Item 1.01. Entry into a Material Definitive Agreement.
As previously announced, on June 26, 2019, CM Finance Inc (CM Finance) entered into a Stock Purchase and Transaction
Agreement (the SPA) by and between CM Finance and Investcorp BDC Holdings Limited (Investcorp), an affiliate of Investcorp Credit Management US LLC (ICM). The SPA was entered into
simultaneously with ICMs entrance into a definitive interest purchase agreement to acquire a majority ownership interest in CM Investment Partners LLC (the Adviser), the investment adviser to CM Finance (the Adviser
Transaction).
The Adviser Transaction closed on August 30, 2019 pursuant to which ICM became the majority owner of the
Adviser. In addition, the Initial Closing (as defined in the SPA) under the SPA occurred on August 30, 2019 (the Closing). Effective as of the Closing, CM Finance changed its name to Investcorp Credit Management BDC, Inc.
(Investcorp Credit). References herein to the Company, we or us refer to CM Finance immediately prior to the Closing and to Investcorp Credit at and after the Closing.
In connection with the Closing, on August 30, 2019, the Investment Advisory Agreement, dated February 5, 2014, between the Company
and the Adviser and the Administration Agreement, dated February 5, 2014, between the Company and the Adviser were terminated, and the Company entered into a new Investment Advisory Agreement with the Adviser (the New Advisory
Agreement) and a new Administration Agreement with the Adviser (the New Administration Agreement). The New Advisory Agreement and New Administration Agreement were unanimously approved by the Companys then-current
board of directors (the Board) on June 26, 2019, and the Companys stockholders approved the New Advisory Agreement at a special meeting of stockholders on August 28, 2019.
SPA Waiver Agreement
On August 28, 2019, the Company entered into the Letter Agreement, dated August 28, 2019, with Investcorp (the
Waiver Agreement) amending certain terms of the SPA. Under the Waiver Agreement, the Company waived Investcorps obligation to identify a second director candidate prior to the Closing and Investcorp waived the Companys
obligation to take all action necessary so that, effective upon the Closing, the size of the Board is reduced to four members and each of Keith Lee, Robert Ryder and Robert Wagner resigns as a member of the Board.
Pursuant to the Waiver Agreement, among other things, (i) Investcorp has the right to identify a second director
candidate (the Post-Closing Designated Director) prior to March 31, 2020; provided that if by March 31, 2020 the Post-Closing Designated Director has not been elected to the Board and the Nominating and Corporate
Governance Committee of the Board (the Nominating Committee) has rejected one or more proposed Post-Closing Designated Directors, then such date will be extended for such period of time as necessary for Investcorp to propose a
qualified Post-Closing Designated Director, but in any event not beyond August 30, 2020, (ii) Messrs. Ryder and Wagner have submitted their resignations from the Board, each to be effective as of September 15, 2019, (iii) Mr. Lee has
delivered a letter to the Chairman of the Board indicating that, in light of the SPA and the Adviser Transaction, he intends to resign as a member of the Board upon the recommendation by the Nominating Committee to the Board to appoint the
Post-Closing Designated Director and the appointment by the Board of the Post-Closing Designated Director to the Board, and (iv) the Board has approved a reduction in the size of the Board to four members, effective as of September 15,
2019.
New Advisory Agreement
On August 30, 2019 (the Commencement Date), the Company entered into the New Advisory Agreement with
the Adviser, an investment adviser registered under the Investment Advisers Act of 1940, as amended.
3
Pursuant to the New Advisory Agreement and subject to the overall supervision of the Board and in
accordance with the Investment Company Act of 1940, as amended (the 1940 Act), the Adviser manages the Companys day-to-day operations and
provides it with investment advisory services. Under the terms of the New Advisory Agreement, the Adviser:
|
|
|
determines the composition of the Companys portfolio, the nature and timing of the changes to the
Companys portfolio and the manner of implementing such changes;
|
|
|
|
identifies, evaluates and negotiates the structure of the investments the Company makes;
|
|
|
|
executes, closes, services and monitors the investments the Company makes;
|
|
|
|
determines the securities and other assets that the Company will purchase, retain or sell;
|
|
|
|
performs due diligence on prospective portfolio companies; and
|
|
|
|
provides the Company with such other investment advisory, research and related services as the Company may, from
time to time, reasonably require for the investment of its funds.
|
The Advisers services under the New Advisory Agreement are not
exclusive, and it may furnish similar services to other entities.
