|
|
|
|
|
|
|
|
|
Senior Income |
|
Floating Rate
Income
Opportunity |
|
Short Duration Credit Opportunities |
|
Acquiring Fund |
|
Differences |
Adjustable Rate Instruments |
|
Adjustable Rate Instruments |
|
Adjustable Rate Instruments |
|
Adjustable Rate Instruments |
|
|
|
|
|
|
|
The Fund will not invest more than 10% of its Managed Assets in senior loans with interest rates that adjust less often than
semi-annually. The Funds portfolio of senior loans will at all times have a
dollar-weighted average time until the next interest rate adjustment of 90 days or less. |
|
With respect to the Funds senior loans included in the 80% policy, such instruments will at all times have a dollar-weighted average
time until the next interest rate adjustment of 90 days or less. The Fund also may
invest in adjustable rate unsecured senior loans and adjustable rate secured and unsecured subordinated loans. |
|
The Fund will invest at least 70% of its Managed Assets in adjustable rate corporate debt instruments, including senior secured loans, second lien loans, and other adjustable rate corporate debt instruments. |
|
With respect to the Funds senior loans included in the 80% policy, such instruments will at times have a dollar-weighted average time until the next interest rate adjustment of 90 days or less. |
|
Similar; each Fund, other than Short Duration Credit Opportunities, maintains a dollar-weighted time until the next adjustment of 90 days or less with respect to such instruments. |
|
|
|
|
|
Other Debt or Debt-Related Instruments: |
|
Other Debt or Debt-Related Instruments: |
|
Other Debt or Debt-Related Instruments: |
|
Other Debt or Debt-Related Instruments: |
|
|
|
|
|
|
|
The Fund may invest up to 20% of its Managed Assets, in the aggregate, in (i) other income producing securities such as investment and non-investment grade corporate debt securities, of
corporate or governmental issuers; and (ii) equity securities and warrants acquired in connection with the Funds investments in senior loans. |
|
The Fund may invest up to 20% of its Managed Assets in the following adjustable or fixed rate securities: (i) other debt securities such as investment and non-investment grade debt
securities, fixed rate senior loans or subordinated loans, convertible securities and structured notes; (ii) mortgage-related and other asset-backed securities (including collateralized loan obligations and |
|
No stated policy. |
|
The Fund may invest up to 20% of its Managed Assets in (i) other debt securities such as investment and non-investment grade debt securities, convertible securities and structured notes,
(ii) mortgage-related and other asset-backed securities (including collateralized loan obligations and collateralized debt obligations), and (iii) debt securities and |
|
The Funds may invest in certain other debt or debt-related instruments, including, with respect to Senior Income and Floating Rate Income Opportunity, warrants and equity
securities. |
6
|
|
|
|
|
|
|
|
|
Senior Income |
|
Floating Rate
Income
Opportunity |
|
Short Duration Credit Opportunities |
|
Acquiring Fund |
|
Differences |
|
|
collateralized debt obligations); and (iii) debt securities and other instruments issued by government, government-related or
supranational issuers. No more than 5% of the Funds Managed Assets may be
invested in each of convertible securities, mortgage-related and other asset-backed securities, and sovereign debt securities.
The Fund also may receive warrants and equity securities issued by an issuer or its affiliates in connection with the Funds other investments in such
entities. |
|
|
|
other instruments issued by government, government-related or supranational issuers.
No more than 5% of the Funds Managed Assets may be invested in each of convertible
securities, mortgage-related and other asset-backed securities, and sovereign debt securities. The Fund also may receive warrants and equity securities issued by a borrower or its affiliates in connection with the Funds other investments in
such entities. |
|
|
|
|
|
|
|
Non-U.S. Issuers: |
|
Non-U.S. Issuers: |
|
Non-U.S. Issuers: |
|
Non-U.S. Issuers: |
|
|
|
|
|
|
|
The Fund may invest up to 20% of its Managed Assets in U.S. dollar denominated senior loans of borrowers that are organized or located in countries outside the United States. |
|
The Fund may invest up to 20% of its Managed Assets in securities of non-U.S. issuers that are U.S. dollar or non-U.S. dollar denominated. The
Funds Managed Assets to be invested in adjustable rate loans and other debt instruments of non-U.S. issuers may include debt |
|
The Fund may invest up to 20% of its Managed Assets in debt instruments of non-U.S. issuers (which term includes borrowers) that are U.S. dollar or
non-U.S. dollar denominated. The Funds investments in debt instruments of non-U.S. |
|
The Fund may invest up to 20% of its Managed Assets in securities of non-U.S. issuers (which includes borrowers) that are U.S. dollar or non-U.S. dollar
denominated. The Funds Managed Assets to be invested in senior loans and other debt |
|
Senior Incomes investments in non-U.S. issuers are limited to U.S. dollar denominated senior loans, while the other Funds investments in
non-U.S. issuers may include both U.S. dollar and non-U.S. dollar denominated securities or debt |
7
|
|
|
|
|
|
|
|
|
Senior Income |
|
Floating Rate
Income
Opportunity |
|
Short Duration Credit Opportunities |
|
Acquiring Fund |
|
Differences |
|
|
securities of issuers located, or conducting their business in, emerging markets countries. |
|
issuers may include debt instruments located, or conducting their business, in emerging market countries. |
|
instruments of non-U.S. issuers may include debt securities of issuers located, or conducting their business in, emerging markets countries. |
|
instruments and may also include issuers in emerging markets countries. |
|
|
|
|
|
Senior Loans Secured by Collateral: |
|
Senior Loans Secured by Collateral: |
|
Senior Loans Secured by Collateral: |
|
Senior Loans Secured by Collateral: |
|
|
|
|
|
|
|
The Fund invests at least 65% of its Managed Assets in senior loans that are secured by specific collateral. Such collateral consists of assets and/or stock of the borrower. |
|
The Fund invests at least 65% of its Managed Assets in senior loans that are secured by specific collateral. Such collateral consists of assets and/or stock of the borrower. |
|
No stated policy. |
|
The Fund invests at least 65% of its Managed Assets in senior loans that are secured by specific collateral. |
|
Short Duration Credit Opportunities does not have a stated collateral policy; the other Funds policies are substantially the same. |
|
|
|
|
|
Senior Loans for which Fund is Agent/Co-Agent: |
|
Senior Loans for which Fund is Agent/Co-Agent: |
|
Senior Loans for which Fund is Agent/Co-Agent: |
|
Senior Loans for which Fund is Agent/Co-Agent: |
|
|
|
|
|
|
|
The Fund invests no more than 20% of its total assets in senior loans in which it acts as an agent or co-agent, and the size of any such individual senior loan will not exceed 5% of the
Funds total assets. |
|
The Fund invests no more than 20% of its total assets in senior loans in which it acts as an agent or co-agent and the size of any such individual senior loan will not exceed 5% of the
Funds total assets. |
|
No stated policy. |
|
No stated policy. |
|
Senior Income and Floating Rate Income Opportunity have identical limits on this investment type; the other Funds have no stated policy. |
|
|
|
|
|
Single Borrower Policy: |
|
Single Borrower Policy: |
|
Single Borrower Policy: |
|
Single Borrower Policy: |
|
|
|
|
|
|
|
The Fund does not intend to invest more than 5% of its Managed Assets in senior loans or other securities of a single borrower. |
|
No stated policy. |
|
No stated policy. |
|
No stated policy. |
|
Senior Income has a stated limited in investments in a single borrower; the other Funds do not have a stated borrower limit. |
8
|
|
|
|
|
|
|
|
|
Senior Income |
|
Floating Rate
Income
Opportunity |
|
Short Duration Credit Opportunities |
|
Acquiring Fund |
|
Differences |
|
|
|
|
|
Industry Allocation: |
|
Industry Allocation: |
|
Industry Allocation: |
|
Industry Allocation: |
|
|
|
|
|
|
|
The Fund will not invest more than 25% of its Managed Assets in borrowers that conduct their principal businesses in the same industry. |
|
The Fund may not invest more than 20% of its Managed Assets in securities from an industry which generally refers to the classification of companies in the same or similar lines of business. |
|
No stated policy. |
|
The Fund may not invest more than 20% of its Managed Assets in securities from an industry which generally refers to the classification of companies in the same or similar lines of business. |
|
Senior Income, Floating Rate Income Opportunity and the Acquiring Fund have similar limits on industry exposure; Short Duration Credit Opportunities has no stated policy. |
|
|
|
|
|
iBoxx Loan Total Return Swaps: |
|
iBoxx Loan Total Return Swaps: |
|
iBoxx Loan Total Return Swaps: |
|
iBoxx Loan Total Return Swaps: |
|
|
|
|
|
|
|
The Fund may invest up to 5% of its Managed Assets in iBoxx Loan Total Return Swaps.(3) |
|
The Fund may invest up to 5% of its Managed Assets in iBoxx Loan Total Return Swaps.(3) |
|
No stated policy. |
|
The Fund may invest up to 5% of its Managed Assets in iBoxx Loan Total Return Swaps.(3) |
|
Senior Income, Floating Rate Income Opportunity and the Acquiring Fund have identical policies with respect to this investment type; Short Duration Credit Opportunities has no stated policy. |
|
|
|
|
|
Leverage: |
|
Leverage: |
|
Leverage: |
|
Leverage: |
|
|
|
|
|
|
|
The Fund may use leverage to the extent permitted by the 1940 Act. The Fund may source leverage through a number of methods including through borrowings, issuing preferred shares, the issuance of debt securities, and entering into
reverse repurchase agreements (effectively a borrowing). In addition, the Fund |
|
The Fund may use leverage to the extent permitted by the 1940 Act. The Fund may source leverage through a number of methods including through borrowings, issuing preferred shares, the issuance of debt securities, and entering into
reverse repurchase agreements (effectively a borrowing). In |
|
The Fund may use leverage to the extent permitted by the 1940 Act. The Fund may source leverage through a number of methods including through borrowings, issuing preferred shares and the issuance of debt securities. In addition,
