Item 1.01
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Entry into a Material Definitive Agreement.
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Termination of Existing Investment Advisory Agreement
and Existing Administration Agreement and Entry into New Investment Advisory Agreement and New Administration Agreement
On
October 17, 2017, the transactions contemplated by the Asset Purchase Agreement (the Asset Purchase Agreement) entered into on July 13, 2017 by Fifth Street Management LLC (FSM), Oaktree Capital Management, L.P.
(Oaktree), Fifth Street Asset Management Inc. (solely for the purposes set forth therein) and Fifth Street Holdings L.P. (FSH) were consummated. In connection therewith, the Fourth Amended and Restated Investment Advisory
Agreement, dated as of March 20, 2017, between FSM and Oaktree Specialty Lending Corporation (f/k/a Fifth Street Finance Corp.) (the Company, we or us), and the Administration Agreement, dated as of
January 1, 2015, between the Company and FSC CT LLC were terminated, and the Company entered into a new Investment Advisory Agreement with Oaktree (the New Investment Advisory Agreement) and a new Administration Agreement with
Oaktree Fund Administration, LLC (Oaktree Administrator), a subsidiary of Oaktree (the New Administration Agreement). The New Investment Advisory Agreement and New Administration Agreement were approved by the Companys
board of directors (the Board) on July 13, 2017, and the Companys stockholders approved the New Investment Advisory Agreement at a special meeting of our stockholders on September 7, 2017.
Oaktree is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the Advisers Act). Pursuant
to the New Investment Advisory Agreement, Oaktree will manage our day-to-day operations and provide us with investment advisory services. Among other things, Oaktree will (i) determine the composition of our portfolio, the nature and timing of
the changes to our portfolio and the manner of implementing such changes, (ii) identify, evaluate and negotiate the structure of the investments we make, (iii) execute, close, monitor and service the investments we make,
(iii) determine what securities and other assets we purchase, retain or sell, (iv) perform due diligence on prospective portfolio companies and (v) provide us with such other investment advisory, research and related services as we
may, from time to time, reasonably require for the investment of our funds.
Oaktrees services under the New Investment Advisory
Agreement will not be exclusive and, Oaktree will generally be free to furnish similar services to other entities so long as its services to us are not impaired.
We will pay Oaktree a fee for its services under the New Investment Advisory Agreement consisting of two components a base management
fee and an incentive fee. The cost of both the base management fee payable to Oaktree and any incentive fees earned by Oaktree will ultimately be borne by our common stockholders.
Base Management Fee
Under the New Investment Advisory Agreement, the base management fee on total gross assets, including any investment made with borrowings, but
excluding cash and cash equivalents, will be 1.50%.
Incentive Fee
The incentive fee consists of two parts. Under the New Investment Advisory Agreement, the first part of the incentive fee, which is referred to
as the incentive fee on income, will be calculated and payable quarterly in arrears based upon our pre-incentive fee net investment income for the immediately preceding quarter. The payment of the incentive fee on income will be subject
to payment of a preferred return to investors each quarter (i.e., a hurdle rate), expressed as a rate of return on the value of our net assets at the end of the most recently completed quarter, of 1.50%, subject to a catch up
feature.
For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other
income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies, other than fees for providing managerial assistance) accrued during the fiscal
quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the New Administration Agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments with payment-in-kind interest and zero coupon securities),
accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Under the New Investment Advisory Agreement, the calculation of the incentive fee on income for each quarter will be as follows:
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No incentive fee is payable to Oaktree in any quarter in which our pre-incentive fee net investment income does not exceed the preferred return rate of 1.50% (the preferred return) on net assets.
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100% of our pre-incentive fee net investment income, if any, that exceeds the preferred return but is less than or equal to 1.8182% in any fiscal quarter is payable to Oaktree. We refer to this portion of the incentive
fee on income as the catch-up provision, and it is intended to provide Oaktree with an incentive fee of 17.5% on all of our pre-incentive fee net investment income when our pre-incentive fee net investment income reaches 1.8182% on net
assets in any fiscal quarter.