Under the New Advisory Agreement, the Company pays the Adviser a fee
for investment advisory and management services consisting of two components a base management fee (the Base Management Fee) and an incentive fee (the Incentive Fee).
Base Management Fee
The Base Management
Fee is calculated at an annual rate of 1.75% of the Companys gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such amount, Gross Assets). The
Base Management Fee is payable quarterly in arrears and the Base Management Fees for any partial month or quarter will be appropriately pro-rated.
For the period from the Commencement Date through the end of the first and second fiscal quarters after the Commencement Date, the Base
Management Fee is calculated based on the value of the Companys Gross Assets as of the end of such quarter. Subsequently, the Base Management Fee will be calculated based on the average value of the Companys Gross Assets at the end of
the two most recently completed fiscal quarters. Base Management Fees for any partial month or quarter will be appropriately pro-rated.
Incentive Fee
The Incentive Fee, which
provides the Adviser with a share of the income that it generates for the Company, has two components, ordinary income (the Income-Based Fee) and capital gains (the Capital Gains Fee). Incentive Fees are
calculated as described below and payable quarterly in arrears (or, upon termination of the New Advisory Agreement, as of the termination date).
Income-Based Fee
The
Income-Based Fee is calculated and payable quarterly in arrears based on the Companys Pre-Incentive Fee Net Investment Income (as defined below) for the immediately preceding fiscal quarter, subject
to a total return requirement (the Total Return Requirement) and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which the Companys Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Companys net assets attributable to its common stock, for the immediately preceding fiscal quarter, exceeds a
2.0% (which is 8.0% annualized)
4
hurdle rate and a catch-up provision measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, the
Adviser receives no Incentive Fee until the Companys Pre-Incentive Fee Net Investment Income equals the hurdle rate of 2.0%, but then receives, as
a catch-up, 100% of the Companys Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.5% (which is 10.0% annualized). The effect of
the catch-up provision is that, subject to the Total Return Requirement and deferral provisions discussed below, if Pre-Incentive Fee Net
Investment Income exceeds 2.5% in any fiscal quarter, the Adviser receives 20.0% of the Companys Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply.
Pre-Incentive Fee Net Investment Income means interest income, dividend income and
any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that the Company receives from portfolio companies) accrued during the fiscal quarter, minus
the Companys operating expenses for the quarter (including the Base Management Fee, expenses payable under the New Administration Agreement and any interest expense and any distributions paid on any issued and outstanding preferred stock, but
excluding the Incentive Fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount (OID),
debt instruments with payment-in-kind (PIK) interest and zero coupon securities), accrued income that the Company has not yet received in
cash.
Pre-Incentive Fee Net Investment Income does not include any realized capital gains,
realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the Incentive Fee, it is possible that the Company may pay an Incentive Fee in a quarter where it incurs a loss, subject to the Total Return
Requirement and deferral of non-cash amounts. For example, if the Company receives Pre-Incentive Fee Net Investment Income in excess of the quarterly
minimum hurdle rate, it would pay the applicable Incentive Fee even if it has incurred a loss in that quarter due to realized and unrealized capital losses. The Companys net investment income used to calculate this component of the Incentive
Fee is also included in the amount of its Gross Assets used to calculate the Base Management Fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the
current quarter.
The calculation period for the Pre-Incentive Fee Net Investment Income is based
on fiscal quarters and the Lookback Period (as defined below) for purposes of the Total Return Requirement for the Income-Based Fee begins on September 30, 2019. No Income-Based Fee is payable under the New Advisory Agreement except to the
extent 20.0% of the cumulative net increase in net assets resulting from operations over the fiscal quarter for which fees are being calculated and the Lookback Period exceeds the cumulative Incentive Fees accrued and/or paid for the Lookback
Period. For the foregoing purpose, the cumulative net increase in net assets resulting from operations is the amount, if positive, of the sum of Pre-Incentive Fee Net Investment Income,
realized gains and losses and unrealized appreciation and depreciation of the Company for the then current fiscal quarter and the Lookback Period. The Lookback Period means (1) through June 30, 2022, the period that begins on
September 30, 3019 and ends on the last day of the fiscal quarter immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated, and (2) after June 30, 2022, the eleven fiscal quarters immediately
preceding the fiscal quarter for which the Income-Based Fee is being calculated.