the |
|
The Fund may use leverage to the extent permitted by the 1940 Act. The Fund may source leverage through a number of methods including through borrowings, issuing preferred shares, the issuance of debt securities, and entering
into |
|
No material differences. |
9
|
|
|
|
|
|
|
|
|
Senior Income |
|
Floating Rate
Income
Opportunity |
|
Short Duration Credit Opportunities |
|
Acquiring Fund |
|
Differences |
|
|
|
|
|
may use derivatives that may have the economic effect of leverage, such as certain credit default swaps, total return swaps and bond futures. The amount and sources of leverage will vary depending on market conditions. |
|
addition, the Fund may use derivatives that may have the economic effect of leverage, such as certain credit default swaps, total return swaps and bond futures. The amount and sources of leverage will vary depending on market
conditions. |
|
Fund may use derivatives that may have the economic effect of leverage, such as certain credit default swaps, total return swaps and bond futures. The amount and sources of leverage will vary depending on market conditions. |
|
reverse repurchase agreements (effectively a borrowing). In addition, the Fund may use derivatives that may have the economic effect of leverage, such as certain credit default swaps, total return swaps and bond futures. The amount
and sources of leverage will vary depending on market conditions. |
|
|
|
|
|
|
|
Illiquid Securities: |
|
Illiquid Securities: |
|
Illiquid Securities: |
|
Illiquid Securities: |
|
|
|
|
|
|
|
The Fund may invest in illiquid securities (i.e., securities that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the Securities Act of 1933, as amended (the 1933 Act), and repurchase agreements with maturities in excess of seven days. |
|
The Fund may invest in illiquid securities (i.e., securities that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the 1933 Act, and repurchase agreements with maturities in excess of seven days. |
|
The Fund may invest in illiquid securities (i.e., securities that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the 1933 Act, and repurchase agreements with maturities in excess of seven days. |
|
The Fund may invest in illiquid securities (i.e., securities that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the 1933 Act, and repurchase agreements with maturities in excess of seven days. |
|
No material differences. |
10
|
|
|
|
|
|
|
|
|
Senior Income |
|
Floating Rate
Income
Opportunity |
|
Short Duration Credit Opportunities |
|
Acquiring Fund |
|
Differences |
Other Investment Companies: |
|
Other Investment Companies: |
|
Other Investment Companies: |
|
Other Investment Companies: |
|
|
|
|
|
|
|
The Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies (including exchange-traded funds (ETFs)) that invest primarily
in the types in which the Fund may invest directly. |
|
The Fund may also invest in securities of other open- or closed-end investment companies (including ETFs) that invest primarily in the types in which the Fund may invest directly, to the
extent permitted under the 1940 Act and the rules and regulations issued thereunder and exemptive orders issued by the SEC. |
|
The Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies (including ETFs) that invest primarily in the types in which the Fund may
invest directly. |
|
The Fund may also invest in securities of other open- or closed-end investment companies (including ETFs) that invest primarily in the types in which the Fund may invest directly, to the
extent permitted under the 1940 Act and the rules and regulations issued thereunder and exemptive orders issued by the SEC. |
|
Senior Income and Short Duration Credit Opportunities each may invest up to 10% of their Managed Assets in securities of other investment companies, while Floating Rate Income Opportunity and the Acquiring Fund each may invest in
securities of other investment companies to the extent permitted under the 1940 Act and the rules and regulations issued thereunder and exemptive orders issued by the SEC. |
|
|
|
|
|
Temporary Defensive Periods: |
|
Temporary Defensive Periods: |
|
Temporary Defensive Periods: |
|
Temporary Defensive Periods: |
|
|
|
|
|
|
|
During temporary defensive periods (e.g., times when, in the Funds investment advisers and/or the Funds sub-advisers opinion, temporary imbalances of supply and demand
or other temporary dislocations in the senior loan market adversely affect the price at which senior loans are available), the Fund may invest |
|
During temporary defensive periods (e.g., times when, in the Funds investment advisers and/or the Funds sub-advisers opinion, temporary imbalances of supply and demand
or other temporary dislocations in the senior loan market adversely affect the price at which |
|
During temporary defensive periods (e.g., times when, in the Funds investment advisers and/or the Funds sub-advisers opinion, temporary imbalances of supply and demand
or other temporary dislocations in |
|
During temporary defensive periods (e.g., times when, in the Funds investment advisers and/or the Funds sub-advisers opinion, temporary imbalances of supply and demand
or other temporary dislocations in |
|
No material differences. |
11
|
|
|
|
|
|
|
|
|
Senior Income |
|
Floating Rate
Income
Opportunity |
|
Short Duration Credit Opportunities |
|
Acquiring Fund |
|
Differences |
up to 100% of its assets in high quality, short-term securities, and in short-, intermediate-, or long-term U.S. Treasury securities. |
|
senior loans are available), the Fund may invest up to 100% of its assets in high quality, short-term securities, and in short-, intermediate-, or long-term U.S. Treasury securities. |
|
the senior loan market adversely affect the price at which senior loans are available), the Fund may invest up to 100% of its assets in high quality, short-term securities, and in short-, intermediate-, or long-term U.S. Treasury
securities. |
|
the senior loan market adversely affect the price at which senior loans are available), the Fund may invest up to 100% of its assets in high quality, short-term securities, and in short-, intermediate-, or long-term U.S. Treasury
securities. |
|
|
(1) |
Each Fund defines Assets as the net assets of the Fund plus the amount of any borrowings for
investment purposes. |
(2) |
Each Fund defines Managed Assets as the total assets of the Fund, minus the sum of its accrued
liabilities (other than Fund liabilities incurred for the express purpose of creating leverage). Total assets for this purpose shall include assets attributable to the Funds use of leverage (whether or not those assets are reflected in the
Funds financial statements for purposes of generally accepted accounting principles), and derivatives will be valued at their market value. |
(3) |
iBoxx Loan Total Return Swaps are standardized total return swaps on loan indices that are designed to provide
exposure to the senior loan market. |
Leverage. Each Fund currently employs leverage through the issuance of TFP
Shares and secured bank borrowings (subject to investment restrictions). Each Fund also may source leverage through other methods, including reverse repurchase agreements. In addition, each Fund may use derivatives and other portfolio instruments
that have the economic effect of leverage. Certain important ratios related to each Funds use of leverage for the last three fiscal years for which published financial statements are available are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Income |
|
2022 |
|
|
2021 |
|
|
2020 |
|
Asset Coverage Ratio(1) |
|
|
260.29 |
% |
|
|
275.14 |
% |
|
|
279.27 |
% |
Regulatory Leverage Ratio(2) |
|
|
38.42 |
% |
|
|
36.35 |
% |
|
|
35.81 |
% |
Effective Leverage Ratio(3) |
|
|
38.42 |
% |
|
|
36.35 |
% |
|
|
35.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate Income Opportunity |
|
2022 |
|
|
2021 |
|
|
2020 |
|
Asset Coverage Ratio(1) |
|
|
259.20 |
% |
|
|
273.82 |
% |
|
|
279.80 |
% |
Regulatory Leverage Ratio(2) |
|
|
38.58 |
% |
|
|
36.52 |
% |
|
|
35.74 |
% |
Effective Leverage Ratio(3) |
|
|
38.58 |
% |
|
|
36.52 |
% |
|
|
35.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Duration Credit Opportunities |
|
2022 |
|
|
2021 |
|
|
2020 |
|
Asset Coverage Ratio(1) |
|
|
260.06 |
% |
|
|
274.85 |
% |
|
|
279.59 |
% |
Regulatory Leverage Ratio(2) |
|
|
38.45 |
% |
|
|
36.38 |
% |
|
|
35.77 |
% |
Effective Leverage Ratio(3) |
|
|
38.45 |
% |
|
|
36.38 |
% |
|
|
35.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring Fund |
|
2022 |
|
|
2021 |
|
|
2020 |
|
Asset Coverage Ratio(1) |
|
|
260.29 |
% |
|
|
274.19 |
% |
|
|
279.42 |
% |
Regulatory Leverage Ratio(2) |
|
|
38.42 |
% |
|
|
36.47 |
% |
|
|
35.79 |
% |
Effective Leverage Ratio(3) |
|
|
38.42 |
% |
|
|
36.47 |
% |
|
|
35.79 |
% |
(1) |
A Funds asset coverage ratio is defined under the 1940 Act as the ratio that the value of the total assets
of the Fund, less all liabilities and indebtedness not represented by preferred shares or senior securities representing indebtedness, bears to the aggregate amount of preferred shares and senior securities representing indebtedness issued by the
Fund. |
12
(2) |
Regulatory leverage consists of preferred shares issued by and borrowings of a Fund. Both of these are part of a
Funds capital structure. A Fund, however, also may from time to time borrow on a typically transient basis in connection with its day-to-day operations, primarily
in connection with the need to settle portfolio trades. Such incidental borrowings are excluded from the calculation of a Funds regulatory leverage and effective leverage ratios. Regulatory leverage is subject to asset coverage limits set
forth in the 1940 Act. |
(3) |
Effective leverage is a Funds effective economic leverage, and includes both regulatory leverage and the
leverage effects of certain derivative and other investments in a Funds portfolio that increase the Funds investment exposure. |
Board Members and Officers. The Acquiring Fund and the Target Funds have the same Board Members and officers. The management of each
Fund, including general oversight of the duties performed by the Funds investment adviser under an investment management agreement between the investment adviser and such Fund (each, an Investment Management Agreement), is the
responsibility of its Board. Each Fund currently has ten (10) Board Members, each of whom is not considered an interested person, as defined in the 1940 Act, of the Fund.
