Item 1A. Risk Factors
Item 1A.
Risk Factors
Investing in our common stock involves a number of significant risks. Before an investor invests in our common stock, the investor should be aware of various
risks, including those described below. The investor should carefully consider these risk factors, together with all of the other information included in this Annual Report, before the investor decides whether to make an investment in our
securities. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair business, financial condition, and/or operating results. If any
of the following events occur, our business, financial condition, and results of operations could be materially and adversely affected. In such case, the net asset value of our common stock and the trading price, if any, of our securities could
decline, and an investor may lose all or part of his or her investment.
Risks Relating to the COVID-19
pandemic
Global economic, political and market conditions caused by the current public health crisis have (and in the future, could further)
adversely affect our business, results of operations and financial condition and those of our portfolio companies.
A novel strain of coronavirus
initially appeared in China in late 2019 and rapidly spread to other countries, including the United States. In an attempt to slow the spread of the coronavirus, governments around the world, including the United States, placed restrictions on
travel, issued stay at home orders and ordered the temporary closure of certain businesses, such as factories and retail
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stores. Such restrictions and closures impacted supply chains, consumer demand and/or the operations of many businesses. As jurisdictions around the United States and the world continue to
experience surges in cases of COVID-19 and governments consider pausing the lifting of or re-imposing restrictions, there is considerable uncertainty surrounding the
full economic impact of the coronavirus pandemic and the long-term effects on the U.S. and global financial markets.
Any disruptions in the capital
markets, as a result of the COVID-19 pandemic or otherwise, may increase the spread between the yields realized on risk-free and higher risk securities and can result in illiquidity in parts of the capital
markets, significant write-offs in the financial sector and re-pricing of credit risk in the broadly syndicated market. These and any other unfavorable economic conditions could increase our funding costs,
limit our access to the capital markets or result in a decision by lenders not to extend credit to us. During the spring of 2020, the occurrence of these events negatively impacted the fair value of the investments that we held and, if they were to
occur again in the future, could limit our investment originations (including as a result of the investment professionals of our Adviser diverting their time to the restructuring of certain investments), negatively impact our operating results and
limit our ability to grow. In addition, our success depends in substantial part on the management, skill and acumen of our Adviser, whose operations may be adversely impacted, including through quarantine measures and travel restrictions imposed on
its investment professionals or service providers, or any related health issues of such investment professionals or service providers.
In addition, the
restrictions and closures and related market conditions resulted in, and if re-imposed in the future, could further result in certain of our portfolio companies halting or significantly curtailing operations
and negative impacts to the supply chains of certain of our portfolio companies. The financial results of middle-market companies, like those in which we invest, experienced deterioration, which could ultimately lead to difficulty in meeting debt
service requirements and an increase in defaults, and further deterioration will further depress the outlook for those companies. Further, adverse economic conditions decreased and may in the future decrease the value of collateral securing some of
our loans and the value of our equity investments. Such conditions have required and may in the future require us to modify the payment terms of our investments, including changes in PIK interest provisions and/or cash interest rates. The
performance of certain of our portfolio companies has been, and in the future may be, negatively impacted by these economic or other conditions, which can result in our receipt of reduced interest income from our portfolio companies and/or realized
and unrealized losses related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations. In addition, as governments ease
COVID-19 related restrictions, certain of our portfolio companies may experience increased health and safety expenses, payroll costs and other operating expenses.
In December 2020, the U.S. Food and Drug Administration authorized vaccines produced by Pfizer-BioNTech and Moderna
for emergency use. However, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when herd immunity will be achieved and the restrictions that were imposed to slow the spread of the virus will be
lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and our business and operations, as well as the business and operations of our portfolio
companies, could be materially adversely affected by a prolonged recession in the United States and other major markets.
As the potential impact of the
coronavirus remains difficult to predict, the extent to which the coronavirus could negatively affect our and our portfolio companies operating results or the duration or reoccurrence of any potential business or supply-chain disruption is
uncertain. Any potential impact to our results of operations will depend to a large extent on future developments regarding the duration and severity of the coronavirus and the actions taken by governments (including stimulus measures or the lack
thereof) and their citizens to contain the coronavirus or treat its impact, all of which are beyond our control.
Risks Relating to our Business and
Structure
We have a limited operating history.
We were formed in February 2015 and commenced operations on June 26, 2015. As a result of our limited operating history, we are subject to the
business risks and uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and that the value of an investors investment could decline substantially.
We are dependent upon key personnel of Crescent and the Adviser.
We do not have any internal management capacity or employees. Our ability to achieve our investment objective will depend on our ability to manage our business
and to grow our investments and earnings. This will depend, in turn, on the diligence, skill and network of business contacts of Crescents senior professionals. We expect that these senior professionals will evaluate, negotiate, structure,
close and monitor our investments in accordance with the terms of our Investment Advisory Agreement. We can offer no assurance, however, that Crescents senior professionals will continue to provide investment advice to us. If these individuals
do not maintain their employment or other relationships with Crescent and do not develop new relationships with other sources of investment opportunities available to us, we may not be able to grow our investment portfolio. In addition, individuals
with whom Crescents senior professionals have relationships are not obligated to provide us with investment opportunities. Therefore, we can offer no assurance that such relationships will generate investment opportunities for us.
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The Adviser is an affiliate of Crescent and will depend upon access to the investment professionals and
Crescents other resources to fulfill its obligations to us under the Investment Advisory Agreement. The Adviser will also depend upon such investment professionals to obtain access to deal flow generated by Crescent. Under a Resource Sharing
Agreement, Crescent has agreed to provide the Adviser with the experienced investment professionals necessary to fulfill its obligations under the Investment Advisory Agreement. The Resource Sharing Agreement provides that Crescent will make
available to the Adviser experienced investment professionals and access to Crescents resources for purposes of evaluating, negotiating, structuring, closing and monitoring our investments. Although we are a third-party beneficiary of the
Resource Sharing Agreement, it may be terminated by either party on 60 days notice. We cannot assure investors that Crescent will fulfill its obligations under the agreement. We cannot assure investors that the Adviser will enforce the
Resource Sharing Agreement if Crescent fails to perform, that such agreement will not be terminated by either party or that we will continue to have access to Crescents investment professionals and its affiliates or their information and deal
flow.
Crescents and the Advisers investment professionals, which are currently composed of the same personnel, have substantial
responsibilities in connection with the management of other Crescent clients. Crescents personnel may be called upon to provide managerial assistance to our portfolio companies. These demands on their time, which may increase as the number of
investments grow, may distract them or slow our rate of investment.
The Advisers investment committee, which provides oversight over our investment
activities, is provided to us by the Adviser under the Investment Advisory Agreement. The loss of any member of the Advisers investment committee or of Crescents other senior professionals would limit our ability to achieve our
investment objective and operate as we anticipate. This could have a material adverse effect on our financial condition, results of operations and cash flows.
Further, we depend upon Crescent to maintain its relationships with private equity sponsors, placement agents, investment banks, management groups and other
financial institutions, and we expect to rely to a significant extent upon these relationships to provide us with potential investment opportunities. If Crescent fails to maintain such relationships, or to develop new relationships with other
sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom Crescents senior professionals have relationships are not obligated to provide us with investment opportunities, and
we can offer no assurance that these relationships will generate investment opportunities in the future.
We may not replicate the historical
results achieved by Crescent.
Our primary focus in making investments may differ from those of existing investment funds, accounts or other
investment vehicles that are or have been managed by members of the Advisers investment committee or by Crescent. Past performance should not be relied upon as an indication of future results. There can be no guarantee that we will replicate
our own historical performance, the historical success of Crescent or the historical performance of investment funds, accounts or other investment vehicles that are or have been managed by members of the Advisers investment committee or by
Crescent or its employees, and we caution investors that our investment returns could be substantially lower than the returns achieved by them in prior periods. We cannot assure you that we will be profitable in the future or that the Adviser will
be able to continue to implement our investment objectives with the same degree of success that it has had in the past. Additionally, all or a portion of the prior results may have been achieved in particular market conditions which may never be
repeated. Moreover, current or future market volatility and regulatory uncertainty may have an adverse impact on our future performance.
We depend
on Crescent to manage our business effectively.
Our ability to achieve our investment objective will depend on our ability to manage our business
and to grow our investments and earnings. This will depend, in turn, on Crescents ability to identify, invest in and monitor portfolio companies that meet our investment criteria. The achievement of our investment objectives on a
cost-effective basis will depend upon Crescents execution of our investment process, its ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. Crescents
investment professionals will have substantial responsibilities in connection with the management of other investment funds, accounts and investment vehicles. Crescents personnel may be called upon to provide managerial assistance to our
portfolio companies. These activities may distract them from servicing new investment opportunities for us or slow our rate of investment. Any failure to manage our business and our future growth effectively could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
Global capital markets could enter a period of severe disruption and
instability. These conditions have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and our business.
From time to time, the global capital markets may experience periods of disruption and instability resulting in increasing spreads between the yields realized
on riskier debt securities and those realized on risk-free securities and a lack of liquidity in parts of the
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debt capital markets, significant write-offs in the financial services sector relating to subprime mortgages and the re-pricing of credit risk in the
broadly syndicated market. Deteriorating market conditions could result in increasing volatility and illiquidity in the global credit, debt and equity markets generally. The duration and ultimate effect of such market conditions cannot be
forecasted. Deteriorating market conditions and uncertainty regarding economic markets generally could result in declines in the market values of potential investments or declines in the market values of investments after they are made or acquired
by us and affect the potential for liquidity events involving such investments or portfolio companies.
Such declines may be exacerbated by other events,
such as the failure of significant financial institutions or hedge funds, dislocations in other investment markets or other extrinsic events. Applicable accounting standards require us to determine the fair value of our investments as the amount
that would be received in an orderly transaction between market participants at the measurement date. While most of our investments are not publicly traded, as part of the valuation process we consider a number of measures, including comparison to
publicly traded securities. As a result, volatility in the public capital markets can adversely affect our investment valuations.
During any such periods
of market disruption and instability, we and other companies in the financial services sector may have limited access, if any, to alternative markets for debt and equity capital. Equity capital may be difficult to raise because, subject to some
limited exceptions that will apply to us as a BDC, we will generally not be able to issue additional shares of our common stock at a price less than net asset value (NAV) without first obtaining approval for such issuance from our
stockholders and independent directors. In addition, our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as defined in the 1940 Act, as amended, must equal at
least 150% immediately after each time we incur indebtedness. The debt capital that will be available, if any, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative
effect on our business, financial condition and results of operations.
A prolonged period of market illiquidity may cause us to reduce the volume of
loans and debt securities we originate and/or fund and adversely affect the value of our portfolio investments, which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Global economic, political and market conditions, including uncertainty about the financial stability of the United States, could have a significant
adverse effect on our business, financial condition and results of operations.
Downgrades by rating agencies to the U.S. governments credit
rating or concerns about its credit and deficit levels in general, could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with our debt portfolio and our ability to access
the debt markets on favorable terms. In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our Common Stock.
Deterioration in the economic conditions in the Eurozone and globally, including instability in financial markets, may pose a risk to our business. In recent
years, financial markets have been affected at times by a number of global macroeconomic and political events, including the following: large sovereign debts and fiscal deficits of several countries in Europe and in emerging markets jurisdictions,
levels of non-performing loans on the balance sheets of European banks, the potential effect of any European country leaving the Eurozone, the potential effect of the United Kingdom leaving the European Union,
and market volatility and loss of investor confidence driven by political events. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence
and default on consumer debt and home prices, among other factors. We cannot assure you that market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global
economy, and we cannot assure you that assistance packages will be available, or if available, be sufficient to stabilize countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic
recovery in Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.