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For any quarter in which our pre-incentive fee net investment income exceeds 1.8182% on net assets, the subordinated incentive fee on income is equal to 17.5% of the amount of our pre-incentive fee net investment
income, as the preferred return and catch-up will have been achieved.
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There is no accumulation of amounts on the hurdle
rate from quarter to quarter, and accordingly, there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle.
Under the New Investment Advisory Agreement, the second part of the incentive fee will be determined and payable in arrears as of the end of
each fiscal year (or upon termination of the New Investment Advisory Agreement, as of the termination date) commencing with the fiscal year ending September 30, 2019 and will equal 17.5% of our realized capital gains, if any, on a cumulative
basis from the beginning of the fiscal year ending September 30, 2019 through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any
previously paid capital gain incentive fees under the New Investment Advisory Agreement. Any realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to the Companys
portfolio as of the end of the fiscal year ending September 30, 2018 will be excluded from the calculations of the second part of the incentive fee.
Duration and Termination
Unless earlier terminated as described below, the New Investment Advisory Agreement will remain in effect for two years from the date of its
execution and thereafter from year-to-year if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not
interested persons. The New Investment Advisory Agreement will automatically terminate in the event of its assignment. The New Investment Advisory Agreement may be terminated by either party without penalty upon 60 days written notice to the
other. The New Investment Advisory Agreement may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.
Indemnification
The New
Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oaktree and its
officers, managers, partners, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including
reasonable attorneys fees and amounts reasonably paid in settlement) arising from the rendering of Oaktrees services under the New Investment Advisory Agreement or otherwise as our investment adviser.
Administrative Services
Upon effectiveness of the New Investment Advisory Agreement, the Company will enter into the New Administration Agreement with Oaktree
Administrator. Pursuant to the New Administration Agreement, Oaktree Administrator will provide administrative services to the Company necessary for the operations of the Company, which include providing office facilities, equipment, clerical,
bookkeeping and record keeping services at such facilities and such other services as Oaktree Administrator, subject to review by the Board, shall from time to time deem to be necessary or useful to perform its obligations under the New
Administration Agreement. Oaktree Administrator may, on behalf of the Company, conduct relations and negotiate agreements with custodians, trustees, depositories, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks
and such other persons in any such other capacity deemed to be necessary or desirable. Oaktree Administrator will make reports to the Board of its performance of obligations under the New Administration Agreement and furnish advice and
recommendations with respect to such other aspects of the business and affairs of the Company, in each case, as it shall determine to be desirable or as reasonably required by the Board; provided that the Administrator shall not provide any
investment advice or recommendation.
Oaktree Administrator will also provide portfolio collection functions for interest income, fees and
warrants and is responsible for the financial and other records that the Company is required to maintain and prepares, prints and disseminates reports to the Companys stockholders and reports and all other materials filed with the SEC. In
addition, Oaktree Administrator will assist the Company in determining and publishing the Companys net asset value, overseeing the preparation and filing of the Companys tax
returns, and generally overseeing the payment of the Companys expenses and the performance of administrative and professional services rendered to the Company by others. For providing these
services, facilities and personnel, the Company will reimburse Oaktree Administrator the allocable portion of overhead and other expenses incurred by Oaktree Administrator in performing its obligations under the New Administration Agreement,
including the Companys allocable portion of the rent of the Companys principal executive offices at market rates and the Companys allocable portion of the costs of compensation and related expenses of its chief financial officer
and chief compliance officer and their staffs. Such reimbursement is at cost, with no profit to, or markup by, Oaktree Administrator. Oaktree Administrator may also offer to provide, on the Companys behalf, managerial assistance to the
Companys portfolio companies. Unless earlier terminated as described below, the New Administration Agreement will remain in effect for two years from the date of its execution and thereafter from year-to-year if approved annually by our Board
or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. The New Administration Agreement may be terminated by
either party without penalty upon 60 days written notice to the other. The New Administration Agreement may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.