Pursuant to each Funds by-laws, the Board of the Fund is divided into three classes
(Class I, Class II and Class III) with staggered multi-year terms, such that typically only the members of one of the three classes stand for election each year; provided, however, that holders of preferred shares are entitled as a
class to elect two Board Members at all times. The staggered board structure could delay for up to two years the election of a majority of the Board of each Fund. To the extent that one or more preferred shareholders owns, holds or controls,
individually or in aggregate, all or a significant portion of a series of a Funds outstanding preferred shares, a few holders could exert influence on the selection of the Board as a result of the requirement that holders of preferred shares
be entitled to elect two Board Members at all times. The Acquiring Funds board structure will remain in place following the closing of the Mergers.
Investment Adviser. Nuveen Fund Advisors, LLC (previously defined as Nuveen Fund Advisors or the Adviser) is
the investment adviser to each Fund and is responsible for overseeing each Funds overall investment strategy, including the use of leverage, and its implementation. Nuveen Fund Advisors also is responsible for the ongoing monitoring of any sub-adviser to the Funds, managing each Funds business affairs and providing certain clerical, bookkeeping and other administrative services to the Funds. Nuveen Fund Advisors is located at 333 West Wacker
Drive, Chicago, Illinois 60606.
Nuveen Fund Advisors, a registered investment adviser, is a subsidiary of Nuveen, LLC
(Nuveen), the investment management arm of Teachers Insurance and Annuity Association of America (TIAA). TIAA is a life insurance company founded in 1918 by the Carnegie Foundation for the Advancement of Teaching and is the
companion organization of College Retirement Equities Fund. As of December 31, 2022, Nuveen managed approximately $1.1 trillion in assets, of which approximately $147.7 billion was managed by Nuveen Fund Advisors.
Unless earlier terminated as described below, each Funds Investment Management Agreement with Nuveen Fund Advisors will remain in effect
until August 1, 2023. Each Investment Management Agreement continues in effect from year to year so long as such continuation is approved at least annually by: (1) the Board or the vote of a majority of the outstanding voting securities of
the Fund; and (2) a majority of the Board Members who are not interested persons of any party to the Investment Management Agreement, cast in person at a meeting called for the purpose of voting on such approval. Each Investment Management
Agreement may be terminated at any time, without penalty, by either the Fund or Nuveen Fund Advisors upon 60 days written notice and is automatically terminated in the event of its assignment, as defined in the 1940 Act.
Pursuant to each Investment Management Agreement, each Fund has agreed to pay an annual management fee for the overall advisory and
administrative services and general office facilities provided by Nuveen Fund Advisors. Each Funds management fee consists of two componentsa complex-level fee, based on the aggregate amount of all eligible fund assets of Nuveen-branded
closed- and open-end registered investment companies organized in the United States, and a specific fund-level fee, based only on the amount of assets of such Fund. This pricing structure enables the
Funds shareholders to benefit from growth in assets within each individual Fund as well as from growth of complex-wide assets managed by Nuveen Fund Advisors.
13
For Senior Incomes, Floating Rate Income Opportunitys, Short Duration Credit
Opportunities and the Acquiring Funds fiscal year ended July 31, 2022, the effective management fee rates, expressed as a percentage of average total daily managed assets (including assets attributable to leverage), were 0.80%,
0.80%, 0.80% and 0.79%, respectively.
The annual fund-level fee rate for each Fund, payable monthly, is calculated according to the
following schedules:
Current Fund-Level Fee Schedules for the Funds
|
|
|
|
|
All Funds |
|
Average Total Daily Managed Assets* |
|
Annual Fee Rate |
|
For the first $500 million |
|
|
0.6500 |
% |
For the next $500 million |
|
|
0.6250 |
% |
For the next $500 million |
|
|
0.6000 |
% |
For the next $500 million |
|
|
0.5750 |
% |
For managed assets over $2 billion |
|
|
0.5500 |
% |
* |
For this purpose, managed assets means the total assets of the Fund, minus the sum of its accrued liabilities
(other than Fund liabilities incurred for the express purpose of creating leverage). Total assets for this purpose shall include assets attributable to the Funds use of effective leverage (whether or not those assets are reflected in the
Funds financial statements for purposes of U.S. generally accepted accounting principles). |
The management fee
compensates the Adviser for overall investment advisory and administrative services and general office facilities. Each Fund pays all of its other costs and expenses of its operations, including compensation of its Board Members (other than those
affiliated with the Adviser), custodian, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any preferred shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to governmental agencies, listing fees and taxes, if any.
Each
Fund also pays a complex-level fee to Nuveen Fund Advisors, which is payable monthly and is in addition to the fund-level fee. The complex-level fee is based on the aggregate daily amount of eligible assets for all Nuveen-branded closed- and open-end registered investment companies organized in the United States, as stated in the table below. As of December 31, 2022, the complex-level fee rate for each Fund was 0.1590%.
The annual complex-level fee for each Fund, payable monthly, is calculated by multiplying the current complex-wide fee rate, determined
according to the following schedule, by a Funds daily managed assets:
Complex-Level Fee Rates
|
|
|
|
|
Complex-Level Managed Asset Breakpoint
Level* |
|
Effective Rate at Breakpoint Level |
|
$55 billion |
|
|
0.2000 |
% |
$56 billion |
|
|
0.1996 |
% |
$57 billion |
|
|
0.1989 |
% |
$60 billion |
|
|
0.1961 |
% |
$63 billion |
|
|
0.1931 |
% |
$66 billion |
|
|
0.1900 |
% |
$71 billion |
|
|
0.1851 |
% |
$76 billion |
|
|
0.1806 |
% |
$80 billion |
|
|
0.1773 |
% |
$91 billion |
|
|
0.1691 |
% |
$125 billion |
|
|
0.1599 |
% |
$200 billion |
|
|
0.1505 |
% |
14
|
|
|
|
|
Complex-Level Managed Asset Breakpoint
Level* |
|
Effective Rate at Breakpoint Level |
|
$250 billion |
|
|
0.1469 |
% |
$300 billion |
|
|
0.1445 |
% |
* |
For the complex-level fees, managed assets include closed-end fund
assets managed by the Adviser that are attributable to certain types of leverage. For these purposes, leverage includes the funds use of preferred stock and borrowings and certain investments in the residual interest certificates (also called
inverse floating rate securities) in tender option bond (TOB) trusts, including the portion of assets held by a TOB trust that has been effectively financed by the trusts issuance of floating rate securities, subject to an agreement by the
Adviser as to certain funds to limit the amount of such assets for determining managed assets in certain circumstances. The complex-level fee is calculated based upon the aggregate daily managed assets of all Nuveen
open-end and closed-end funds that constitute eligible assets. Eligible assets do not include assets attributable to investments in other Nuveen funds or
assets in excess of a determined amount (originally $2 billion) added to the Nuveen fund complex in connection with the Advisers assumption of the management of the former First American Funds effective January 1, 2011, but do include
certain assets of certain Nuveen funds that were reorganized into funds advised by an affiliate of the Adviser during the 2019 calendar year. |
Sub-Adviser. Nuveen Fund Advisors has selected its wholly owned subsidiary, Nuveen Asset
Management, LLC (Nuveen Asset Management or the Sub-Adviser), located at 333 West Wacker Drive, Chicago, Illinois 60606, to serve as the
sub-adviser to each of the Funds pursuant to a sub-advisory agreement between Nuveen Fund Advisors and Nuveen Asset Management (the
Sub-Advisory Agreement). Nuveen Asset Management, a registered investment adviser, oversees day-to-day operations and
manages the investment of the Funds assets on a discretionary basis, subject to the supervision of Nuveen Fund Advisors.