The current global financial market situation, as well as various social and political circumstances in the U.S. and around the world, including wars and
other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, adverse effects of climate change and global health epidemics (including the COVID-19), may contribute to increased market volatility and economic uncertainties or deterioration in the U.S. and worldwide. Additionally, the U.S. governments credit and deficit concerns, the European
sovereign debt crisis, and the potential trade war with China, could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets on favorable terms.
Adverse developments in the credit markets may impair our ability to enter into new debt financing arrangements.
During the economic downturn in the United States that began in mid-2007, many commercial banks and other financial
institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited refinancing and
loan modification transactions
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and reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. If these conditions recur, it may be difficult for us to enter into a
new credit or other borrowing facility, obtain other financing to finance the growth of its investments, or refinance any outstanding indebtedness on acceptable economic terms, or at all.
The Adviser, the investment committee of the Adviser, Crescent and their affiliates, officers, directors and employees may face certain conflicts of
interest.
As a result of our arrangements with Crescent, the Adviser and the Advisers investment committee, there may be times when the
Adviser or such persons have interests that differ from those of our stockholders, giving rise to a conflict of interest.
The members of the
Advisers investment committee serve, or may serve, as officers, directors, members, or principals of entities that operate in the same or a related line of business as we do, or of investment funds, accounts, or investment vehicles managed by
Crescent and/or its affiliates. Similarly, Crescent and its affiliates may have other clients with similar, different or competing investment objectives.
In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the
best interests of, or which may be adverse to the interests of, us or our stockholders. For example, Crescent has, and will continue to have management responsibilities for other investment funds, accounts and investment vehicles. There is a
potential that we will compete with these funds, and other entities managed by Crescent and its affiliates, for capital and investment opportunities. As a result, members of the Advisers investment committee who are affiliated with Crescent
will face conflicts in the allocation of investment opportunities among us, and other investment funds, accounts and investment vehicles managed by Crescent and its affiliates and may make certain investments that are appropriate for us but for
which we receive a relatively small allocation or no allocation at all. Crescent intends to allocate investment opportunities among eligible investment funds, accounts and investment vehicles in a manner that is fair and equitable over time and
consistent with its allocation policy. However, we can offer no assurance that such opportunities will be allocated to us fairly or equitably in the short-term or over time and we may not be given the opportunity to participate in investments made
by investment funds managed by Crescent or its affiliates. We expect that Crescent and the Adviser will agree with our Board that, subject to applicable law, allocations among us and other investment funds, accounts and investment vehicles managed
by Crescent will generally be made based on capital available for investment in the asset class being allocated and the respective governing documents of such investment funds, accounts and investment vehicles. We expect that available capital for
our investments will be determined based on the amount of cash on-hand, existing commitments and reserves, if any, the targeted leverage level, targeted asset mix and diversification requirements and other
investment policies and restrictions set by our Board or as imposed by applicable laws, rules, regulations or interpretations. However, there can be no assurance that we will be able to participate in all investment opportunities that are suitable
to us.
Further, to the extent permitted by applicable law, we and our affiliates may own investments at different levels of a portfolio companys
capital structure or otherwise own different classes of a portfolio companys securities, which may give rise to conflicts of interest or perceived conflicts of interest. Conflicts may also arise because decisions regarding our portfolio may
benefit our affiliates. Our affiliates may pursue or enforce rights with respect to one of its portfolio companies, and those activities may have an adverse effect on us.
Crescents principals and employees, the Adviser or their affiliates may, from time to time, possess material
non-public information, limiting our investment discretion .
Crescents executive officers and
directors, principals and other employees, including members of the Advisers investment committee, may serve as directors of, or in a similar capacity with, portfolio companies in which we invest, the securities of which are purchased or sold
on our behalf and may come into possession of material non-public information with respect to issuers in which we may be considering making an investment. In the event that material non-public information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies, Crescents policies or as a result of
applicable law or regulations, we could be prohibited for a period of time or indefinitely from purchasing or selling the securities of such companies, or we may be precluded from providing such information or other ideas to other funds affiliated
with Crescent that might benefit from such information, and this prohibition may have an adverse effect on us.
Our management and incentive fee
structure may create incentives for the Adviser that are not fully aligned with our stockholders interests and may induce the Adviser to make speculative investments.
In the course of our investing activities, we will pay management and incentive fees to the Adviser. We have entered into the Investment Advisory Agreement
with the Adviser that provides that these fees are based on the value of our gross assets (which includes assets purchased with borrowed amounts or other forms of leverage but excludes cash and cash equivalents), instead of net assets (defined as
total assets less indebtedness and before taking into account any incentive fees payable). As a result, investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses,
including the costs of leverage, resulting in a lower rate of return than one might achieve if distributions were made on a gross basis. Because our management fees
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are based on the value of our gross assets, incurrence of debt or the use of leverage will increase the management fees due to the Adviser. As such, the Adviser may have an incentive to use
leverage to make additional investments. In addition, as additional leverage would magnify positive returns, if any, on our portfolio, the incentive fee would become payable to the Adviser (i.e., exceed the Hurdle Amount (as defined herein under the
heading Incentive Fee )) at a lower average return on our portfolio. Thus, if we incur additional leverage, the Adviser may receive additional incentive fees without any corresponding increase (and potentially with a decrease) in
the performance of our portfolio.
Additionally, under the incentive fee structure, the Adviser may benefit when capital gains are recognized and, because
the Adviser will determine when to sell a holding, the Adviser will control the timing of the recognition of such capital gains. As a result of these arrangements, there may be times when the management team of the Adviser has interests that differ
from those of our stockholders, giving rise to a conflict. Furthermore, there is a risk the Adviser will make more speculative investments in an effort to receive this payment. PIK interest and OID would increase our
pre-incentive fee net investment income by increasing the size of the loan balance of underlying loans and increasing our assets under management and would make it easier for the Adviser to surpass the Hurdle
Amount and increase the amount of incentive fees payable to the Adviser.
The part of the incentive fee payable to the Adviser relating to our net
investment income is computed and paid on income that may include interest income that has been accrued but not yet received in cash. This fee structure may give rise to a conflict of interest for the Adviser to the extent that it encourages the
Adviser to favor debt financings that provide for deferred interest, rather than current cash payments of interest. The Adviser may have an incentive to invest in deferred interest securities in circumstances where it would not have done so but for
the opportunity to continue to earn the incentive fee even when the issuers of the deferred interest securities would not be able to make actual cash payments to us on such securities. This risk could be increased because, under the Investment
Advisory Agreement, the Adviser is not obligated to reimburse us for incentive fees it receives even if we subsequently incur losses or never receives in cash the deferred income that was previously accrued.
Our Board is charged with protecting our interests by monitoring how the Adviser addresses these and other conflicts of interest associated with its services
and compensation. While our Board is not expected to review or approve each investment decision or incurrence of leverage, our independent directors will periodically review the Advisers services and fees as well as its portfolio management
decisions and portfolio performance. In connection with these reviews, our independent directors will consider whether the Advisers fees and expenses (including those related to leverage) remain appropriate.
We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent it
so invests, bear its ratable share of any such investment companys expenses, including management and performance fees. We also remain obligated to pay management and incentive fees to the Adviser with respect to the assets invested in the
securities and instruments of other investment companies. With respect to each of these investments, each of our stockholders bears his or her share of the management and incentive fees of the Adviser as well as indirectly bearing the management and
performance fees and other expenses of any investment companies in which we invest.
Conflicts of interest may be created by the valuation process
for certain portfolio holdings.
We make many of our portfolio investments in the form of loans and securities that are not publicly traded and for
which no market based price quotation is available. As a result, our Board will determine the fair value of these loans and securities in good faith as described below in The majority of our portfolio investments are recorded at fair
value as determined in good faith by our Board and, as a result, there may be uncertainty as to the value of our portfolio investments . Each of the interested members of our Board has an indirect pecuniary interest in the Adviser. The
participation of the Advisers investment professionals in our valuation process, and the pecuniary interest in the Adviser by certain members of the our Board, could result in a conflict of interest as the Advisers management fee is
based, in part, on the value of our gross assets, and our incentive fees will be based, in part, on realized gains and realized and unrealized losses.
Conflicts may arise related to other arrangements with Crescent and the Adviser and other affiliates.
We have entered into a license agreement with Crescent under which Crescent has agreed to grant us a non-exclusive,
royalty-free license to use the name Crescent Capital. In addition, the Administration Agreement with the Administrator, an affiliate of Crescent, requires we pay to the Administrator our allocable portion of overhead and other expenses
incurred by the Administrator in performing its obligations under the Administration Agreement, such as rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs. In addition,
the Adviser has entered into a Resource Sharing Agreement with Crescent pursuant to which Crescent provides the Adviser with the resources necessary to fulfill its obligations under the Investment Advisory Agreement. These agreements create
conflicts of interest that the independent members of our Board will monitor. For example, under the terms of the license agreement, we will be unable to preclude Crescent from licensing or transferring the ownership of the Crescent
Capital name to third parties, some of whom may compete against us. Consequently, it will be unable to prevent any damage to goodwill that may occur as a result of the activities of Crescent or others. Furthermore, in the event the license
agreement is terminated, we will be required to change our name and cease using Crescent Capital as part of our name. Any of these events could disrupt our recognition in the market place, damage any goodwill it may have generated and
otherwise harm its business.
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Our Investment Advisory Agreement was negotiated with the Adviser and the Administration Agreement was
negotiated with the Administrator, which are both our related parties.
The Investment Advisory Agreement, and the Administration Agreement were
negotiated between related parties. Consequently, their terms, including fees payable to the Adviser, may not be as favorable to us as if they had been negotiated exclusively with an unaffiliated third party. In addition, we may desire not to
enforce, or to enforce less vigorously, its rights and remedies under these agreements because of our desire to maintain our ongoing relationship with the Adviser, the Administrator and their respective affiliates. Any such decision, however, could
breach our fiduciary obligations to its stockholders.
The Adviser has limited liability and is entitled to indemnification under the Investment
Advisory Agreement.
Under the Investment Advisory Agreement, the Adviser has not assumed any responsibility to us other than to render the
services called for under that agreement. The Adviser will not be responsible for any action of our Board in following or declining to follow the Advisers advice or recommendations. Under the Investment Advisory Agreement the Adviser, its
officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser, including, without limitation, its general partner and the Administrator, and any person controlling or
controlled by the Adviser will not be liable to us, any of our subsidiaries, our directors, our stockholders or any subsidiarys stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory
Agreement, except those resulting from acts constituting gross negligence, willful misfeasance, bad faith or reckless disregard of the duties that the Adviser owes to us under the Investment Advisory Agreement. In addition, as part of the Investment
Advisory Agreement, we have agreed to indemnify the Adviser and each of its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser, including, without limitation, its
general partner and the Administrator, and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) incurred by such party in or by reason
of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of us or our security holders) arising out of or otherwise based upon the performance of any of the
Advisers duties or obligations under the Investment Advisory Agreement or otherwise as an investment adviser of us, except in respect of any liability to us or our security holders to which such party would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of the Advisers duties or by reason of the reckless disregard of the Advisers duties and obligations under the Investment Advisory Agreement. These protections may
lead the Adviser to act in a riskier manner when acting on our behalf than the Adviser would when acting for its own account.
Our ability to enter
into transactions with our affiliates is restricted.