Please see the definitive proxy statement filed by the Company pursuant to Regulation 14A with the Securities and Exchange Commission (the
SEC) on July 25, 2017 for additional information regarding the New Investment Advisory Agreement and the New Administration Agreement. The New Investment Advisory Agreement and the New Administration Agreement are attached as
Exhibits 10.1 and 10.2 hereto, respectively, and are incorporated herein by reference.
Pledge Agreement
On October 17, 2017, in connection with the Asset Purchase Agreement, the Company entered into a pledge agreement (the Pledge
Agreement) with FSH with respect to 6,265,665 shares of the Companys common stock owned by FSH, pursuant to which FSH pledged such shares to the Company to secure indemnification obligations of FSM and FSH under the Asset Purchase
Agreement relating to certain SEC investigation-related legal costs and expenses, if any, and certain fees, fines, monetary penalties, deductibles and disgorgements, if any, that may be ordered by the SEC to be paid by the Company, net of any
disgorgements paid by FSM to the Company and any insurance recoveries received by the Company. The Pledge Agreement is attached as Exhibit 10.3 hereto and incorporated herein by reference.
Supplemental Indentures
On
October 17, 2017, in connection with the change of the name of the Company discussed in Item 5.03 below, the Company entered into a Fourth Supplemental Indenture (the Fourth Supplemental Indenture) with Deutsche Bank Trust
Company Americas (the Trustee), amending the Indenture, dated as of April 30, 2012 (the Base Indenture), between the Company and the Trustee, to expressly provide for the Company authority to exchange the existing notes
issued thereunder for new notes bearing the new name of the Company and new CUSIP numbers. A copy of the Fourth Supplemental Indenture is attached as Exhibit 4.1 hereto and is incorporated herein by reference.
Pursuant to the authority provided in the Fourth Supplement Indenture, the following occurred:
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the global note bearing CUSIP number 31679B AF7 (the Old 2019 Note), representing $250,000,000 aggregate principal amount of the Companys 4.875% Senior Notes due 2019 and issued pursuant to the Third
Supplemental Indenture, dated as of February 26, 2014 (the 2019 Notes), was cancelled and a global note bearing CUSIP number 67401P AA6 (the New 2019 Note), representing the 2019 Notes, was issued in exchange therefor;
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the global note bearing CUSIP number 31679B 209 (the Old 2024 Note), representing $75,000,000 aggregate principal amount of the Companys 5.875% Senior Notes due 2024 and issued pursuant to the First
Supplemental Indenture, dated as of October 18, 2012 (the 2024 Notes), was cancelled and a global note bearing CUSIP number 67401P 207 (the New 2024 Note), representing the 2024 Notes, was issued in exchange therefor;
and
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the global note bearing CUSIP number 31679B 308 (the Old 2028 Note, collectively with the Old 2019 Note and the Old 2024 Note, the Old Notes), representing $86,250,000 aggregate principal amount
of the Companys 6.125% Senior Notes due 2028 and issued pursuant to the Second Supplemental Indenture, dated as of April 4, 2013 (the 2028 Notes), was cancelled and a global note bearing CUSIP number 67401P 306 (collectively
with the New 2019 Note and the New 2024 Note, the New Notes), representing the 2028 Notes, was issued in exchange therefore.
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The rights of the holders of the 2019 Notes, 2024 Notes and 2028 Notes and the rank and other terms of such notes are not being altered in
connection with the cancellation of the Old Notes and issuance of the New Notes. The forms of the New 2019 Notes, New 2024 Notes and New 2028 Notes are attached as Exhibits 4.2, 4.3 and 4.4 hereto, respectively, and are incorporated herein by
reference.