For the
services provided pursuant to Senior Incomes, Floating Rate Income Opportunitys, Short Duration Credit Opportunities and the Acquiring Funds Sub-Advisory Agreements, Nuveen Fund
Advisors pays Nuveen Asset Management a portfolio management fee, payable monthly, calculated as set forth below. The sub-advisory fee is calculated as a percentage of the net management fee (net of applicable
breakpoints, waivers and reimbursements) paid by the Funds to Nuveen Fund Advisors.
|
|
|
|
|
Average Daily Managed Assets |
|
Percentage of Net Management Fee |
|
Up to $125 million |
|
|
50.0 |
% |
$125 million to $150 million |
|
|
47.5 |
% |
$150 million to $175 million |
|
|
45.0 |
% |
$175 million to $200 million |
|
|
42.5 |
% |
$200 million and over |
|
|
40.0 |
% |
Nuveen Fund Advisors and the Sub-Adviser retain the right to
reallocate investment advisory responsibilities and fees between themselves in the future.
A discussion of the basis for the Boards
most recent approval of the current Investment Management Agreement and Sub-Advisory Agreement for Senior Income, Floating Rate Income Opportunity, Short Duration Credit Opportunities and the Acquiring Fund is
included in the Funds Annual Report for the fiscal year ended July 31, 2022.
Portfolio Management. Subject to the
supervision of Nuveen Fund Advisors, Nuveen Asset Management is responsible for execution of specific investment strategies and day-to-day investment operations. Nuveen
Asset Management manages the portfolio of each Fund using a team of analysts and a portfolio manager that focuses on a specific group of funds. Scott Caraher and Kevin Lorenz, CFA are portfolio managers of the Target Funds and the Acquiring Fund.
Mr. Caraher assumed portfolio management responsibility for Senior Income, Floating Rate Income Opportunity and the Acquiring Fund in 2009 and Short Duration Credit Opportunities in 2011. Mr. Lorenz assumed portfolio management responsibility for
each Fund in 2020. Scott Caraher and Kevin Lorenz, CFA, will manage the combined fund upon completion of the Mergers.
15
Scott Caraher is Head of Senior Loans and responsible for retail and institutional bank
loan-focused portfolio management and co-PM on the firms Long-Short Credit Strategy. When Scott joined Nuveen affiliate Symphony Asset Management in 2002, he was a gaming and industrials analyst
providing long and short credit ideas to the investment team up and down the capital structure. Scott began trading loans for the platform in 2003 and in 2005 was named an associate portfolio manager on the firms loan strategies. He became the
lead portfolio manager on the firms loan strategies in 2008. Prior to joining the firm, Scott was an Investment Banking Analyst in the industrial group at Deutsche Banc Alex Brown in New York.
Kevin Lorenz, CFA, is head of high yield and responsible for retail and institutional high yield bond focused portfolio management. He has
served in a variety of roles since joining the firm in 1987. He has been investing in high yield over his entire career and has focused exclusively on high yield since 1995. Kevin is also a member of the global fixed income investment committee,
which discusses and debates investment policy for all global fixed income products.
Comparative Risk Information
Risk is inherent in all investing. Investing in the Funds involves risk, including the risk that you may receive little or no return on your
investment or that you may even lose part or all of your investment. An investment in the Funds is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before you
invest in a Fund, you should consider its principal risks.
Because each Fund invests primarily in senior loans, the principal risks of an
investment in each Fund are similar. However, there are differences between the Funds investment policies that may affect their comparative risk profiles. Short Duration Credit Opportunities invests at least 80% of its managed assets in below
investment grade debt instruments, while Senior Income, Floating Rate Income Opportunity and the Acquiring Fund are not required to invest in below investment grade debt instruments. Senior Incomes investments in
non-U.S. issuers are limited to U.S. dollar denominated senior loans, while the other Funds investments in non-U.S. issuers may include both U.S. dollar and non-U.S. dollar denominated securities or debt instruments and may also include issuers in emerging markets countries. Floating Rate Income Opportunity and the Acquiring Fund each may not invest more than 20% of
their managed assets in securities from the same industry, while Senior Income may not invest more than 25% of its managed assets in borrowers from the same industry and Short Duration Credit Opportunities has no stated policy in this regard.
The principal risks of investing in the Acquiring Fund are described in more detail under the caption Risk Factors in the
Confidential Information Memorandum accompanying this Proxy Statement as Appendix B (the Memorandum).
Comparative Expense Information
The purpose of the Comparative Fee Table is to assist you in understanding the various costs and expenses of investing in common shares of the
Funds. The information in the table reflects the fees and expenses of Senior Income, Floating Rate Income Opportunity, Short Duration Credit Opportunities and the Acquiring Fund for the fiscal year ended July 31, 2022 and the pro forma fees and
expenses of the combined fund following the Mergers for the twelve months ended July 31, 2022 assuming all Mergers were completed on July 31, 2022 and for each Merger separately.
The assets of the Funds will vary based on market conditions and other factors and may vary significantly during volatile market conditions.
The figures in the Example are not necessarily indicative of past or future expenses, and actual expenses may be greater or less than those shown. The Funds actual rates of return may be greater or less than the hypothetical 5% annual return
shown in the Example.
16
1. Comparative Fee Table(1)Mergers of Senior Income, Floating Rate Income Opportunity and Short Duration Credit Opportunities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Income |
|
|
Floating Rate Income Opportunity |
|
|
Short Duration Credit Opportunities |
|
|
Acquiring Fund |
|
|
Combined Fund Pro Forma(2) |
|
Annual Expenses (as a percentage of net assets attributable to common shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees |
|
|
1.27 |
% |
|
|
1.27 |
% |
|
|
1.27 |
% |
|
|
1.26 |
% |
|
|
1.21 |
% |
Fees on Preferred Shares and Interest and Related Expenses from Borrowings(3) |
|
|
0.82 |
% |
|
|
0.80 |
% |
|
|
0.91 |
% |
|
|
0.80 |
% |
|
|
0.81 |
% |
Other Expenses |
|
|
0.18 |
%(4) |
|
|
0.12 |
%(4) |
|
|
0.21 |
%(4) |
|
|
0.11 |
%(4) |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annual Expenses |
|
|
2.27 |
% |
|
|
2.19 |
% |
|
|
2.39 |
% |
|
|
2.17 |
% |
|
|
2.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The table presented above estimates what the annual expenses of the combined fund following the Mergers would be
stated as a percentage of the combined funds net assets attributable to common shares including the costs of leverage for the twelve month annual period ended July 31, 2022. Please see Additional Information About the Acquiring
FundAnnual Expenses Excluding the Costs of Leverage at page 100 for additional information. |
(2) |
Assumes the issuance of preferred shares in the amounts set forth in the capitalization table and assumes
borrowings remain at the percentage level in place during the twelve months ended July 31, 2022. Such amounts may change prior to the closing date. Please see C. Information About the MergersCapitalization at page 27.
|
(3) |
Fees on preferred shares assume annual dividends paid and amortization of offering costs for TFP Shares, where
applicable, and annual liquidity and remarketing fees for TFP Shares of Short Duration Credit Opportunities and the Acquiring Fund. The Funds use of leverage will increase the amount of management fees paid to the Adviser and the Sub-Adviser. |
(4) |
Other Expenses are estimated based on actual expenses from the prior fiscal reporting period.