We are prohibited under the 1940 Act from participating in certain transactions with our
affiliates without the prior approval of our independent directors and, in some cases, the SEC. We consider the Adviser and its affiliates, including Crescent, to be our affiliates for such purposes. In addition, any person that owns, directly or
indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any security from or to such affiliate without the prior approval of our
independent directors. We consider the Adviser and its affiliates, including Crescent, to be our affiliates for such purposes. The 1940 Act also prohibits certain joint transactions with certain of our affiliates, which could include
investments in the same portfolio company, without prior approval of our independent directors and, in some cases, of the SEC. We are prohibited from buying or selling any security from or to any person who owns more than 25% of our voting
securities or certain of that persons affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC.
We may, however, invest alongside Crescents investment funds, accounts and investment vehicles in certain circumstances where doing so is consistent
with our investment strategy as well as applicable law and SEC staff interpretations or exemptive orders. For example, we may invest alongside such investment funds, accounts and investment vehicles consistent with guidance promulgated by the SEC
staff to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that Crescent, acting on our behalf and on behalf of such investment funds, accounts and investment vehicles, negotiates no
term other than price. We may also invest alongside Crescents investment funds, accounts and investment vehicles as otherwise permissible under regulatory guidance, applicable regulations or exemptive orders and Crescents allocation
policy. If the Company is prohibited by applicable law from investing alongside Crescents investment funds, accounts and investment vehicles with respect to an investment opportunity, we may not be able to participate in such investment
opportunity. This allocation policy provides that allocations among us and investment funds, accounts and investment vehicles managed by Crescent and its affiliates will generally be made pro rata based on capital available for investment, as
determined, in our case, by our Board as well as the terms of our governing documents and those of such investment funds, accounts and investment vehicles. It is our policy to base our determinations on such factors as: the amount of cash on-hand, existing commitments and reserves, if any, our targeted leverage level, our targeted asset mix and diversification requirements and other investment policies and restrictions set by our Board or imposed by
applicable laws, rules, regulations or interpretations. We expect that these determinations will be made similarly for investment funds, accounts and investment vehicles managed by Crescent. However, we can offer no assurance that investment
opportunities will be allocated to us fairly or equitably in the short-term or over time.
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In situations where co-investment with investment funds, accounts
and investment vehicles managed by Crescent is not permitted or appropriate, such as when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict
between our interests and those of Crescents clients, subject to the limitations described in the preceding paragraph, Crescent will need to decide which client will proceed with the investment. Similar restrictions limit our ability to
transact business with our officers or directors or their affiliates. These restrictions will limit the scope of investment opportunities that would otherwise be available to us.
We, the Adviser and Crescent have been granted exemptive relief from the SEC which permits greater flexibility to negotiate the terms of co-investments if our Board determines that it would be advantageous for us to co-invest with investment funds, accounts and investment vehicles managed by Crescent in a
manner consistent with our investment objectives, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. We believe that co-investment by us and
investment funds, accounts and investment vehicles managed by Crescent may afford us additional investment opportunities and an ability to achieve a more varied portfolio. Accordingly, our exemptive order permits us to invest with investment funds,
accounts and investment vehicles managed by Crescent in the same portfolio companies under circumstances in which such investments would otherwise not be permitted by the 1940 Act. The exemptive relief permitting
co-investment transactions generally applies only if our independent directors and directors who have no financial interest in such transaction review and approve in advance each
co-investment transaction.
Our ability to sell or otherwise exit investments also invested in by other
Crescent investment vehicles is restricted.
We may be considered affiliates with respect to certain of our portfolio companies because our
affiliates, which may include certain investment funds, accounts or investment vehicles managed by Crescent, also hold interests in these portfolio companies and as such these interests may be considered a joint enterprise under the 1940 Act. To the
extent that our interests in these portfolio companies may need to be restructured in the future or to the extent that we choose to exit certain of these transactions, our ability to do so will be limited. We intend to seek exemptive relief in
relation to certain joint transactions; however, there is no assurance that we will obtain relief that would permit us to negotiate future restructurings or other transactions that may be considered a joint enterprise.
We operate in an increasingly competitive market for investment opportunities, which could make it difficult for us to identify and make investments
that are consistent with our investment objectives.
A number of entities compete with us to make the types of investments that we make and plan to
make. We compete with public and private funds, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are
substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some of our competitors may have access to funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution requirements we must satisfy to maintain
our RIC qualification. The competitive pressures we face may have a material adverse effect on our business, financial condition, results of operations and cash flows. As a result of this competition, we may not be able to take advantage of
attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objectives.
With respect to the investments we make, we will not seek to compete based primarily on the interest rates we will offer, and we believe that some of our
competitors may make loans with interest rates that will be lower than the rates we offer. In the secondary market for acquiring existing loans, we expect to compete generally on the basis of pricing terms. With respect to all investments, we may
lose some investment opportunities if we do not match our competitors pricing, terms and structure. However, if we match our competitors pricing, terms and structure, we may experience decreased net interest income, lower yields and
increased risk of credit loss. We may also compete for investment opportunities with investment funds, accounts and investment vehicles managed by Crescent. Although Crescent will allocate opportunities in accordance with its policies and
procedures, allocations to such investment funds, accounts and investment vehicles will reduce the amount and frequency of opportunities available to us and may not be in the best interests of us and our stockholders. Moreover, the performance of
investments will not be known at the time of allocation. See The Adviser, the investment committee of the Adviser, Crescent and their affiliates, officers, directors and employees may face certain conflicts of interest.
We will be subject to corporate level income tax if we are unable to qualify as a RIC.
To qualify as a RIC under the Code, we must meet certain source-of-income,
asset diversification and distribution requirements. The distribution requirement for a RIC is satisfied if we distribute at least 90% of our net ordinary income and net short-term capital gains
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in excess of net long-term capital losses, if any, to our stockholders on an annual basis. We will be subject, to the extent we use debt financing, to certain asset coverage ratio requirements
under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail
to qualify as a RIC and, thus, may be subject to corporate-level income tax. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having
to dispose of certain investments quickly in order to prevent the loss of our qualifications as a RIC. Because most of our investments will be in private or thinly traded public companies, any such dispositions could be made at disadvantageous
prices and may result in substantial losses. If we fail to qualify as a RIC for any reason and become subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for
distributions to our stockholders and the amount of funds available for new investments. Such a failure would have a material adverse effect on us and our stockholders.
We may need to raise additional capital.
We
intend to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain additional capital to fund new investments and grow our portfolio of investments. Unfavorable economic
conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A reduction in the availability of new capital could limit our ability to grow. In addition, we will
be required to distribute in respect of each taxable year at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, for such taxable year to our stockholders to maintain our
qualification as a RIC. Amounts so distributed will not be available to fund new investments or repay maturing debt. An inability on our part to access the capital markets successfully could limit our ability to grow our business and execute our
business strategy fully and could decrease our earnings, if any, which would have an adverse effect on the value of our securities.
Further, we may
pursue growth through acquisitions or strategic investments in new businesses. Completion and timing of any such acquisitions or strategic investments may be subject to a number of contingencies and risks. There can be no assurance that the
integration of an acquired business will be successful or that an acquired business will prove to be profitable or sustainable.
Regulations
governing our operation as a BDC affect our ability to, and the way in which we may, raise additional capital.
We may issue debt securities or
preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities, up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we will be
permitted as a BDC to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, as amended, equals at least 150% of our gross assets less all liabilities and indebtedness not represented by senior securities,
after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments at a time when such sales may be disadvantageous to us in
order to repay a portion of its indebtedness. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss.
Furthermore, equity capital may be difficult to raise because, subject to some limited exceptions we are not generally able to issue and sell our common stock
at a price below NAV per share. We may, however, sell our common stock, or warrants, options or rights to acquire shares of our common stock, at a price below the then-current NAV per share of our common stock if our Board determines that such sale
is in our best interests, and if our stockholders, including a majority of those stockholders that are not affiliated with us, approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a
price that, in the determination of our Board, closely approximates the market value of such securities (less any distributing commission or discount). We do not currently have authorization from our stockholders to issue our common stock at a price
below the then-current NAV per share.
Stockholders may be required to pay tax in excess of the cash they receive.
Under our dividend reinvestment plan, if a stockholder owns shares of our common stock, the stockholder will have all cash distributions automatically
reinvested in additional shares of our common stock unless such stockholder, or his, her or its nominee on such stockholders behalf, specifically opts out of the dividend reinvestment plan by delivering a written notice to the plan
administrator prior to the record date of the next distribution. If a stockholder does not opt out of the dividend reinvestment plan, that stockholder will be deemed to have received, and for U.S. federal income tax purposes will be
taxed on, the amount reinvested in our common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, a stockholder may have to use funds from other sources to pay U.S.
federal income tax liability on the value of the common stock received. Even if a stockholder chooses to opt out of the dividend reinvestment plan, we will have the ability to declare a large portion of a dividend in shares of our common
stock instead of in cash in order to satisfy the Annual Distribution Requirement (as defined herein under the heading Item 1(c). Description of BusinessRegulation as a Business Development CompanyElection to Be Taxed as a
RIC ). As long as a portion of this dividend is paid in cash and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder generally will be subject
to tax on 100% of the fair market value of the dividend on the date the dividend is received by the stockholder in the same manner as a cash dividend, even though most of the dividend was paid in shares of common stock.
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We may have difficulty paying our required distributions if we recognize income before, or without,
receiving cash representing such income.
For U.S. federal income tax purposes, we will include in income certain amounts that we have not yet
received in cash, such as the accretion of OID. This may arise if we receive warrants in connection with the making of a loan and in other circumstances, or through contracted PIK interest, which represents contractual interest added to the loan
balance and due at the end of the loan term. Such OID, which could be significant relative to our overall investment activities, or increases in loan balances as a result of contracted PIK arrangements, will be included in income before we receive
any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.
Since in certain
cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term
capital losses, if any, to maintain our qualification as a RIC. In such a case, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to
meet these distribution requirements. If we are not able to obtain such cash from other sources, we may fail to qualify as a RIC and thus be subject to corporate-level income tax.
We may be subject to withholding of U. S. Federal income tax on distributions for non-U.S. stockholders.
Distributions by a RIC generally are treated as dividends for U.S. tax purposes, and will be subject to U.S. income or withholding tax unless the
stockholder receiving the dividend qualifies for an exemption from U.S. tax, or the distribution is subject to one of the special look-through rules described below. Distributions paid out of net capital gains can qualify for a reduced rate of
taxation in the hands of an individual U.S. stockholder, and an exemption from U.S. tax in the hands of a non-U.S. stockholder.
Properly reported dividend distributions by RICs paid out of certain interest income (such distributions, interest-related dividends) are
generally exempt from U.S. withholding tax for non-U.S. stockholders. Under such exemption, a non-U.S. stockholder generally may receive interest-related dividends free
of U.S. withholding tax if the stockholder would not have been subject to U.S. withholding tax if it had received the underlying interest income directly. No assurance can be given as to whether any of our distributions will be eligible for this
exemption from U.S. withholding tax or, if eligible, will be designated as such by us. In particular, the exemption does apply to distributions paid in respect of a RICs non-U.S. source interest income,
its dividend income or its foreign currency gains. In the case shares of our common stock held through an intermediary, the intermediary may withhold U.S. federal income tax even if we designate the payment as a dividend eligible for the exemption.
Also, because our common stock will be subject to significant transfer restrictions, and an investment in our common stock will generally be illiquid, non-U.S. stockholders whose distributions on our common
stock are subject to U.S. withholding tax may not be able to transfer their shares of our common stock easily or quickly or at all.
