percentage of the CIC’s “net assets” rather than “Adjusted Capital”. This change would be effective upon shareholder approval and is not dependant on a Listing.
“Adjusted Capital” is defined in the current advisory agreement to mean cumulative gross proceeds generated from issuances of CIC’s common stock (including its distribution reinvestment plan) reduced for distributions to shareholders that represent a return of capital and amounts paid for share repurchases pursuant to CIC’s share repurchase program. This provision was initially designed to work in connection with CIC’s former continuous public offerings and its share repurchase program. CIC’s follow-on continuous public offering ended on January 25, 2019, the date on which CIC closed the public offering of its Shares. Also, upon a Listing, CIC would no longer conduct a share repurchase program. Therefore, the concept of “Adjusted Capital” will no longer be relevant to CIC. This change is consistent with provisions in investment advisory agreements of other Listed BDCs.
What else is changing about the subordinated incentive fee on income?
The proposed advisory agreement would also reduce the hurdle and the incentive fee rates. The hurdle rate would be reduced from 1.875% per quarter or an annualized rate of 7.5%, to 1.625% per quarter or an annualized rate of 6.5%. The “catch up” hurdle of 9.375% (annualized) or 2.34375% per quarter would be reduced to 7.879% (annualized) or 1.96975% per quarter, and once the hurdle and “catch up” rates are exceeded, the amount of pre-incentive fee net investment income that CIC would pay would be reduced from 20.0% to 17.5%.
As a result of these proposed revisions, the subordinated incentive fee on income would be calculated and payable quarterly in arrears based on pre-incentive fee net investment income for the most recently completed calendar quarter, subject to a “hurdle rate”, expressed as a rate of return on CIC’s net assets, equal to 1.625% per quarter, or an annualized rate of 6.5%. CIC would pay 100% of pre-incentive fee net investment income once the hurdle rate is exceeded until the annualized rate of 7.879% (or 1.96975% per quarter) is exceeded, at which point CIC would pay 17.5% of the amount of pre-incentive fee net investment income that exceeds the annualized rate of 7.879% (or 1.96975% per quarter).
What is changing about the incentive fee on capital gains?
Under the proposed advisory agreement, the incentive fee on capital gains payable by CIC would be reduced from 20.0% to 17.5%.
Why is CIC seeking shareholder approval permitting CIC to sell or otherwise issue shares, not exceeding 25% of its then outstanding shares, at a price below net asset value?
Although in August 2020 CIC’s shareholders authorized CIC to sell or otherwise issue shares, not exceeding 25% of its then outstanding shares, at a price below net asset value, such approval is only valid until August 2021 (one year after shareholder approval). CIC has not issued any shares below net asset value to date.
From time to time, capital markets may experience periods of disruption and instability. The market is currently experiencing such a period of severe instability due to the effects of the COVID-19 pandemic and the measures taken to contain it. This period of market disruption and instability may adversely affect CIC’s access to sufficient debt and equity capital. Debt capital that will be available, if any, may be at a higher cost and on less favorable terms and conditions. Further, although CIC has terminated its public offering, it may be advantageous to seek to raise additional equity capital in private placements, which would be greatly aided by the flexibility of being able to offer shares at a price below current net asset value. This access to equity capital will allow CIC to better negotiate with its lenders and avoid CIC from being a forced seller of assets in this current marketplace. It will also preserve financial flexibility during these uncertain times for other purposes, such as providing liquidity to troubled portfolio companies by participating in a capital restructurings. In addition, CIC believes that additional attractive investment opportunities may present themselves during this period.
Although shareholders should consider the dilutive effect of CIC issuing shares below net asset value, it is important to note that CIC’s ability to issue such shares is subject to certain restrictions and limitations, including, among others described in the proxy statement (i) such issuances must occur within one year after shareholder approval, (ii) the Board, including a majority of the independent directors, must approve such issuances as in the best interests of CIC and the shareholders at the time of issuance, and (iii) such issuances cannot exceed 25% of CIC’s then outstanding shares. Also, if approved by shareholders, the authorization will be conditioned upon a future Listing.