|
Example: The following examples illustrate the expenses that a common shareholder would pay on a $1,000
investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that Total Annual Expenses remain the same. The examples also assume a 5% annual return. The
examples should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
10 Years |
|
Senior Income |
|
$ |
23 |
|
|
$ |
71 |
|
|
$ |
122 |
|
|
$ |
261 |
|
Floating Rate Income Opportunity |
|
$ |
22 |
|
|
$ |
69 |
|
|
$ |
117 |
|
|
$ |
252 |
|
Short Duration Credit Opportunities |
|
$ |
24 |
|
|
$ |
75 |
|
|
$ |
128 |
|
|
$ |
273 |
|
Acquiring Fund |
|
$ |
22 |
|
|
$ |
68 |
|
|
$ |
116 |
|
|
$ |
250 |
|
Combined Fund Pro Forma |
|
$ |
22 |
|
|
$ |
67 |
|
|
$ |
114 |
|
|
$ |
246 |
|
2. Comparative Fee Table(1)Merger of Senior
Income Only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Income |
|
|
Acquiring Fund |
|
|
Combined Fund Pro Forma(2) |
|
Annual Expenses (as a percentage of net assets attributable to common shares) |
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees |
|
|
1.27 |
% |
|
|
1.26 |
% |
|
|
1.24 |
% |
Fees on Preferred Shares and Interest and Related Expenses from Borrowings(3) |
|
|
0.82 |
% |
|
|
0.80 |
% |
|
|
0.80 |
% |
Other Expenses |
|
|
0.18 |
%(4) |
|
|
0.11 |
%(4) |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annual Expenses |
|
|
2.27 |
% |
|
|
2.17 |
% |
|
|
2.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The table presented above estimates what the annual expenses of the combined fund following the Merger would be
stated as a percentage of the combined funds net assets attributable to common shares including the costs of leverage for the twelve month annual |
17
|
period ended July 31, 2022. Please see Additional Information About the Acquiring FundAnnual Expenses Excluding the Costs of Leverage at page 100 for additional
information. |
(2) |
Assumes the issuance of preferred shares in the amounts set forth in the capitalization table and assumes
borrowings remain at the percentage level in place during the twelve months ended July 31, 2022. Such amounts may change prior to the closing date. Please see C. Information About the MergersCapitalization at page 27.
|
(3) |
Fees on preferred shares assume annual dividends paid and amortization of offering costs for TFP Shares, where
applicable, and annual liquidity and remarketing fees for TFP Shares of the Acquiring Fund. The TFP Shares of Senior Income, which currently are in a Variable Rate Mode, currently do not incur liquidity or remarketing fees. The Funds use of
leverage will increase the amount of management fees paid to the Adviser and the Sub-Adviser. |
(4) |
Other Expenses are estimated based on actual expenses from the prior fiscal reporting period.
|
Example: The following examples illustrate the expenses that a common shareholder would pay on a $1,000
investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that Total Annual Expenses remain the same. The examples also assume a 5% annual return. The
examples should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
10 Years |
|
Senior Income |
|
$ |
23 |
|
|
$ |
71 |
|
|
$ |
122 |
|
|
$ |
261 |
|
Acquiring Fund |
|
$ |
22 |
|
|
$ |
68 |
|
|
$ |
116 |
|
|
$ |
250 |
|
Combined Fund Pro Forma |
|
$ |
22 |
|
|
$ |
67 |
|
|
$ |
115 |
|
|
$ |
248 |
|
3. Comparative Fee Table(1)Merger of Floating
Rate Income Opportunity Only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate Income Opportunity |
|
|
Acquiring Fund |
|
|
Combined Fund Pro Forma(2) |
|
Annual Expenses (as a percentage of net assets attributable to common shares) |
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees |
|
|
1.27 |
% |
|
|
1.26 |
% |
|
|
1.23 |
% |
Fees on Preferred Shares and Interest and Related Expenses from Borrowings(3) |
|
|
0.80 |
% |
|
|
0.80 |
% |
|
|
0.80 |
% |
Other Expenses |
|
|
0.12 |
%(4) |
|
|
0.11 |
%(4) |
|
|
0.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annual Expenses |
|
|
2.19 |
% |
|
|
2.17 |
% |
|
|
2.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The table presented above estimates what the annual expenses of the combined fund following the Merger would be
stated as a percentage of the combined funds net assets attributable to common shares including the costs of leverage for the twelve month annual period ended July 31, 2022. Please see Additional Information About the Acquiring
FundAnnual Expenses Excluding the Costs of Leverage at page 100 for additional information. |
(2) |
Assumes the issuance of preferred shares in the amounts set forth in the capitalization table and assumes
borrowings remain at the percentage level in place during the twelve months ended July 31, 2022. Such amounts may change prior to the closing date. Please see C. Information About the MergersCapitalization at page 27.
|
(3) |
Fees on preferred shares assume annual dividends paid and amortization of offering costs for TFP Shares, where
applicable, and annual liquidity and remarketing fees for TFP Shares of the Acquiring Fund. The TFP Shares of Floating Rate Income Opportunity, which currently are in a Variable Rate Mode, currently do not incur liquidity or remarketing fees. The
Funds use of leverage will increase the amount of management fees paid to the Adviser and the Sub-Adviser. |
(4) |
Other Expenses are estimated based on actual expenses from the prior fiscal reporting period.
|
18
Example: The following examples illustrate the expenses that a common shareholder would
pay on a $1,000 investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that Total Annual Expenses remain the same. The examples also assume a 5% annual
return. The examples should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
10 Years |
|
Floating Rate Income Opportunity |
|
$ |
22 |
|
|
$ |
69 |
|
|
$ |
117 |
|
|
$ |
252 |
|
Acquiring Fund |
|
$ |
22 |
|
|
$ |
68 |
|
|
$ |
116 |
|
|
$ |
250 |
|
Combined Fund Pro Forma |
|
$ |
22 |
|
|
$ |
67 |
|
|
$ |
114 |
|
|
$ |
246 |
|
4. Comparative Fee Table(1)Merger of Short
Duration Credit Opportunities Only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Duration Credit Opportunities |
|
|
Acquiring Fund |
|
|
Combined Fund Pro Forma(2) |
|
Annual Expenses (as a percentage of net assets attributable to common shares) |
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees |
|
|
1.27 |
% |
|
|
1.26 |
% |
|
|
1.25 |
% |
Fees on Preferred Shares and Interest and Related Expenses from Borrowings(3) |
|
|
0.91 |
% |
|
|
0.80 |
% |
|
|
0.82 |
% |
Other Expenses |
|
|
0.21 |
%(4) |
|
|
0.11 |
%(4) |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annual Expenses |
|
|
2.39 |
% |
|
|
2.17 |
% |
|
|
2.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The table presented above estimates what the annual expenses of the combined fund following the Merger would be
stated as a percentage of the combined funds net assets attributable to common shares including the costs of leverage for the twelve month annual period ended July 31, 2022. Please see Additional Information About the Acquiring
FundAnnual Expenses Excluding the Costs of Leverage at page 100 for additional information. |
(2) |
Assumes the issuance of preferred shares in the amounts set forth in the capitalization table and assumes
borrowings remain at the percentage level in place during the twelve months ended July 31, 2022. Such amounts may change prior to the closing date. Please see C. Information About the MergersCapitalization at page 27.
|
(3) |
Fees on preferred shares assume annual dividends paid and amortization of offering costs for TFP Shares, where
applicable, and annual liquidity and remarketing fees for TFP Shares of Short Duration Credit Opportunities and the Acquiring Fund. The Funds use of leverage will increase the amount of management fees paid to the Adviser and the Sub-Adviser. |
(4) |
Other Expenses are estimated based on actual expenses from the prior fiscal reporting period.
|
Example: The following examples illustrate the expenses that a common shareholder would pay on a $1,000
investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that Total Annual Expenses remain the same. The examples also assume a 5% annual return. The
examples should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
10 Years |
|
Short Duration Credit Opportunities |
|
$ |
24 |
|
|
$ |
75 |
|
|
$ |
128 |
|
|
$ |
273 |
|
Acquiring Fund |
|
$ |
22 |
|
|
$ |
68 |
|
|
$ |
116 |
|
|
$ |
250 |
|
Combined Fund Pro Forma |
|
$ |
22 |
|
|
$ |
68 |
|
|
$ |
117 |
|
|
$ |
251 |
|
19
Comparative Performance Information
Comparative total return performance for the Funds for periods ended July 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Total Return on Net Asset Value |
|
|
Average Annual Total Return on Market Value |
|
|
|
One Year |
|
|
Five Years |
|
|
Ten Years |
|
|
One Year |
|
|
Five Years |
|
|
Ten Years |
|
Senior Income |
|
|
-3.03 |
% |
|
|
2.05 |
% |
|
|
4.19 |
% |
|
|
-5.84 |
% |
|
|
1.23 |
% |
|
|
3.42 |
% |
Floating Rate Income Opportunity |
|
|
-2.82 |
% |
|
|
2.17 |
% |
|
|
4.52 |
% |
|
|
-3.76 |
% |
|
|
1.05 |
% |
|
|
4.03 |
% |
Short Duration Credit Opportunities |
|
|
-3.52 |
% |
|
|
1.82 |
% |
|
|
3.94 |
% |
|
|
-5.50 |
% |
|
|
0.78 |
% |
|
|
3.43 |
% |
Acquiring Fund |
|
|
-2.84 |
% |
|
|
2.18 |
% |
|
|
4.37 |
% |
|
|
-2.59 |
% |
|
|
1.44 |
% |
|
|
4.31 |
% |
Average Annual Total Return on Net Asset Value is the combination of changes in common share net asset value,
reinvested dividend income at net asset value and reinvested capital gains distributions at net asset value, if any. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be
reinvested at the ending net asset value. The actual reinvestment price for the last dividend declared in the period may often be based on the Funds market price (and not its net asset value), and therefore may be different from the price used
in the calculation. Average Annual Total Return on Market Value is the combination of changes in the market price per share and the effect of reinvested dividend income and reinvested capital gains distributions, if any, at the average price paid
per share at the time of reinvestment. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending market price. The actual reinvestment for the last
dividend declared in the period may take place over several days, and in some instances it may not be based on the market price, so the actual reinvestment price may be different from the price used in the calculation. Past performance information
is not necessarily indicative of future results.