We may retain
income and capital gains in excess of what is permissible for excise tax purposes and such amounts will be subject to 4% U.S. federal excise tax, reducing the amount available for distribution to stockholders.
We may retain some income and capital gains in the future, including for purposes of providing additional liquidity, which amounts would be subject to the 4%
U.S. federal excise tax. In that event, we will be liable for the tax on the amount by which it does not meet the foregoing distribution requirement. See Item 1(c). Description of BusinessRegulation as a Business Development
CompanyTaxation as a RIC.
Our business may be adversely affected if it fails to maintain its qualification as a RIC.
To maintain RIC tax treatment under the Code, we must meet the Annual Distribution Requirement, 90% Income Test and Diversification Tests described below and
defined and further described in Item 1(c). Description of BusinessRegulation as a Business Development CompanyElection to Be Taxed as a RIC . The Annual Distribution Requirement will be satisfied if we distribute
dividends to our stockholders in respect of each taxable year of an amount generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for distributions paid. In this regard, a RIC may, in
certain cases, satisfy the Annual Distribution Requirement by distributing dividends relating to a taxable year after the close of such taxable year under the spillback dividend provisions of Subchapter M of the Code. We will be subject
to tax, at regular corporate rates, on any retained income and/or gains, including any short-term capital gains or long-term capital gains. We must also satisfy the Excise Tax Avoidance Requirement, which is an additional distribution requirement
with respect to each calendar year in order to avoid the imposition of a 4% excise tax on the amount of any under-distribution. Because we use debt financing, we are subject to (i) an asset coverage ratio requirement under the 1940 Act and are
subject to (ii) certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirements. If we are unable to obtain cash from
other sources, or chose or be required to retain a portion of our taxable income or gains, it could (i) be required to pay excise tax and (ii) fail to qualify for RIC tax treatment, and thus become subject to corporate-level income tax on
its taxable income (including gains).
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The 90% Income Test will be satisfied if we earn at least 90% of its gross income each taxable year from
distributions, interest, gains from the sale of stock or securities, or other income derived from the business of investing in stock or securities. The Diversification Tests will be satisfied if we meet certain asset diversification requirements at
the end of each quarter of our taxable year. To satisfy the Diversification Tests, at least 50% of the value of our assets at the close of each quarter of each taxable year must consist of cash, cash equivalents (including receivables), U.S.
government securities, securities of other RICs, and other acceptable securities, and no more than 25% of the value of its assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of
two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain qualified publicly traded partnerships. Failure to meet
these requirements may result in us having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such
dispositions could be made at disadvantageous prices and could result in substantial losses.
We may invest in certain debt and equity investments through
taxable subsidiaries and the net taxable income of these taxable subsidiaries will be subject to federal and state corporate income taxes. We also may invest in certain foreign debt and equity investments that could be subject to foreign taxes (such
as income tax, withholding, and value added taxes). If we fail to maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income
available for distribution, and the amount of our distributions.
Certain investors are limited in their ability to make significant investments in
us.
Private funds that are excluded from the definition of investment company either pursuant to Section 3(c)(1) or 3(c)(7) of
the 1940 Act are restricted from acquiring directly or through a controlled entity more than 3% of our total outstanding voting stock (measured at the time of the acquisition). Investment companies registered under the 1940 Act and BDCs, such as us,
are also currently subject to this restriction as well as other limitations under the 1940 Act that would restrict the amount that they are able to invest in our securities. As a result, certain investors will be limited in their ability to make
significant investments in us at a time that they might desire to do so. The SEC has proposed Rule 12d1-4 under the 1940 Act. Subject to certain conditions, proposed Rule
12d1-4 would provide an exemption to permit acquiring funds to invest in the securities of other registered investment companies and BDCs in excess of the limits currently prescribed by the 1940 Act.
Our business could be adversely affected in the event we default under our existing credit facilities or any future credit or other borrowing facility.
We have entered into, and additionally may enter into, one or more credit facilities. The closing of any additional credit facilities is
contingent on a number of conditions including, without limitation, the negotiation and execution of definitive documents relating to such credit facility. If we obtain any additional credit facilities, we intend to use borrowings under such credit
facilities to make additional investments and for other general corporate purposes. However, there can be no assurance that we will be able to close such additional credit facilities or obtain other financing.
In the event we default under one of our credit facilities or any other future borrowing facility, our business could be adversely affected as we may be
forced to sell a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support working capital requirements under the relevant credit facility or
such future borrowing facility, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, following any such default, the agent for the lenders under any future
borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material adverse effect on our business, ability to
pay dividends, financial condition, results of operations and cash flows. If we were unable to obtain a waiver of a default from the lenders or holders of that indebtedness, as applicable, those lenders or holders could accelerate repayment under
that indebtedness, which might result in cross-acceleration of other indebtedness. An acceleration could have a material adverse impact on our business, financial condition and results of operations.
In addition, following any such default, the agent for the lenders under the relevant credit facility or such future credit or other borrowing facility could
assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Lastly, as a result of any such default, we may be unable to obtain additional leverage, which could, in turn, affect our
return on capital.
Our strategy involves a high degree of leverage. We intend to continue to finance our investments with borrowed money, which
will magnify the potential for gain or loss on amounts invested and increases the risk of investing in us. The risks of investment in a highly leveraged fund include volatility and possible distribution restrictions.
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The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is
generally considered a speculative investment technique and increases the risks associated with investing in our securities. However, we have borrowed from, and may in the future issue debt securities to, banks, insurance companies and other
lenders. Lenders of these funds have fixed dollar claims on our assets that are superior to the claims
of our common stockholders, and we would expect
such lenders to seek recovery against our assets in the event of a default. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instruments we may enter into with lenders. In
addition, under the terms of our credit facilities and any borrowing facility or other debt instrument we may enter into, we are likely to be required to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed
under such facility or instrument before applying such net proceeds to any other uses. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby
magnifying losses or eliminating our stake in a leveraged investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively
affect our ability to make dividend payments on our common stock or preferred stock. Our ability to service any debt will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. In
addition, our common stockholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the base management fee payable to the Adviser.
There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our
credit facilities or otherwise in an amount sufficient to enable us to repay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before it matures. There can be no assurance that
we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets or seeking additional equity. There can be no assurance that
any such actions, if necessary, could be effected on commercially reasonable terms or at all, or on terms that would not be disadvantageous to stockholders or on terms that would not require us to breach the terms and conditions of our existing or
future debt agreements.
As a BDC, we are generally required to meet a coverage ratio of total assets to total borrowings and other senior securities,
which include all of our borrowings and any preferred stock that we may issue in the future, of at least 150%. If this ratio declines below 150%, we will not be able to incur additional debt and could be required to sell a portion of our investments
to repay some debt when we are otherwise disadvantageous for us to do so. This could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of leverage that we employ will depend on the
Advisers assessment of market and other factors at the time of any proposed borrowing. We cannot assure stockholders that we will be able to obtain credit at all or on terms acceptable to it.
We are subject to risks associated with the current interest rate environment, and to the extent we use debt to finance our investments, changes in
interest rates may affect our cost of capital and net investment income. Further, changes in LIBOR or its discontinuation may adversely affect the value of LIBOR-indexed securities, loans, and other financial obligations or extensions of credit in
our portfolio.
An increase in interest rates from their comparatively low present levels may make it more difficult for our portfolio companies to
service their obligations under the debt investments that we hold. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their
business and operations and could, over time, lead to increased defaults.
In addition, concerns have been publicized that some of the member banks
surveyed by the British Bankers Association (the BBA) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate
applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those
they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in
various jurisdictions are ongoing. These developments may have adversely affected the interest rates on securities, loans, and other financial obligations or extensions of credit whose interest payments were determined by reference to LIBOR. Any
future similar developments could, in turn, reduce the value of such instruments held by or due to us.
In July 2017, the head of the United Kingdom
Financial Conduct Authority (the FCA), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the
continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It appears highly likely that LIBOR will be discontinued or modified by 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates
Committee of the Federal Reserve Board, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury
securities (the Secured Overnight Financing Rate, or SOFR). Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is
unknown whether this or any other alternative reference rates will attain market acceptance as replacements for LIBOR. The unavailability of LIBOR presents risks to us, including the risk that any pricing or
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adjustments to our investments resulting from a substitute reference rate may adversely affect our performance or NAV. If LIBOR ceases to exist, we may need to renegotiate any credit agreements
extending beyond 2021 with our prospective portfolio companies that utilize LIBOR as a factor in determining the interest rate. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement
rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.
There can be no
assurance that all of the LIBOR-indexed securities, loans, and other financial obligations or extensions of credit in which we are invested do or will include, or be amended to include, an alternative rate-setting methodology to be used in the event
that LIBOR ceases to exist. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for or
value of any LIBOR- linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
To the extent we borrow money to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow
funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance
our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income.
In addition, a rise
in the general level of interest rates typically leads to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates may result in an increase of the amount of our
pre-incentive fee net investment income, which could make it easier for us to meet or exceed the Hurdle Amount and, as a result, increase the in incentive fees payable to the Adviser.
It remains unclear whether the cessation of LIBOR will be delayed due to COVID-19 or what form any delay may take, and
there are no assurances that there will be a delay. It is also unclear what the duration and severity of COVID-19 will be, and whether this will impact LIBOR transition planning.
COVID-19 may also slow regulators and others efforts to develop and implement alternative reference rates, which could make LIBOR transition planning more difficult, particularly if the cessation
of LIBOR is not delayed but an alternative reference rate does not emerge as industry standard. In anticipation of the cessation of LIBOR, we may need to renegotiate credit facilities and any credit agreements extending beyond 2021 with our
prospective portfolio companies that utilize LIBOR as a factor in determining the interest rate or rely on certain fallback provisions that could cause interest rates to shift to a base rate plus a margin. Any such renegotiations may have a material
adverse effect on our business, financial condition and results of operations, including as a result of changes in interest rates payable to us by our portfolio companies or payable by us under our credit facilities.
We are and may be subject to restrictions under our credit facilities and any future credit or other borrowing facility that could adversely impact our
business.
Our credit facilities, and any future borrowing facility, may be backed by all or a portion of our loans and securities on which the
lenders may have a security interest. We currently pledge and may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instrument we enter into with lenders. Like with its current credit
facilities, we expect that any future security interests we grant will be set forth in a pledge and security agreement and evidenced by the filing of financing statements by the agent for the lenders, and we expect that the custodian for our
securities serving as collateral for such loan would include in the custodians electronic systems notices indicating the existence of such security interests and, following notice of occurrence of an event of default, if any, and during its
continuance, will only accept transfer instructions with respect to any such securities from the lender or its designee. Under our current credit facilities, we are subject to customary events of default. If we were to default under the terms of our
current credit facilities and any future borrowing facility, the agent for the applicable lenders would be able to assume control of the timing of disposition of the assets pledged under the facility, which could include any or all of our assets
securing such debt. Such remedial action would have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, the security interests as well as negative covenants under its credit facilities, or any other future borrowing facility, may limit our ability
to create liens on assets to secure additional debt and may make it difficult for us to restructure or refinance indebtedness at or prior to maturity or obtain additional debt or equity financing. In addition, if our borrowing base under our credit
facilities or any other borrowing facility were to decrease, we would be required to secure additional assets in an amount equal to any borrowing base deficiency. In the event that all of our assets are secured at the time of such a borrowing base
deficiency, we could be required to repay advances under the relevant credit facility or any other borrowing facility or make deposits to a collection account, either of which could have a material adverse impact on our ability to fund future
investments and to pay dividends.