Capital Gains Fee
The Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the New Advisory
Agreement, as of the termination date), commencing with the fiscal year ending June 30, 2021, and will equal 20.0% of the Companys cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year,
computed net of the Companys aggregate cumulative realized capital losses and the Companys aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains
Fees. If such amount is negative, then no Capital Gains Fee will be payable for such year. Additionally, if the New Advisory Agreement is terminated as of a date that is not a fiscal year end, the termination date will be treated as though it were a
fiscal year end for purposes of calculating and paying the Capital Gains Fee. For the avoidance of doubt, realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to the
5
Companys portfolio as of the end of the fiscal year ended June 30, 2020 will be excluded from the calculations of the Capital Gains Fee.
Duration and Termination
Unless
terminated earlier as described below, the New Advisory Agreement will be in effect for an initial two-year term and will continue in effect from year-to-year thereafter if approved annually by the Board, including a majority of the directors who are not interested persons of the Company, as defined in
Section 2(a)(19) of the 1940 Act (the Independent Directors), or by the affirmative vote of the holders of a majority of the Companys outstanding voting securities and a majority of the Independent Directors.
The New Advisory Agreement may be terminated by either party without penalty by delivering notice of termination upon not less than 60
days written notice to the other party and will automatically terminate in the event of its assignment. The holders of a majority of the Companys outstanding voting securities may also terminate the New Advisory Agreement without penalty
upon 60 days written notice.
Indemnification
The New Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by
reason of the reckless disregard of its duties and obligations under the New Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it,
are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from the rendering of the Advisers services under
the New Advisory Agreement or otherwise as the Adviser.
New Administration Agreement
Under the New Administration Agreement, the Adviser furnishes the Company with office facilities and equipment and provides it with clerical,
bookkeeping, recordkeeping and other administrative services at such facilities. Under the New Administration Agreement, the Adviser performs, or oversees the performance of, the Companys required administrative services, which includes, among
other things, being responsible for the financial and other records that it is required to maintain and preparing reports to its stockholders and reports and other materials filed with the Securities and Exchange Commission (the
SEC). In addition, the Adviser assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports and other materials to its
stockholders, and generally oversees the payment of its expenses and the performance of administrative and professional services rendered to the Company by others. Under the New Administration Agreement, the Adviser also provides managerial
assistance on the Companys behalf to those portfolio companies that have accepted its offer to provide such assistance. The Adviser may satisfy certain of its obligations under the New Administration Agreement to the Company through its
services agreement with Investcorp International Inc., an affiliate of Investcorp, including supplying the Company with accounting and back-office professionals upon the request of the Adviser.
Payments under the New Administration Agreement equal an amount based upon the Companys allocable portion (subject to the review of the
Board) of the Advisers overhead in performing its obligations under the New Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Companys allocable portion of the cost of
its Chief Financial Officer and Chief Compliance Officer and their respective staffs. In addition, if requested to provide significant managerial assistance to the Companys portfolio companies, the Adviser will be paid an additional amount
based on the services provided, which shall not exceed the amount the Company receives from such portfolio companies for providing this assistance. The New Administration Agreement has an initial term of two years and may be renewed with the
approval of the Board. The New Administration Agreement may be terminated by either party
6
without penalty upon 60 days written notice to the other party. To the extent that the Adviser outsources any of its functions, the Company pays the fees associated with such functions on a
direct basis without any incremental profit to the Adviser.
Indemnification
The New Administration Agreement provides that, absent criminal conduct, willful misfeasance, bad faith or gross negligence in
the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with
it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from the rendering of the Advisers services
under the New Administration Agreement or otherwise as the Companys administrator.
License Agreement
On August 30, 2019, the Company entered into the Trademark License Agreement with the Adviser (the License
Agreement), pursuant to which the Adviser has granted the Company a non-exclusive, royalty-free license to use the name Investcorp.
The foregoing descriptions of the Waiver Agreement, the New Advisory Agreement, the New Administration Agreement and the
License Agreement are only summaries of certain of the provisions of such agreements and are qualified in their entirety by reference to the underlying agreements. The Waiver Agreement, the New Advisory Agreement, the New Administration Agreement
and the License Agreement are attached as Exhibits 10.1, 10.2, 10.3 and 10.4 to this Current Report on Form 8-K, respectively, and are incorporated herein by reference.