An investment in the Acquiring Fund may not be appropriate for all investors. The Acquiring Fund is not intended to be a complete investment
program and, due to the uncertainty inherent in all investments, there can be no assurance that the Acquiring Fund will achieve its investment objectives. Investors should consider their long-term investment goals and financial needs when making an
investment decision with respect to shares of the Acquiring Fund. An investment in the Acquiring Fund is intended to be a long-term investment, and you should not view the Fund as a trading vehicle. Your shares at any point in time may be worth less
than your original investment, even after taking into account the reinvestment of Fund dividends and distributions, if applicable.
The
principal risks of investing in TFP Shares of the Acquiring Fund are described under the caption Risk Factors in the Memorandum accompanying this Proxy Statement as Appendix B. An investment in TFP Shares of each Target Fund is
also generally subject to these principal risks. The risks and special considerations discussed in the Memorandum should be considered by holders of TFP Shares of each Target Fund in their evaluation of the applicable Merger.
C. |
INFORMATION ABOUT THE MERGERS |
General
Nuveen Fund Advisors, a subsidiary of Nuveen and the Funds investment adviser, recommended the Merger proposals as part of an ongoing
initiative to streamline Nuveens closed-end fund line-up and eliminate overlapping products. Each Funds Board considered its Funds Merger(s) and
determined that the Merger(s) would be in the best interests of its Fund. Based on information provided by Nuveen Fund Advisors, each Target Funds Board believes that its Funds proposed Merger may benefit the common shareholders of its
Fund in a number of ways, including, among other things:
20
|
|
|
Greater secondary market liquidity and improved secondary market trading for common shares as a result of the
combined funds greater share volume, which may lead to narrower bid-ask spreads and smaller trade-to-trade price movements;
|
|
|
|
The potential for a narrower trading discount as a result of the larger size of the combined fund and the
Acquiring Funds common shares trading at a discount that historically has been approximately equal to or lower than that of the Target Funds common shares; |
|
|
|
Increased portfolio and leverage management flexibility due to the significantly larger asset base of the
combined fund; and |
|
|
|
Assuming each Merger is completed, lower net operating expenses (excluding the cost of leverage), as certain
fixed costs are spread over the combined funds larger asset base which may also help to achieve fund-level management fee breakpoints. |
With respect to holders of preferred shares of each Target Fund, the Target Funds Board considered that, upon the closing of the
applicable Merger, holders of any preferred shares outstanding immediately prior to the closing will receive, on a one-for-one basis, newly issued preferred shares of
the Acquiring Fund having substantially similar terms as the preferred shares of the applicable Target Fund immediately prior to the closing of the Merger.
Based on information provided by Nuveen Fund Advisors, the Acquiring Funds Board considered that the Acquiring Fund also may benefit
from economies of scale due to a larger asset base, greater secondary market liquidity and increased portfolio and leverage management flexibility. With respect to holders of preferred shares of the Acquiring Fund, the Acquiring Funds Board
considered that the outstanding preferred shares of the Acquiring Fund and preferred shares of the Acquiring Fund to be issued in the Mergers would have equal priority with each other as to payment of dividends and distributions of assets upon
dissolution, liquidation or winding up of the affairs of the Acquiring Fund.
For these reasons, each Funds Board has determined
that its Funds Merger(s) are in the best interest of its Fund and has approved such Merger(s).
The closing of each Merger is
subject to the satisfaction or waiver of certain closing conditions, which include customary closing conditions. In order for a Merger to occur, all requisite shareholder approvals must be obtained at the applicable Funds shareholder meetings,
and certain other consents, confirmations and/or waivers from various third parties, including the liquidity provider with respect to outstanding preferred shares of the Acquiring Fund and lenders under the Acquiring Funds Credit Facility,
must also be obtained. Because the closing of each Merger is contingent upon the applicable Target Fund and the Acquiring Fund obtaining such shareholder approvals and satisfying (or obtaining the waiver of) other closing conditions, it is possible
that a Merger will not occur even if shareholders of a Fund entitled to vote approve the Merger and a Fund satisfies all of its closing conditions if the other Fund does not obtain its requisite shareholder approvals or satisfy (or obtain the waiver
of) its closing conditions. If a Merger is not consummated, the Board of the Target Fund involved in that Merger may take such actions as it deems in the best interests of the Fund, including conducting additional solicitations with respect to the
Merger proposals or continuing to operate the Target Fund as a standalone fund. The closing of one Merger is not contingent on the closing of any other Merger.
Terms of the Mergers
General. The Agreement and Plan of Merger by and among the Acquiring Fund, each Target Fund and the Merger Sub (the
Agreement), in the form attached as Appendix A to this Proxy Statement, sets forth the terms of each Merger and, with respect to each Merger, provides for: (1) the merger of the Target Fund with and into the Merger Sub, with
the Merger Sub continuing as the surviving company and the separate legal existence
21
of the Target Fund ceasing for all purposes as of the Effective Time; (2) the conversion of the issued and outstanding common shares of beneficial interest of the Target Fund into newly
issued common shares of beneficial interest of the Acquiring Fund, par value $0.01 per share (with cash being received in lieu of any fractional Acquiring Fund common shares), and (3) the conversion of the issued and outstanding TFP Shares of
the Target Fund into newly issued TFP Shares of the Acquiring Fund, with a par value of $0.01 per share and a liquidation preference of $1,000 per share. With respect to each Merger, as of the Effective Time, without any further action, the Merger
Sub as the surviving company shall (i) succeed to and possess all rights, powers and privileges of the Merger Sub and the Target Fund, and all of the assets and property of whatever kind and character of the Target Fund and the Merger Sub shall
vest in the Merger Sub, and (ii) be liable for all of the liabilities and obligations of the Target Fund and the Merger Sub. As soon as practicable following the completion of the Mergers, the Merger Sub will distribute its assets to the
Acquiring Fund and the Acquiring Fund will assume the liabilities of the Merger Sub in complete liquidation and dissolution of the Merger Sub under Massachusetts law. The Merger Sub has been formed for the sole purpose of consummating the Mergers
and the Merger Sub will not conduct any business prior to the closing of the Mergers, except as necessary to facilitate the Mergers.
As a
result of the Mergers, and subsequent distribution of assets to the Acquiring Fund, the assets of the Acquiring Fund and the Target Funds would be combined, and the shareholders of the Target Funds would become shareholders of the Acquiring Fund.
The Acquiring Fund will be the accounting survivor of the Mergers.
Each preferred shareholder of a Target Fund will receive the same
number of Acquiring Fund TFP Shares having substantially similar terms as the outstanding TFP Shares of such Target Fund held by such preferred shareholder immediately prior to the closing of the Mergers. The aggregate liquidation preference of the
Acquiring Fund TFP Shares received in connection with the Mergers will equal the aggregate liquidation preference of a Target Funds TFP Shares held immediately prior to the closing of the Mergers. The Acquiring Fund TFP Shares to be issued in
connection with the Mergers will have equal priority with each other and with the Acquiring Funds other outstanding preferred shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Acquiring Fund. In addition, the preferred shares of the Acquiring Fund, including any TFP Shares of the Acquiring Fund to be issued in connection with the Mergers, and any borrowings of the Acquiring Fund, will be senior in
priority to the Acquiring Funds common shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund.
The closing date is expected to be on or about June 5, 2023, or such other date as the parties may agree (the Closing Date).
Following the Mergers, each Target Fund will terminate its registration as an investment company under the 1940 Act. The Acquiring Fund will continue to operate after the Mergers as a registered closed-end
management investment company, with the investment objectives and policies described in this Proxy Statement.