In addition, under our credit facilities, or any other future borrowing facility, we may be limited as to how borrowed
funds may be used, which may include restrictions on geographic and industry concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings, as well as regulatory restrictions on leverage which may
affect the amount of funding that may be obtained.
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There may also be certain requirements relating to portfolio performance, including required minimum
portfolio yield and limitations on delinquencies and charge-offs, a violation of which could limit further advances and, in some cases, result in an event of default. An event of default under our credit facilities or any other borrowing facility
could result in an accelerated maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition. This could reduce our revenues and, by delaying any cash payment allowed to us
under the relevant credit facility or any other borrowing facility until the lenders have been paid in full, reduce our liquidity and cash flow and impair its ability to grow its business and maintain its qualification as a RIC.
We may be the target of litigation.
We may be the
target of securities litigation in the future, particularly if the value of shares of our common stock fluctuates significantly. We could also generally be subject to litigation, including derivative actions by stockholders. In addition, our
investment activities subject it to litigation relating to the bankruptcy process and the normal risks of becoming involved in litigation by third parties. This risk is somewhat greater where we exercise control or significant influence over a
portfolio companys direction. Any litigation could result in substantial costs and divert managements attention and resources from our business and cause a material adverse effect on our business, financial condition and results of
operations.
There is a risk that investors in our common stock may not receive dividends or that our dividends may not grow over time and that
investors in our debt securities may not receive all of the interest income to which they are entitled.
We intend to make distributions on a
quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or
year-to-year increases in cash distributions. If we declare a dividend and if more stockholders opt to receive cash distributions rather than participate in its
reinvestment plan, we may be forced to sell some of its investments in order to make cash dividend payments.
In addition, due to the asset coverage test
applicable to us as a BDC, we may be limited in our ability to make distributions. Certain of our credit facilities may also limit our ability to declare dividends if we default under certain provisions. Further, if we invest a greater amount of
assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.
The above-referenced restrictions
on distributions may also inhibit our ability to make required interest payments to holders of our debt, which may cause a default under the terms of its debt agreements. Such a default could materially increase our cost of raising capital, as well
as cause us to incur penalties under the terms of its debt agreements.
If we do not invest a sufficient portion of our assets in qualifying assets,
we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.
To maintain its status as a BDC, we
are not permitted to acquire any assets other than qualifying assets specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Subject
to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying
asset only if such issuer has a common equity market capitalization that is less than $250 million at the time of such investment. Subject to certain exceptions for follow-on investments and investments
in distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such issuer has a common equity market capitalization that is less than
$250 million at the time of such investment.
We may be precluded from investing in what we believe are attractive investments if such investments
are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the
1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at
inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such
investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows.
The majority of our portfolio investments are recorded at fair value as determined in good faith by our Board and, as a result, there may be uncertainty
as to the value of our portfolio investments.
Many of our portfolio investments are in the form of loans and securities that are not publicly
traded. The fair value of loans, securities and other investments that are not publicly traded may not be readily determinable, and we will value these investments at
fair value
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as determined in good faith by our Board, including to reflect significant events affecting the value of our investments. Most, if not all, of our investments (other than cash and cash
equivalents) will be classified as Level 3 under the FASB Accounting Standards Codification, Fair Value Measurements and Disclosures (ASC Topic 820). This means that our portfolio valuations will be based on unobservable inputs and our own
assumptions about how market participants would price the asset or liability in question. We expect that inputs into the determination of fair value of our portfolio investments will require significant management judgment or estimation. Even if
observable market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We retain the services of one or more independent service providers to review
the valuation of these loans and securities. However, the ultimate determination of fair value will be made by our Board and not by such third-party valuation firm. The types of factors that our Board may take into account in determining the fair
value of our investments generally include, as appropriate, comparison to publicly-traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable
value of any collateral, the portfolio companys ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, changes in the interest rate environment and the credit markets
generally that may affect the price at which similar investments may be made in the future, comparisons to publicly traded companies, relevant credit market indices and other relevant factors.
Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods
of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these loans and securities existed. Also, since these valuations are, to a large extent,
based on estimates, comparisons and qualitative evaluations of private information, our fair valuation process could make it more difficult for investors to accurately value our investments and could lead to undervaluation or overvaluation of our
securities. In addition, the valuation of these types of securities may result in substantial write-downs and earnings volatility. Also, privately held companies frequently have less diverse product lines and smaller market presence than larger
public competitors.
Our NAV could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the
values that we ultimately realize upon the disposal of such loans and securities. Further, our NAV as of a particular date may be materially greater than or less than the value that would be realized if our assets were to be liquidated as of such
date. For example, if we were required to sell a certain asset or all or a substantial portion of our assets on a particular date, the actual price that we would realize upon the disposition of such asset or assets could be materially less than the
value of such asset or assets as reflected in our NAV. Volatile market conditions could also cause reduced liquidity in the market for certain assets, which could result in liquidation values that are materially less than the values of such assets
as reflected in the NAV.
We will adjust quarterly the valuation of our portfolio to reflect our Boards determination of the fair value of each
investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation.
We may experience fluctuations in our quarterly operating results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the loans and debt
securities we acquire, the default rate on such loans and securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets
and general economic conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
New or modified laws or regulations governing our operations may adversely affect our business.
We and our portfolio companies are subject to regulation by laws at the U.S. federal, state and local levels. These laws and regulations, as well as their
interpretation, may change from time to time, including as the result of interpretive guidance or other directives from the U.S. President and others in the executive branch, and new laws, regulations and interpretations may also come into effect.
Any such new or changed laws or regulations could have a material adverse effect on our business. In addition, if we do not comply with applicable laws and regulations, we could lose any licenses that we then hold for the conduct of its business and
may be subject to civil fines and criminal penalties.
Additionally, changes to the laws and regulations governing our operations, including those
associated with RICs, may cause us to alter our investment strategy in order to avail our self of new or different opportunities or result in the imposition of corporate-level taxes on us. Such changes could result in material differences to the
strategies and plans set forth therein and may shift our investment focus from the areas of Crescents expertise to other types of investments in which Crescent may have little or no expertise or experience. Any such changes, if they occur,
could have a material adverse effect on our results of operations and the value of an investors investment. If we invest in commodity interests in the future, the Adviser may determine not to use investment strategies that trigger additional
regulation by the U.S. Commodity Futures Trading Commission (CFTC) or may determine to operate subject to CFTC regulation, if applicable. If we or the Adviser were to operate subject to CFTC regulation, we may incur additional expenses
and would be subject to additional regulation.
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On March 23, 2018, the SBCAA was signed into law. The SBCAA, among other things, modified the
applicable provisions of the 1940 Act to reduce the required asset coverage ratio applicable to a BDC from 200% to 150% subject to certain approval, time and disclosure requirements.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, which increased from
$50 billion to $250 billion the asset threshold for designation of systemically important financial institutions or SIFIs subject to enhanced prudential standards set by the Federal Reserve Board, staggering
application of this change based on the size and risk of the covered bank holding company. On May 30, 2018, the Federal Reserve Board voted to consider changes to the Volcker Rule that would loosen compliance requirements for all banks.
On January 20, 2021, Mr. Joseph R. Biden was inaugurated as President of the United States. As a candidate, President Biden called for
significant policy changes and the reversal of several of the prior presidential administrations policies, including significant changes to U.S. fiscal, tax, trade, healthcare, immigration, foreign, and government regulatory policy. In this
regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and
difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a
corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current presidential administration implements
changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas.
Further, there has been increasing commentary amongst regulators and intergovernmental institutions, including the Financial Stability Board and
International Monetary Fund, on the topic of so called shadow banking (a term generally taken to refer to credit intermediation involving entities and activities outside the regulated banking system). We are an entity outside the
regulated banking system and certain of our activities may be argued to fall within this definition and, in consequence, may be subject to regulatory developments. As a result, we and the Adviser could be subject to increased levels of oversight and
regulation. This could increase costs and limit operations. In an extreme eventuality, it is possible that such regulations could render our continued operation unviable and lead to our premature termination or restructuring.
The United Kingdom referendum decision to leave the European Union may create significant risks and uncertainty for global markets and our investments.
On January 31, 2020, the United Kingdom (UK) officially withdrew from the European Union (EU) and the two sides
entered into a transition phase, where the UK effectively remained in the EU from an economic perspective, but no longer had any political representation in the EU parliament. The transition period concluded on December 31, 2020, and EU law no
longer applies in the UK.
On December 30, 2020, the UK and the EU signed an EU-UK Trade and Cooperation
Agreement (UK/EU Trade Agreement), which went into effect on January 1, 2021 and sets out the foundation of the economic and legal framework for trade between the UK and the EU. As the UK/EU Trade Agreement is a new legal framework,
the implementation of the UK/EU Trade Agreement may result in uncertainty in its application and periods of volatility in both the UK and wider European markets. The UKs exit from the EU is expected to result in additional trade costs and
disruptions in this trading relationship. Furthermore, there is the possibility that either party may impose tariffs on trade in the future in the event that regulatory standards between the EU and the UK diverge. The terms of the future
relationship may cause continued uncertainty in the global financial markets, and adversely affect our ability, and the ability of our portfolio companies, to execute our respective strategies and to receive attractive returns.
In particular, currency volatility may mean that our returns and the returns of our portfolio companies will be adversely affected by market movements and may
make it more difficult, or more expensive, for us to implement appropriate currency hedging. Potential declines in the value of the British Pound and/or the euro against other currencies, along with the potential downgrading of the UKs
sovereign credit rating, may also have an impact on the performance of any of our portfolio companies located in the UK or Europe.
In addition to the
effects on our investments in European issuers, the unavoidable uncertainties and events related to Brexit could negatively affect the value and liquidity of the our other investments, increase taxes and costs of business and cause volatility in
currency exchange rates and interest rates. European, UK or worldwide political, regulatory, economic or market conditions and could contribute to instability in political institutions, regulatory agencies and financial markets. Brexit could also
lead to legal uncertainty and politically divergent national laws and regulations as the new relationship between the UK and EU is further defined and as the UK determines which EU laws to replace or replicate. In addition, Brexit could lead to
further disintegration of the EU and related political stresses (including those related to sentiment against cross border capital movements and activities of investors like us), prejudice to financial services businesses that are conducting
business in the EU and which are based in the UK, legal uncertainty regarding achievement of compliance with applicable financial and commercial laws and regulations in view of the expected steps to be taken pursuant to or in contemplation of
Brexit. Any of these effects of Brexit, and others that cannot be anticipated, could adversely affect the Companys business, results of operations and financial condition.
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Our Board may change our investment objectives, operating policies and strategies without prior notice
or stockholder approval.
Our Board has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our investment
objectives, operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. Under
Maryland law, we also cannot be dissolved without prior stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the market price of its common
stock. Nevertheless, any such changes could adversely affect our business and impair our ability to make distributions to our stockholders.
The
Adviser and the Administrator each have the ability to resign on 60 days notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in operations that could adversely affect our financial
condition, business and results of operations.
The Adviser has the right under the Investment Advisory Agreement to resign as our investment
adviser at any time upon not less than 60 days written notice, whether we have found a replacement or not. Similarly, the Administrator has the right under the Administration Agreement to resign at any time upon not less than 60 days
written notice, whether we have found a replacement or not. If the Adviser or the Administrator were to resign, we may not be able to find a new investment adviser or administrator, as applicable, or hire internal management with similar expertise
and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of
operations as well as our ability to pay distributions to our stockholders are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment or administrative
activities, as applicable, is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Adviser and the Administrator, as applicable. Even if we are
able to retain a comparable service provider or individuals performing such services are retained, whether internal or external, their integration and lack of familiarity with our investment objectives may result in additional costs and time delays
that may adversely affect our business, financial condition, results of operations and cash flows.
