital and pay
dividends and other payments at a rate of LIBOR plus 60 bps and that
the Company's debt (including, without limitation, outstanding Notes)
will represent approximately 33.2% of the Company's capital and require
interest payments at a rate of LIBOR plus 40 bps, the income generated
by the Company's portfolio (net of estimated expenses) must exceed
approximately LIBOR plus 47 bps to cover the dividends, interest and
other payments specifically related to the Term Preferred Shares and
such debt assuming the Term Preferred Shares and such debt are fully
drawn. Of course, these numbers are merely estimates used for
illustration. Actual interest rates and drawdown schedules on the
Preferred Shares and the debt will vary frequently and may be
significantly higher or lower, and vary, respectively, than the rate
estimated above.
2
The following information replaces and supersedes in its entirety the
disclosure contained in "Appendix B: Additional Hypothetical Returns --
Effect of Leverage":
Assumed Portfolio Total Return -10% -5% 0% 5% 10%
(Net of Expenses)
Common Share Total Return -13.20% -7.54% -2.21% 2.32% 10.04%
The following information replaces and supersedes information contained in
the Collateral Valuation Schedules as indicated:
The $404.5 million amount of Equity Capital Commitments in the definition
of "Moody's Net Accrual Amount" contained in Appendix C is replaced and
superseded with $325.0 million.
The $404.5 million and $809.0 million amounts contained in the definition
of "Total Capitalization" contained in Appendix C are replaced and superseded
with $325.0 million and $650.0 million, respectively.
The $404.5 million amount of Equity Capital Commitments in the definition
of "S&P Net Accrual Amount" contained in Appendix D is replaced and superseded
with $325.0 million.
The $404.5 million and $809.0 million amounts contained in the definition
of "Total Capitalization" contained in Appendix D are replaced and superseded
with $325.0 million and $650.0 million, respectively.
By subscribing to and making payment for the Common Shares, the Investor
hereby acknowledges and accepts the information contained in this Private
Placement Memorandum Supplement. The Investor further acknowledges that it has
read this Private Placement Memorandum Supplement in its entirety and the
Investor has agreed to and understands the revised capitalization of the
Company. Notwithstanding the revised capitalization, the Investor hereby agrees
to make contributions of capital in accordance with the Subscription Agreements.
3
Part C - Other Information
Item 25. Financial Statements and Exhibits
25.1 Not Applicable
25.2 Exhibits
25.2(a)(1) Certificate of Formation of Limited Liability Company
25.2(a)(2) Operating Agreement
25.2(a)(3) Indenture
25.2(b) Bylaws of Limited Liability Company
25.2(c) Not Applicable
25.2(d) See Item 25(a)(2) and (a)(3)
25.2(e) Not Applicable
25.2(f) Not Applicable
25.2(g) Investment Management Agreement
25.2(h)(1) Placement Agency Agreement for Common Shares
25.2(h)(2) Placement Agency Agreement for Preferred Shares
and Revolving Notes
25.2(i) Not Applicable
25.2(j)(1) Custodial Agreement
25.2(j)(2) Sub-Custodial Agreement
25.2(k) Fund Services Agreement
25.2(l) Not Applicable
25.2(m) Not Applicable
25.2(n) Not Applicable
25.2(o) Not Applicable
25.2(p) Not Applicable
25.2(q) Not Applicable
25.2(r)(1) Code of Ethics of the Company
25.2(r)(2) Code of Ethics of the Adviser
Item 26. Marketing Arrangements
Not Applicable
Item 27. Other Expenses of Issuance and Distribution
All Amounts are Estimates
-------------------------
Blue Sky Fees and Expenses
(including fees of counsel)..................... $[____]
Accounting Fees and Expenses.................... $[____]
Legal Fees and Expenses......................... $[____]
Printing and Engraving.......................... $[____]
Offering Expenses............................... $[____]
Miscellaneous................................... $[____]
Total........................................... $[____]
Item 28. Persons Controlled By or Under Common Control
After completion of the private offering, the Registrant expects that no person
will be directly or indirectly under common control with the Registrant, except
that the Registrant may be deemed to be controlled by York Enhanced Strategies
Management LLC (the "Adviser"), the investment adviser to the Registrant. The
Adviser is a limited liability company formed under the laws of the State of New
York.
Item 29. Number of Holders of Securities
Number of Record Holders: 1 (Registrant anticipates that as the result of
the private offering of securities there may be more than 100 record holders
of such securities).
Item 30. Indemnification
The Registrant hereby undertakes that it will apply the indemnification
provisions of the Operating Agreement in a manner consistent with Investment
Company Act Release No. 11330 (Sept. 4, 1980) issued by the Securities and
Exchange Commission, so long as the interpretation of Sections 17(h) and 17(i)
of the 1940 Act contained in that release remains in effect.
The Registrant maintains insurance on behalf of any person who is or was a
Director, including Independent Directors, officer, employee or agent of the
Registrant, against certain liability asserted against him or her and incurred
by him or her or arising out of his or her position. In no event, however, will
the Registrant pay that portion of the premium, if any, for insurance to
indemnify any such person or any act for which the Registrant itself is not
permitted to indemnify.
Item 31. Business and Other Connections of Investment Adviser
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and directors of the Adviser,
reference is made to the Private Placement Memorandum in the section entitled
"The Adviser".
Item 32. Location of Accounts and Records
The Adviser maintains certain required accounting related and financial books
and records of the Registrant at 767 Fifth Avenue, 17th Floor, New York, New
York 10153.
Item 33. Management Services
Not Applicable.
Item 34. Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, 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, and State of New York, on the 28th day of November, 2005.
York Enhanced Strategies Fund, LLC
-----------------------------------
Registrant
By /s/ Jeffrey A. Weber, Director
-----------------------------------
(signature and title)
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘N-2/A’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 11/15/13 | | 72 | | 73 |
| | 12/31/10 | | 111 | | | | | N-CSR, NSAR-B, NSAR-B/A, NT-NSAR |
| | 1/1/09 | | 108 |
| | 12/31/08 | | 109 | | | | | N-CSR, NSAR-B, NT-NCSR, NT-NSAR |
| | 1/1/08 | | 110 |
| | 12/31/07 | | 211 | | | | | N-CSR, NSAR-B, NT-NCSR, NT-NCSR/A, NT-NSAR, NT-NSAR/A |
| | 6/30/07 | | 24 | | 198 | | | N-CSRS, N-PX, NSAR-A |
| | 1/1/07 | | 211 |
| | 12/31/06 | | 37 | | | | | N-CSR, NSAR-B, NT-NSAR |
| | 11/30/05 | | 155 | | 194 |
| Filed as of: | | 11/29/05 |
| Filed on: | | 11/28/05 |
| | 11/25/05 | | 155 | | 195 |
| | 11/17/05 | | 23 | | 36 |
| | 11/15/05 | | 210 |
| | 11/2/05 | | 3 | | 211 |
| | 10/31/05 | | 20 | | 209 |
| | 10/1/05 | | 21 | | 209 |
| | 9/30/05 | | 21 | | 209 |
| | 4/15/05 | | 46 |
| | 1/1/05 | | 27 | | 209 |
| | 12/31/04 | | 110 |
| | 10/22/04 | | 110 |
| | 9/11/01 | | 31 | | 117 |
| | 10/1/98 | | 12 |
| List all Filings |
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