The aggregate net asset
value, as of the Valuation Time (as defined below), of the Acquiring Fund common shares received by each Target Funds common shareholders in connection with the Mergers will equal the aggregate net asset value of the Target Fund common shares
held by shareholders of the Target Fund as of the Valuation Time. Prior to the Valuation Time, the net asset value of each Fund will be reduced by the costs of the Mergers borne by such Fund. See Description of Common Shares to Be Issued
by the Acquiring Fund; Comparison to Target Funds for a description of the rights of Acquiring Fund common shareholders. However, no fractional Acquiring Fund common shares will be distributed to a Target Funds common shareholders in
connection with a Merger. The Acquiring Funds transfer agent will aggregate all fractional Acquiring Fund common shares that may be due to a Target Funds shareholders as of the Closing Date and will sell the resulting whole shares for
the account of holders of all such fractional interests at a value that may be higher or lower than net asset value, and each such holder will be entitled to a pro rata share of the proceeds from such sale. With respect to the aggregation and
sale of fractional common shares, the Acquiring Funds transfer agent will act directly on behalf of the shareholders entitled to receive fractional shares and will accumulate fractional shares, sell the shares and distribute the cash proceeds
net of brokerage commissions, if any, directly to the Target Fund shareholders entitled to receive the fractional shares (without interest and subject to withholding taxes). For
22
federal income tax purposes, Target Fund shareholders will be treated as if they received fractional share interests and then sold such interests for cash in a taxable transaction. The holding
period and the aggregate tax basis of the Acquiring Fund shares received by a shareholder, including fractional share interests deemed received by a shareholder, will be the same as the holding period and aggregate tax basis of the Target Fund
common shares previously held by the shareholder and exchanged therefor, provided the Target Fund shares exchanged therefor were held as capital assets at the effective time of a Merger. As a result of the Mergers, common shareholders of the Funds
will hold a smaller percentage of the outstanding common shares of the combined fund as compared to their percentage holdings of their respective Fund prior to the Mergers and thus, common shareholders will hold reduced percentages of ownership in
the larger combined entity than they held in the Acquiring Fund or a Target Fund individually.
Following the Mergers, each preferred
shareholder of the Target Funds would own the same number of new Acquiring Fund TFP Shares with the same aggregate liquidation preference as the TFP Shares of the Target Fund held by such shareholder immediately prior to the closing of the Mergers,
with substantially similar terms as the outstanding TFP Shares of the Target Fund held by such preferred shareholder immediately prior to the closing of a Merger. As a result of the Mergers, preferred shareholders of the Funds will hold reduced
voting percentages of preferred shares in the combined fund than they held in the Acquiring Fund or a Target Fund individually.
The
holders of TFP Shares of each Target Fund will receive the following new series of TFP Shares of the Acquiring Fund:
|
|
|
|
|
Target Fund |
|
Target Fund Preferred Shares Outstanding |
|
Acquiring Fund Preferred Shares to be Issued in the
Merger |
Senior Income |
|
TFP Shares, Series A $1,000 liquidation preference per share Term Redemption Date: November 1, 2030 |
|
TFP Shares, Series B $1,000 liquidation preference per share Term Redemption Date: November 1, 2030 |
|
|
|
Floating Rate Income Opportunity |
|
TFP Shares, Series A $1,000 liquidation preference per share Term Redemption Date: December 1, 2030 |
|
TFP Shares, Series C $1,000 liquidation preference per share Term Redemption Date: December 1, 2030 |
|
|
|
Short Duration Credit Opportunities |
|
TFP Shares, Series A $1,000 liquidation preference per share Term Redemption Date: November 1, 2029 |
|
TFP Shares, Series D $1,000 liquidation preference per share Term Redemption Date: November 1, 2029 |
Valuation of Common Shares. Pursuant to the Agreement, the net asset value per share of each Target
Fund and the Acquiring Fund shall be computed as of the close of regular trading on the NYSE on the business day immediately prior to the Closing Date (such time and date referred to herein as the Valuation Time) using the valuation
procedures of the Nuveen closed-end funds or such other valuation procedures as will be mutually agreed upon by the parties.
Acquiring Fund Common Shares to be Issued. At the effective time of the closing (the Effective Time), each Target Fund
common share outstanding immediately prior to the Effective Time shall be converted into a number of Acquiring Fund common shares equal to one multiplied by the quotient of the net asset value per share of the Target Fund divided by the net asset
value per share of the Acquiring Fund.
Amendments. Under the terms of the Agreement, the Agreement may be amended, modified or
supplemented in such manner as may be mutually agreed upon in writing by each Fund affected by the amendment as specifically authorized by such Funds Board; provided, however, that following the receipt of shareholder approval of the Agreement
with respect to a Merger, no such amendment, modification or supplement may have the effect of changing the provisions for determining the number of Acquiring Fund shares
23
to be issued to a Target Funds shareholders under the Agreement with respect to a Merger to the detriment of such shareholders without their further approval.
Conditions. Under the terms of the Agreement, the closing of each Merger is subject to the satisfaction or waiver (if permissible) of
the following closing conditions: (1) the requisite approval by the common and preferred shareholders of each Fund of the proposals with respect to the Target Funds Merger described in this Proxy Statement, (2) each Funds
receipt of an opinion of counsel substantially to the effect that the merger of the Target Fund with and into the Merger Sub will qualify as a reorganization under the Code (see Material Federal Income Tax Consequences of the
Mergers), (3) the absence of legal proceedings challenging the Mergers, and (4) the Funds receipt of certain customary certificates and legal opinions. Additionally, in order for the Mergers to occur, certain other consents,
confirmations and/or waivers from various third parties, including the liquidity provider with respect to outstanding preferred shares of the Acquiring Fund and lenders under the Acquiring Funds Credit Facility, must also be obtained.
Termination. With respect to each Merger, the Agreement may be terminated by the mutual agreement of the parties, and such termination
may be effected by the Chief Administrative Officer, President or any Vice President of each Fund without further action by a Target Funds Board or the Acquiring Funds Board. In addition, a Fund may at its option terminate the Agreement
with respect to its Merger at or before the closing due to: (1) a breach by the non-terminating party of any representation or warranty, or agreement to be performed at or before the closing, if not cured
within 30 days of the breach and prior to the closing; (2) a condition precedent to the obligations of the terminating party that has not been met or waived and it reasonably appears that it will not or cannot be met; or (3) a
determination by a Target Funds Board or the Acquiring Funds Board that the consummation of the transactions contemplated by the Agreement is not in the best interests of its respective Fund involved in the Merger(s).
Reasons for the Mergers
Based on the considerations described below, the Board of Trustees of each Target Fund (each, a Target Board and collectively, the
Target Boards), all of whom are not interested persons, as defined in the 1940 Act, and the Board of Trustees of the Acquiring Fund (the Acquiring Board and together with the Target Boards, the Boards
and each individually, a Board), all of whom are not interested persons, as defined in the 1940 Act, have each determined that its Funds Merger(s) would be in the best interests of its Fund and that the interests of the
existing shareholders of its Fund would not be diluted as a result of such Merger(s). At a meeting held on January 19, 2023 (the Board Meeting), each Board approved its Funds Merger(s) and recommended that shareholders of its
Fund, as applicable, approve such Merger(s).
At and prior to the Board Meeting, including at previous meetings, Nuveen Fund Advisors made
presentations and provided the Boards with information relating to the proposed Mergers and alternatives to the proposed Mergers. Prior to approving the Mergers, each Board reviewed the foregoing information with its independent legal counsel and
with management, reviewed with independent legal counsel applicable law and its duties in considering such matters and met with independent legal counsel in private sessions without management present. Each Board recognized that Nuveen Fund
Advisors, each Funds investment adviser, had recommended the Merger proposals as part of an ongoing initiative to streamline Nuveens closed-end fund line-up
and eliminate overlapping products. Based on the foregoing, the Boards considered the following factors (as applicable), among others, in approving the Mergers and recommending that shareholders of the Funds (as applicable) approve the Mergers:
|
|
|
the compatibility of the Funds investment objectives, policies and related risks; |
|
|
|
the consistency of portfolio management; |
|
|
|
the larger asset base of the combined fund as a result of the Mergers and the effect of the Mergers on fees and
expense ratios; |
24
|
|
|
the potential for improved secondary market trading with respect to common shares; |
|
|
|
the anticipated federal income tax-free nature of the Mergers;
|
|
|
|
the expected costs of the Mergers; |
|
|
|
the terms of the Mergers and whether the Mergers would dilute the interests of the shareholders of the applicable
Funds; |
|
|
|
the effect of the Mergers on shareholder rights; |
|
|
|
alternatives to the Mergers; and |
|
|
|
any potential benefits of the Mergers to Nuveen Fund Advisors and its affiliates as a result of the Mergers.
|
Compatibility of Investment Objectives, Policies and Related Risks. Based on the information presented, the
Boards noted that the Funds have similar investment objectives, policies and risks, but there are differences. For example, although each Fund has an investment objective that generally includes providing current income, Short Duration Credit
Opportunities investment objective also includes providing the potential for capital appreciation. Further, although each Fund invests primarily in senior loans, there are certain policy differences. In its review, based on information
provided by Nuveen Fund Advisors, each Board considered the anticipated impact of the Mergers on its Funds portfolio, including the expected effect on credit quality, and noted the similarities in portfolio composition and the degree of
portfolio overlap among the Funds. The Boards also noted that each Fund may use leverage through a number of methods, including, among other things, through borrowings and the issuance of preferred shares. Moreover, in comparison to the Target
Funds, the Target Boards recognized the potential for increased portfolio and leverage management flexibility afforded by the significantly larger asset base of the combined fund. With respect to principal investment risks, while the principal risks
of an investment in each Fund would be similar in certain respects because each Fund invests primarily in senior loans, the differences relating to the Funds investment policies may affect the comparative risk profiles.