In addition, if the Adviser resigns or is terminated,
we would lose the benefits of our relationship with Crescent, including the use of its communication and information systems, insights into our existing portfolio, market expertise, sector and macroeconomic views and due diligence capabilities, as
well as any investment opportunities referred to us by Crescent, and we would be required to change our name, which may have a material adverse impact on its operations.
We are highly dependent on information systems, and systems failures or cyber-attacks could significantly disrupt its business, which may, in turn,
negatively affect the value of shares of our common stock and our ability to pay distributions.
Our business is highly dependent on
Crescents communications and information systems, to which we have access through the Administrator. In addition, certain of these systems are provided to Crescent by third-party service providers. Any failure or interruption of such systems,
including as a result of the termination of an agreement with any such third-party service provider, could cause delays or other problems in our activities. This, in turn, could have a material adverse effect on our operating results and negatively
affect the market price of our Common Stock and its ability to pay dividends to its stockholders.
Cybersecurity risks and cyber incidents may
adversely affect our business by causing a disruption to our operations, a compromise or corruption of its confidential information and/or damage to its business relationships.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These
incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing
operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen information, misappropriation of assets, increased cybersecurity protection and insurance costs,
litigation and damage to our business relationships. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations.
In addition, we may be required to expend significant additional resources to modify its protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We face risks posed to our
information systems, both internal and those provided to it by third-party service providers. We, the Adviser and its affiliates have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions,
but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber-incident, may be ineffective and do not guarantee that a cyber-incident will not occur or that our financial results, operations or confidential
information will not be negatively impacted by such an incident.
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Third parties with which we do business (including those that provide services to us) may also be sources or
targets of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower
information.
While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss,
exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may
also result in cost increases due to system changes and the development of new administrative processes.
We and the Adviser are subject to
regulations and SEC oversight. If we or the Adviser fail to comply with applicable requirements, it may adversely impact our results relative to companies that are not subject to such regulations.
As a BDC, we are subject to a portion of the 1940 Act. In addition, we have elected to be treated, and intend to operate in a manner so as to continuously
qualify, as a RIC in accordance with the requirements of Subchapter M of the Code. The 1940 Act and the Code impose various restrictions on the management of a BDC, including related to portfolio construction, asset selection, and tax. These
restrictions may reduce the chances that we will achieve the same results as other vehicles managed by Crescent and/or the Adviser.
However, if we do not
maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment
company, we would be subject to substantially more regulatory restrictions under the 1940 Act which would significantly decrease our operating flexibility.
In addition to these and other requirements applicable to us, the Adviser is subject to regulatory oversight by the SEC. To the extent the SEC raises concerns
or has negative findings concerning the manner in which we or the Adviser operates, it could adversely affect our business.
We are subject to risks
related to corporate social responsibility.
Our business (including that of our portfolio companies) faces increasing public scrutiny related to
environmental, social and governance (ESG) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity, equity and inclusion, environmental stewardship, support for local
communities, corporate governance and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the value of our brand, our relationship with existing and future portfolio
companies, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations.
Additionally, new regulatory initiatives related to ESG that are applicable to us and our portfolio companies could adversely affect our business. In May
2018, the European Commission adopted an action plan on financing sustainable growth. The action plan is, among other things, designed to define and reorient investment toward sustainability. The action plan contemplates: establishing EU
labels for green financial products; increasing disclosure requirements in the financial services sector around ESG and strengthening the transparency of companies on their ESG policies and introducing a green supporting factor in the EU
prudential rules for banks and insurance companies to incorporate climate risks into banks and insurance companies risk management policies. There is a risk that a significant reorientation in the market following the implementation of
these and further measures could be adverse to our portfolio companies if they are perceived to be less valuable as a consequence of, e.g., their carbon footprint or greenwashing (i.e., the holding out of a product as having green or
sustainable characteristics where this is not, in fact, the case). We and our portfolio companies are subject to the risk that similar measures might be introduced in other jurisdictions in the future.
Additionally, compliance with any new laws or regulations increases our regulatory burden and could make compliance more difficult and expensive, affect the
manner in which we or our portfolio companies conduct our businesses and adversely affect our profitability.
Risks Relating to Our Investments
Economic recessions or downturns could impair our portfolio companies, and defaults by our portfolio companies will harm our operating
results.
Many of the portfolio companies in which we expect to make investments are likely to be susceptible to economic slowdowns or recessions
and may be unable to repay their loans during such periods. Therefore, the number of our non-performing assets is likely to increase and the value of our portfolio is likely to decrease during such periods.
Adverse economic conditions may also decrease the value of collateral securing some of our loans and debt securities and the value of our equity investments. If the value of collateral underlying our loan declines during the term of the loan, a
portfolio company may not be able to obtain the necessary funds to repay the loan at maturity through refinancing. Decreasing collateral value may hinder a portfolio companys ability to refinance our loan because the underlying collateral
cannot satisfy the debt service coverage requirements necessary to obtain new financing. Thus, economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic
conditions also could increase our funding costs, limit its access to the capital markets or result in a decision by
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lenders not to extend credit to us. We consider a number of factors in making our investment decisions, including, but not limited to, the financial condition and prospects of a portfolio company
and its ability to repay our loan. Unfavorable economic conditions could negatively affect the valuations of our portfolio companies and, as a result, make it more difficult for such portfolio companies to repay or refinance our loan. Therefore,
these events could prevent us from increasing our investments and harm our operating results. A portfolio companys failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially,
acceleration of the time when the loans are due, termination of the portfolio companys loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize its ability to meet its obligations under the
loans and debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company, which may include the waiver of certain financial covenants.
Furthermore, if one of our portfolio companies were to file for bankruptcy protection, depending on the facts and circumstances, including the extent to which we actually provide significant managerial assistance to that portfolio company, a
bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to claims of other creditors, even though we may have structured our investment as senior secured debt.
Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity, and rising interests
rates may make it more difficult for portfolio companies to make periodic payments on their loans.
Our portfolio companies may be unable to repay
or refinance outstanding principal on their loans at or prior to maturity. This risk and the risk of default is increased to the extent that the loan documents do not require the portfolio companies to pay down the outstanding principal of such debt
prior to maturity. In addition, if general interest rates rise, there is a risk that our portfolio companies will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us. Any failure of one or
more portfolio companies to repay or refinance its debt at or prior to maturity or the inability of one or more portfolio companies to make ongoing payments following an increase in contractual interest rates could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
We may hold the debt securities of leveraged companies.
Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may have limited financial resources and may
be unable to meet their obligations under their loans and debt securities that we hold. Such developments may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees that it
may have obtained in connection with its investment. Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion or maintain their
competitive position.
Leveraged companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant
inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may adversely and permanently affect the
portfolio company. If the proceeding is converted to a liquidation, the value of the portfolio company may not equal the liquidation value that was believed to exist at the time of the investment. The duration of a bankruptcy proceeding is also
difficult to predict, and a creditors return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective.
The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtors estate prior to any return
to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities or other obligations that we own may be lost by increases in the number and amount of claims in
the same class or by different classification and treatment. 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. In addition, certain claims
that have priority by law (for example, claims for taxes) may be substantial.
We typically invest in middle-market companies, which involves higher
risk than investments in large companies.
Investment in private and middle-market companies involves a number of significant risks. Generally,
little public information exists about these companies, and we will rely on the ability of Crescents investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable
to uncover all material information about these companies, we may not make a fully informed investment decision and may lose money on its investments. Middle-market companies may have limited financial resources and may be unable to meet their
obligations under their loans and debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees that it may have obtained in connection with
its investment. In addition, such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions and market
conditions, as well as general economic downturns. Additionally, middle-market companies are more likely to depend on the management talents and efforts of a small group of persons. Therefore, the death, disability, resignation or termination of one
or more of these persons could have a material adverse impact on one or more of the portfolio companies we invest
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in and, in turn, on us. Middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence. In
addition, our executive officers, directors and the Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in portfolio companies.
In addition, investment in middle-market companies involves a number of other significant risks, including:
they typically have shorter operating histories, narrower product lines and smaller market shares than larger
businesses, which tend to render them more vulnerable to competitors actions and market conditions, as well as general economic downturns;
they generally have less predictable operating results, may from time to time be parties to litigation, may be
engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position;
changes in laws and regulations, as well as their interpretations, may adversely affect their business, financial
structure or prospects; and
they may have difficulty accessing the capital markets to meet future capital needs, which may limit their
ability to grow or to repay their outstanding indebtedness upon maturity.
The due diligence process that the Adviser undertakes
in connection with our investments may not reveal all the facts that may be relevant in connection with an investment.
The Advisers due
diligence may not reveal all of a companys liabilities and may not reveal other weaknesses in its business. There can be no assurance that our due diligence process will uncover all relevant facts that would be material to an investment
decision. Before making an investment in, or a loan to, a company, the Adviser will assess the strength and skills of the companys management team and other factors that it believes are material to the performance of the investment. In making
the assessment and otherwise conducting customary due diligence, the Adviser will rely on the resources available to it and, in some cases, an investigation by third parties. This process is particularly important and highly subjective with respect
to newly organized entities because there may be little or no information publicly available about the entities. We may make investments in, or loans to, companies, including middle market companies, which are not subject to public company reporting
requirements, including requirements regarding preparation of financial statements, and will, therefore, depend upon the compliance by investment companies with their contractual reporting obligations and the ability of the Adviser investment
professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we and the Adviser are unable to uncover all material information about these companies, we may not make a fully informed investment
decision and may lose money on its investments. As a result, the evaluation of potential investments and the ability to perform due diligence on and effective monitoring of investments may be impeded, and we may not realize the returns that it
expects on any particular investment. In the event of fraud by any company in which we invest or with respect to which we make a loan, we may suffer a partial or total loss of the amounts invested in that company.
The lack of liquidity in our investments may adversely affect our business.
All of our assets may be invested in illiquid loans and securities, and a substantial portion of our investments in leveraged companies will be subject to
legal and other restrictions on resale or will otherwise be less liquid than more broadly traded public securities. The illiquidity of these investments may make it difficult for us to sell such investments if the need arises. In addition, if we are
required to liquidate all or a portion of its portfolio quickly, we may realize significantly less than the value at which it has previously recorded its investments. Some of our debt investments may contain interest rate reset provisions that may
make it more difficult for the borrowers to make periodic interest payments to us. In addition, some of our debt investments may not pay down principal until the end of their lifetimes, which could result in a substantial loss to us if the portfolio
companies are unable to refinance or repay their debts at maturity.
We may invest in high yield debt, or junk bonds, which has greater credit and
liquidity risk than more highly rated debt obligations.
We may also invest in debt securities which will not be rated by any rating agency and, if
they were rated, would be rated as below investment grade quality. Below investment grade securities, which are often referred to as junk, have predominantly speculative characteristics with respect to the issuers capacity to pay
interest and repay principal. They may also be illiquid and difficult to value.
Price declines and illiquidity in the corporate debt markets may
adversely affect the fair value of our portfolio investments, reducing NAV through increased net unrealized depreciation.
As a BDC, we are
required to carry its investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by the our Board, as described above in Risks Relating to our Business and StructureThe
majority of our portfolio investments are recorded at fair value as determined in good faith by the our Board and, as a result, there may be uncertainty as to the value of our portfolio investments .
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When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we
use the pricing indicated by the external event to corroborate our valuation. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of its valuation process that its investments are sold
in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations. We record decreases in the market
values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our
portfolio may reduce our NAV by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
Following an initial
investment in a portfolio company, we may make additional investments in that portfolio company as follow-on investments, in seeking to:
increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio
company;
exercise warrants, options or convertible securities that were acquired in the original or subsequent financing;
or
preserve or enhance the value of our investment.
We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our
part to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our
participation in a successful operation.
Even if we have sufficient capital to make a desired follow-on
investment, we may elect not to make a follow-on investment because we may not want to increase its level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC
requirements of the 1940 Act or the desire to maintain our qualification as a RIC.
Additionally, certain loans that we may make to portfolio companies
may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio companys obligations under any outstanding senior debt and
may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by first priority liens on the collateral will generally control the
liquidation of, and be entitled to receive proceeds from, any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic
conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment
in full of all obligations secured by the first priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid
from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio companys remaining assets, if any.
We may
also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies. Liens on such portfolio companies collateral, if any, will secure the portfolio companys
obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control
the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic
conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations after payment in full of all secured loan
obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors claims against the portfolio companys
remaining assets, if any. Additionally, we invest in unitranche loans (loans that combine both senior and mezzanine debt, generally in a first lien position), which may provide for a waterfall of cash flow priority between different lenders in the
unitranche loan. In certain instances, we may find another lender to provide the first out portion of such loan and retain the last out portion of such loan, in which case the first out portion of the loan would
generally receive priority with respect to repayment of principal, interest and any other amounts due thereunder over the last out portion of the loan that we would continue to hold.
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited
pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of such senior debt. Under a typical intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are
outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens:
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the ability to cause the commencement of enforcement proceedings against the collateral;
the ability to control the conduct of such proceedings;
the approval of amendments to collateral documents;
releases of liens on the collateral; and
waivers of past defaults under collateral documents.
We may not have the ability to control or direct such actions, even if its rights are adversely affected.
Our subordinated investments may be subject to greater risk than investments that are not similarly subordinated.
We may make subordinated investments that rank below other obligations of the borrower in right of payment. Subordinated investments are subject to greater
risk of default than senior obligations as a result of adverse changes in the financial condition of the borrower or in general economic conditions. If we make a subordinated investment in a portfolio company, the portfolio company may be highly
leveraged, and its relatively high debt-to-equity ratio may create increased risks that its operations might not generate sufficient cash flow to service all of its debt
obligations.
The disposition of our investments may result in contingent liabilities.
We currently expect that substantially all of our investments will involve loans and private securities. In connection with the disposition of an investment in
loans and private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the
purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result in contingent liabilities that ultimately result in funding obligations that
we must satisfy through its return of distributions previously made to us.
We will be subject to the risk that the debt investments we make in our
portfolio companies may be repaid prior to maturity.
We expect that our investments will generally allow for repayment at any time subject to
certain penalties. When such prepayment occurs, we intend to generally reinvest these proceeds in temporary investments, pending their future investment in accordance with our investment strategy. These temporary investments will typically have
substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a result, our results of operations
could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our ability to pay, or the amount of, dividends on our Common Stock, which could
result in a decline in the market price of our shares.
We may be subject to risks under hedging transactions and may become subject to risk
if it invests in non-U.S. securities .
The 1940 Act generally requires that 70% of our investments
be in issuers each of whom is organized under the laws of, and has its principal place of business in, any state of the United States, the District of Columbia, Puerto Rico, the Virgin Islands or any other possession of the United States. However,
our portfolio may include debt securities of non-U.S. companies, including emerging market issuers, to the limited extent such transactions and investments would not cause us to violate the 1940 Act. We expect
that these investments would focus on the same secured debt, unsecured debt and related equity security investments that we make in U.S. middle-market companies and, accordingly, would be complementary to our overall strategy and enhance the
diversity of our holdings. Investing in loans and securities of emerging market issuers involves many risks including economic, social, political, financial, tax and security conditions in the emerging market, potential inflationary economic
environments, regulation by foreign governments, different accounting standards and political uncertainties. Economic, social, political, financial, tax and security conditions also could negatively affect the value of emerging market companies.
These factors could include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States,
higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations or judgments or foreclosing on collateral, lack of uniform accounting and
auditing standards and greater price volatility.
Engaging in either hedging transactions or investing in foreign loans and securities would entail
additional risks to our stockholders. We could, for example, use instruments such as interest rate swaps, caps, collars and floors and, if we were to invest in foreign loans and securities, we could use instruments such as forward contracts or
currency options and borrow under a credit facility in currencies selected to minimize our foreign currency exposure. In each such case, we generally would seek to hedge against fluctuations of the relative values of our portfolio positions from
changes in market interest rates or currency exchange rates. Hedging against a decline
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in the values of our portfolio positions would not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of the positions declined. However,
such hedging could establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions could also limit the opportunity for gain if the values of
the underlying portfolio positions increased. Moreover, it might not be possible to hedge against an exchange rate or interest rate fluctuation that was so generally anticipated that we would not be able to enter into a hedging transaction at an
acceptable price.
While we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in
currency exchange rates or interest rates could result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a
hedging strategy and price movements in the portfolio positions being hedged could vary. Moreover, for a variety of reasons, we might not seek to establish a perfect correlation between the hedging instruments and the portfolio holdings being
hedged. Any such imperfect correlation could prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it might not be possible for us to hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in non-U.S. currencies because the value of those loans and securities would likely fluctuate as a result of factors not related to currency fluctuations.
We may not realize anticipated gains on the equity interests in which it invests.
When we invest in loans and debt securities, it may acquire warrants or other equity securities of portfolio companies as well. We may also invest in equity
securities directly. To the extent we hold equity investments, we will attempt to dispose of them and realize gains upon such disposition. However, the equity interests we receive may not appreciate in value and, may decline in value. As a result,
we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses it experiences.
Our investments in OID and PIK interest income may expose us to risks associated with such income being required to be included in accounting income and
taxable income prior to receipt of cash.
Our investments may include OID and PIK instruments. To the extent OID and PIK interest income constitute
a portion of our income, we will be exposed to risks associated with such income being required to be included in an accounting income and taxable income prior to receipt of cash, including the following:
OID instruments and PIK securities may have unreliable valuations because the accretion of OID as interest income
and the continuing accruals of PIK securities require judgments about their collectability and the collectability of deferred payments and the value of any associated collateral;
OID income may also create uncertainty about the source of our cash dividends;
OID instruments may create heightened credit risks because the inducement to the borrower to accept higher
interest rates in exchange for the deferral of cash payments typically represents, to some extent, speculation on the part of the borrower;
for accounting purposes, cash distributions to stockholders that include a component of accreted OID income do
not come from paid-in capital, although they may be paid from the offering proceeds. Thus, although a distribution of accreted OID income may come from the cash invested by the stockholders, the 1940 Act does
not require that shareholders be given notice of this fact;
generally, we must recognize income for income tax purposes no later than when it recognizes such income for
accounting purposes;
the higher interest rates on PIK securities reflects the payment deferral and increased credit risk associated
with such instruments and PIK securities generally represent a significantly higher credit risk than coupon loans;
the presence of accreted OID income and PIK interest income create the risk of
non-refundable cash payments to the Adviser in the form of incentive fees on income based on non-cash accreted OID income and PIK interest income accruals that may never
be realized;
even if accounting conditions are met, borrowers on such securities could still default when our actual
collection is expected to occur at the maturity of the obligation;
OID and PIK create the risk that incentive fees will be paid to the Adviser based on
non-cash accruals that ultimately may not be realized, which the Adviser
will be under no obligation to reimburse us or these fees; and
PIK interest has the effect of generating investment income and increasing the incentive fees payable at a
compounding rate. In addition, the deferral of PIK interest also reduces the loan-to-value ratio at a compounding rate.
You may receive dividends in the form of Common Stock instead of cash, which could result in adverse tax consequences to you.
In order to satisfy the Annual Distribution Requirement applicable to RICs, we have the ability to declare a large portion of a dividend
in shares of our Common Stock instead of in cash. As long as a portion of such dividend is paid in cash and certain requirements are
40
met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder would be taxed on 100% of the dividend in the same manner as a cash
dividend, even though most of the dividend was paid in shares of our Common Stock.
Changes in healthcare laws and other regulations applicable to
some of our portfolio companies businesses may constrain their ability to offer their products and services.
Changes in healthcare or other laws
and regulations applicable to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less
profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material
effect on the business and operations of some of our portfolio companies.
Our investments in the consumer products and services sector are subject
to various risks including cyclical risks associated with the overall economy.
General risks of companies in the consumer products and services
sector include cyclicality of revenues and earnings, economic recession, currency fluctuations, changing consumer tastes, extensive competition, product liability litigation and increased government regulation. Generally, spending on consumer
products and services is affected by the health of consumers. Companies in the consumer products and services sectors are subject to government regulation affecting the permissibility of using various food additives and production methods, which
regulations could affect company profitability. A weak economy and its effect on consumer spending would adversely affect companies in the consumer products and services sector.
Our investments in the financial services sector are subject to various risks including volatility and extensive government regulation.
These risks include the effects of changes in interest rates on the profitability of financial services companies, the rate of corporate and consumer debt
defaults, price competition, governmental limitations on a companys loans, other financial commitments, product lines and other operations and recent ongoing changes in the financial services industry (including consolidations, development of
new products and changes to the industrys regulatory framework). The deterioration of the credit markets starting in late 2007 generally has caused an adverse impact in a broad range of markets, including U.S. and international credit and
interbank money markets generally, thereby affecting a wide range of financial institutions and markets. In particular, events in the financial sector in late 2008 resulted, and may continue to result, in an unusually high degree of volatility in
the financial markets, both domestic and foreign. This situation has created instability in the financial markets and caused certain financial services companies to incur large losses. Insurance companies have additional risks, such as heavy price
competition, claims activity and marketing competition, and can be particularly sensitive to specific events such as man-made and natural disasters (including weather catastrophes), climate change, terrorism,
mortality risks and morbidity rates.
Our investments in technology companies are subject to many risks, including volatility, intense competition,
shortened product life cycles, litigation risk and periodic downturn.
We have invested and will continue investing in technology companies, many
of which may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors actions and market conditions, as well as to general economic downturns. The revenues, income (or losses), and valuations
of technology-related companies can and often do fluctuate suddenly and dramatically. In addition, technology related markets are generally characterized by abrupt business cycles and intense competition, where the leading companies in any
particular category may hold a highly concentrated percentage of the overall market share.
Therefore, our portfolio companies may face considerably more
risk of loss than do companies in other industry sectors. Because of rapid technological change, the selling prices of products and services provided by technology-related companies have historically decreased over their productive lives. As a
result, the selling prices of products and services offered by technology related companies may decrease over time, which could adversely affect their operating results, their ability to meet obligations under their debt securities and the value of
their equity securities. This could, in turn, materially adversely affect the value of the technology-related companies in our portfolio.
We may be
unable to realize the benefits anticipated by the Alcentra Acquisition, including estimated cost savings and synergies, or it may take longer than anticipated to achieve such benefits.
The realization of certain benefits anticipated as a result of the Alcentra Acquisition will depend in part on the integration of Alcentra Capitals
investment portfolio with our investment portfolio and the integration of Alcentra Capitals business with our business. There can be no assurance that Alcentra Capitals and our businesses can be operated profitably or integrated
successfully into our operations in a timely fashion, or at all. The dedication of management resources to such integration may detract attention from
our day-to-day business, and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be
other material adverse effects as a result of these integration efforts. Such effects, including, but not limited to, incurring unexpected costs or delays in connection with such integration and failure of Alcentra Capitals investment
portfolio to perform as expected, could have a material adverse effect on our financial results.
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We also expect to achieve certain cost savings and synergies from the Alcentra Acquisition when the two
companies have fully integrated their portfolios. It is possible that our estimates of the potential cost savings and synergies could turn out to be incorrect. If the estimates turn out to be incorrect or we cannot integrate Alcentra Capitals
investment portfolio and business, the anticipated cost savings and synergies may not be fully realized, or realized at all, or may take longer to realize than expected.
Risks Relating to Our Common Stock
An
investment in our common stock presents an above average degree of risk.
The investments we make in accordance with our investment objective may
result in a higher amount of risk than associated with alternative investment options, and higher volatility or loss of principal. Our investments in portfolio companies may be speculative and, therefore, an investment in our common stock may not be
suitable for someone with lower risk tolerance.
Our shares of Common Stock have traded at a discount from net asset value and may do so again,
which could limit our ability to raise additional equity capital.
Shares of closed-end investment
companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the
risk that our net asset value per share may decline. It is not possible to accurately predict whether any shares of our common stock will trade at, above, or below net asset value. In the recent past, the stocks of BDCs as an industry, including at
times shares of our common stock, have traded below net asset value. See Item 1a. Risk Factors-Risks Relating to Our Business and Structure- Global capital markets could enter a period of severe disruption and instability. These conditions
have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and our business. When our common stock is trading below its net asset value per share, we
will generally not be able to issue additional shares of our common stock at its market price without first obtaining approval for such issuance from our stockholders and our independent directors.
The market price of our Common Stock may fluctuate significantly.
The market price and liquidity of the market for our Common Stock may be significantly affected by numerous factors, some of which may be beyond our control
and may not be directly related to our operating performance. These factors include:
significant volatility in the market price and trading volume of securities of publicly traded RICs, BDCs or
other companies in our sector, which are not necessarily related to the operating performance of these companies;
price and volume fluctuations in the overall stock market from time to time;
the inclusion or exclusion of our Common Stock from certain indices;
changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to
RICs or BDCs;
loss of RIC status;
changes in earnings or variations in operating results;
changes in the value of our portfolio of investments;
announcements with respect to significant transactions;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities
analysts;
departure of key personnel of ours or the Adviser;
operating performance of companies comparable to us;
short-selling pressure with respect to shares of our Common Stock or BDCs generally;
general economic trends and other external factors; and
loss of a major funding source.
In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been brought
against that company. Because of the potential volatility in the price of our Common Stock, we may become the target of securities litigation in the future. If we were to become involved in securities litigation, it could result in substantial
costs, divert managements attention and resources from the business and adversely affect the business.
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Our stockholders will experience dilution in their ownership percentage if they opt out of our
dividend reinvestment plan.
We have adopted a dividend reinvestment plan, pursuant to which we will reinvest all cash distributions authorized by
the Board on behalf of stockholders who do not elect to receive their distributions in cash. As a result, if the Board authorizes and we declare a cash distribution, then stockholders who have not opted out of the dividend reinvestment plan will
have their cash distributions automatically reinvested in additional shares of Common Stock, rather than receiving the cash distribution. See Item 1BusinessDividend Reinvestment Plan for a description of the dividend
reinvestment plan. Following the listing of our Common Stock on NASDAQ, the number of shares to be issued to a plan participant will be determined by dividing the total dollar amount of the distribution payable to such stockholder by the market
price per share of our Common Stock at the close of regular trading on NASDAQ on the date of such distribution. The market price per share of our Common Stock on a particular date will be the closing price for such shares on NASDAQ on such date, or,
if no sale is reported for such date, at the average of their reported bid and asked prices. However, if the market price per share exceeds the most recently computed net asset value per share, we will issue shares at the greater of (i) the
most recently computed net asset value per share and (ii) 95% of the current market price per share (or such lesser discount to the current market price per share that still exceeds the most recently computed net asset value per share). Accordingly,
participants in the dividend reinvestment plan may receive a greater number shares of our Common Stock than the number of shares associated with the market price of our Common Stock, resulting in dilution for other stockholders. Stockholders that
opt out of the dividend reinvestment plan will experience dilution in their ownership percentage of our Common Stock over time.
Provisions of the
Maryland General Corporation Law and of the Charter and the Bylaws could deter takeover attempts and have an adverse effect on the price of our Common Stock.
Certain provisions of the Maryland General Corporation Law (the MGCL) may discourage, delay or make more difficult a change in control of the
Company, including (i) the Maryland Business Combination Act (the Business Combination Act), which, subject to any applicable requirements of the 1940 Act and certain other limitations, will prohibit certain business combinations
between us and an interested stockholder (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of us who, at
any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding shares of stock) or an
affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter will impose special appraisal rights and supermajority voting requirements on these combinations and (ii) the
Maryland Control Share Acquisition Act (the Control Share Acquisition Act), which, subject to any applicable requirements of the 1940 Act, will provide that our control shares (defined as shares which, when aggregated with
other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a control share acquisition
(defined as the direct or indirect acquisition of ownership or control of issued and outstanding control shares) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. The Board has adopted a resolution exempting from the Business Combination Act any business combination
between us and any other person, provided that the business combination is first approved by the Board, including a majority of the independent directors, and the Bylaws exempt from the Control Share Acquisition Act acquisitions of our stock by any
person. However, if the resolution exempting business combinations is repealed or the Board or independent directors do not approve a business combination or we amend the Bylaws to repeal the exemption from the Control Share Acquisition Act, subject
to any applicable requirements of the 1940 Act, the Business Combination Act or Control Share Acquisition Act, as the case may be, may discourage third parties from trying to acquire control of us and may increase the difficulty of consummating such
an offer.
We are also subject to other measures that may make it difficult for a third party to obtain control of us, including provisions of the Charter
that (i) classify the Board into three classes serving staggered three-year terms and require that any vacancies be filled by a majority of directors remaining in office, (ii) require
a two-thirds vote and cause for director removal, (iii) authorize the Board to classify any unissued shares of stock and reclassify any previously classified but unissued shares of stock into
other classes or series of stock, including preferred stock, and to cause the issuance of additional shares of our Common Stock and (iv) authorize the Board to amend the Charter, without stockholder approval, to increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any class or series that we have the authority to issue. These provisions, as well as other provisions in the Charter and the Bylaws, may delay, defer or prevent a transaction
or a change in control that might otherwise be in the best interests of our stockholders.
The Charter imposes certain restrictions on transfer of
the our Common Stock held by our stockholders prior to the consummation of the Alcentra Acquisition in addition to those otherwise imposed by applicable law or by contract.
The Charter provides that during the period beginning with the date we reincorporated from the State of Delaware to the State of Maryland (the
Reincorporation) and ending 365 days after the date our Common Stock was listed on NASDAQ (the Listing),
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any transfer (whether by sale, gift, merger, operation of law or otherwise), exchange, assignment, pledge, hypothecation or other disposition or encumbrance of any shares of our Common Stock
acquired by a stockholder attendant to the Reincorporation is prohibited, and therefore not effective, until 180 days after the date of the Listing for one third of the shares of our Common Stock acquired by a stockholder in the Reincorporation, 270
days after the date of the Listing for another one-third of the shares of our Common Stock acquired by a stockholder in the Reincorporation and 365 days after the date of the Listing for the final one-third of the shares of our Common Stock acquired by a stockholder in the Reincorporation, unless the Board provides prior written consent permitting an earlier effective date and the transfer,
exchange, assignment, pledge, hypothecation or other disposition or encumbrance is made in accordance with applicable securities and other laws. The Board may impose certain conditions in connection with granting its consent to an earlier effective
date and any such consent shall be granted in the sole discretion of the Board. Any purported transfer, exchange, assignment, pledge, hypothecation or other disposition or encumbrance of any shares of our Common Stock effected on an earlier
effective date in violation of the Charter will have no force or effect, and we will not register or permit registration of (and will direct our transfer agent not to register or permit registration of) any such purported transfer, exchange,
assignment, pledge, hypothecation or other disposition or encumbrance on our books and records until the applicable effective date.
Such transfer
restrictions are applicable only to shares received by our stockholders in the Reincorporation, and not to any other shares of our Common Stock, including the shares issued to Alcentra Capital stockholders in connection with the Alcentra Acquisition
and are in addition to any transfer restrictions applicable by law or any applicable agreements between the stockholder and us.
Our Charter
designates the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders ability to obtain a favorable
judicial forum for disputes with us or our directors, officers or other employees.
Our Charter provides that, unless we consent in writing to the
selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum
for: (i) any derivative action or proceeding brought on our behalf; (ii) any Internal Corporate Claim, as such term is defined in Section 1-101(p) of the MGCL, including, without
limitation, (a) any action asserting a claim of breach of any duty owed by any of our directors or officers or other employees to us or to our stockholders or (b) any action asserting a claim against us or any of our directors or officers
or other employees arising pursuant to any provision of the MGCL or the Charter or the Bylaws; or (iii) any action asserting a claim against us or any of our directors or officers or other employees that is governed by the internal affairs
doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our Common Stock will be deemed to have notice of and to have consented and waived any objection to this exclusive forum provision of the Charter,
as the same may be amended from time to time. The Charter includes this provision so that we can respond to litigation more efficiently, reduce the costs associated with our responses to such litigation, particularly litigation that might otherwise
be brought in multiple forums, and make it less likely that plaintiffs attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements. However, this exclusive forum provision may limit a stockholders
ability to bring a claim in a judicial forum that such stockholder believes is favorable for disputes with us or our directors, officers or other employees, if any, and may discourage lawsuits against us and our directors, officers or other
employees, if any. We believe the risk of a court declining to enforce this exclusive forum provision is remote, as the General Assembly of Maryland has specifically amended the MGCL to authorize the adoption of such provision. However, if a court
were to find such provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings notwithstanding that the MGCL expressly provides that the charter or bylaws of a Maryland corporation may
require that any Internal Corporate Claim be brought only in courts sitting in one or more specified jurisdictions, we may incur additional costs that it does not currently anticipate associated with resolving such matters in other jurisdictions,
which could adversely affect our business, financial condition and results of operations.
We will incur significant costs as a result of our
listing on NASDAQ.
Companies with outstanding, registered securities listed on a national securities exchange incur legal, accounting and other
expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including NASDAQ requirements and
requirements under the Sarbanes-Oxley Act. Accordingly, while we previously filed annual, quarterly and current reports with respect to our business and financial condition under the Exchange Act, we will incur significant additional costs as a
result of the listing of our Common Stock on NASDAQ. These requirements may place a strain on our systems and resources. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over
financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls, significant resources and management oversight will be required. We will be implementing additional procedures,
processes, policies and practices for the purpose of addressing the standards and requirements applicable to listed public companies. These activities may divert managements attention from other business concerns, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, directors and officers liability
insurance, director fees, reporting requirements of the SEC, transfer agent fees, additional administrative expenses payable to the Administrator to compensate it for hiring additional accounting, legal and administrative personnel, increased
auditing and legal fees and similar expenses.
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We maintain our principal executive office at 11100 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025. We do not own any real estate.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.