The Boards recognized that the Acquiring Fund has one series of TFP Shares outstanding, which are expected to remain outstanding following the
Mergers, and each Target Fund has one series of TFP Shares outstanding. With respect to holders of preferred shares of each Target Fund, the Target Board considered that upon the closing of its Funds Merger, holders of any preferred shares
outstanding immediately prior to the closing will receive, on a one-for-one basis, newly issued preferred shares of the Acquiring Fund having substantially similar terms
to those of the preferred shares of the applicable Target Fund immediately prior to the closing of such Merger.
With respect to the
Acquiring Fund, the Acquiring Board considered, based on information provided by Nuveen Fund Advisors, that the Acquiring Fund may benefit from increased portfolio and leverage management flexibility. The Acquiring Board also recognized that the
outstanding preferred shares of the Acquiring Fund and any preferred shares of the Acquiring Fund to be issued in the Mergers would have equal priority with each other as to payment of dividends and distributions of assets upon dissolution,
liquidation or winding up of the affairs of the Acquiring Fund.
Consistency of Portfolio Management. Each Fund has the same
investment adviser and sub-adviser. In addition, each Fund has the same portfolio management team, which will continue to manage the combined fund upon completion of the Mergers. Through the Mergers, the
Boards recognized that shareholders would remain invested in a closed-end management investment company that will have greater net assets and the same investment adviser,
sub-adviser and portfolio managers.
25
Larger Asset Base of the Combined Fund; Effect of the Mergers on Fees and Expense
Ratios. The Boards evaluated the fees and expense ratios of each of the Funds (including estimated expenses of the combined fund following the Mergers). It was anticipated that the Funds will benefit from the larger asset size as fixed
costs are shared over a larger asset base. The Target Boards also considered that the fund-level management fee schedule of the Acquiring Fund was the same as that of each Target Fund at each breakpoint level and that, assuming each Merger is
completed, the larger asset base of the combined fund may help to achieve fund-level management fee breakpoints. In addition, the Target Boards noted that, assuming each Merger is completed, it was expected that the net operating expenses per common
share (i.e., expenses excluding the costs of leverage) of the combined fund would be lower than those of each Target Fund prior to the closing of the Mergers. In addition, the Acquiring Board noted that, assuming each Merger is completed, the net
operating expenses per common share (i.e., expenses excluding the costs of leverage) of the combined fund were expected to be lower than those of the Acquiring Fund prior to the closing of the Mergers.
Potential for Improved Secondary Market Trading. While it is not possible to predict trading levels following the Mergers, the Target
Boards noted that the Mergers are being proposed, in part, to seek to enhance the secondary trading market for the common shares with respect to the Target Funds. The Target Boards considered that, relative to the Target Funds, the combined
funds greater share volume may result in greater secondary market liquidity and improved secondary market trading for common shares after the Mergers, which may lead to narrower bid-ask spreads
and smaller trade-to-trade price movements. In addition, based on information provided by Nuveen Fund Advisors (including, among other things, average trading
discounts calculated over various time periods), the Target Boards considered the potential for a narrower trading discount, relative to the Target Funds, as a result of the larger size of the combined fund and the Acquiring Funds common
shares trading at a discount that historically has been approximately equal to or lower than that of the Target Funds common shares. However, the Target Boards recognized that the past trading record of the common shares of the Acquiring Fund
may not necessarily be indicative of how the common shares of the combined fund will trade in the future and that no assurance can be provided regarding the trading discount of the common shares of the combined fund. Further, with respect to the
Acquiring Fund, the Acquiring Board noted that such Fund may benefit from greater secondary market liquidity with respect to its common shares due to increased scale.
Anticipated Tax-Free Reorganizations; Capital Loss Carryforwards. Each Merger will be
structured with the intention that it qualifies as a tax-free reorganization for federal income tax purposes, and each Fund participating in a Merger will obtain an opinion of counsel substantially
to this effect (based on certain factual representations and certain customary assumptions and exclusions). In addition, the Boards considered the impact of the Mergers on the ability to use capital loss carryforwards of the Funds and applicable
limitations of federal income tax rules. Further, the Boards considered that, with respect to the Target Funds, significant portfolio sales were not expected to occur solely in connection with the Mergers.
Expected Costs of the Mergers. The Boards considered the terms and conditions of the Mergers, including the estimated costs
associated with the Mergers and the allocation of such costs among the Funds. Preferred shareholders will not bear any costs of the Mergers.
Terms of the Mergers and Impact on Shareholders. The terms of the Mergers are intended to avoid dilution of the interests of the
existing shareholders of the applicable Funds. In this regard, each Target Board considered that each holder of common shares of its Target Fund will receive common shares of the Acquiring Fund (taking into account any fractional shares to which the
shareholder would be entitled) equal in value as of the Valuation Time to the aggregate per share net asset value of that shareholders Target Fund common shares held as of the Valuation Time. However, no fractional common shares of the
Acquiring Fund will be distributed to the Target Funds common shareholders in connection with the Mergers. In lieu of such fractional shares, the Target Funds common shareholders will receive cash. As noted above with respect to holders
of preferred shares of each Target Fund, holders of any preferred shares outstanding immediately prior to the closing of the
26
applicable Merger will receive, on a one-for-one basis, newly issued preferred shares of the Acquiring Fund having
substantially similar terms to those of the preferred shares of the applicable Target Fund immediately prior to the closing of such Merger.
In conjunction with the issuance of additional shares of the Acquiring Fund as described above, the Acquiring Board considered that the
Acquiring Fund would receive additional assets and liabilities as a result of each Merger. Further, as noted above, the outstanding preferred shares of the Acquiring Fund and any preferred shares of the Acquiring Fund to be issued in the Mergers
would have equal priority with each other as to payment of dividends and distributions of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund.
Effect on Shareholder Rights. The Boards considered that each Fund is organized as a Massachusetts business trust. In this regard, with
respect to each Target Fund, there will be no change to shareholder rights under state statutory law.
Alternatives. The Target
Boards considered various alternatives to the Mergers, including, among other things, keeping the status quo, liquidating the Target Funds, and merging the Target Funds into an open-end fund. In considering
the status quo, the Target Boards considered Nuveen Fund Advisors view, among other things, that this option would not provide shareholders with the opportunity to benefit from economies of scale. In considering liquidation, the Target Boards
took into account, among other things, that such alternative would be a taxable event and could be potentially disruptive to long-term shareholders. With respect to a merger into an open-end fund, the Target
Boards considered, among other things, that based on the information provided by Nuveen Fund Advisors, this option may result in potentially lower earnings over time for Target Fund shareholders and may be disruptive to the acquiring open-end funds shareholders. In evaluating the proposed Mergers, the Target Boards considered, among other things, Nuveen Fund Advisors view that combining the Target Funds with a larger closed-end fund that also invests primarily in senior loans was an attractive alternative in light of certain potential benefits to shareholders of the Target Funds, as outlined above.
Potential Benefits to Nuveen Fund Advisors and Affiliates. The Boards recognized that the Mergers may result in some benefits and
economies of scale for Nuveen Fund Advisors and its affiliates. These may include, for example, a reduction in the level of operational expenses incurred for administrative, compliance and portfolio management services as a result of the elimination
of each Target Fund as a separate fund in the Nuveen complex.
Conclusion. Each Board approved the Merger(s) involving its Fund,
concluding that each such Merger is in the best interests of its Fund and that the interests of existing shareholders of its Fund will not be diluted as a result of the respective Merger(s).
Capitalization
The following tables set forth the unaudited equity capitalization of the Funds as of November 30, 2022, and the pro-forma combined equity capitalization of the Acquiring Fund as if the Merger(s) had occurred on that date assuming the completion of all Mergers and the completion of each Merger separately.
1. |
Capitalization TableMergers of Senior Income, Floating Rate Income Opportunity and Short Duration
Credit Opportunities |
The table reflects pro forma exchange ratios of approximately 0.58362402, 0.98941510 and 1.47209981 common
shares of the Acquiring Fund issued for each common share of Senior Income, Floating Rate Income Opportunity
27
and Short Duration Credit Opportunities, respectively. If the Mergers are consummated, the actual exchange ratios may vary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Income |
|
|
Floating Rate Income Opportunity |
|
|
Short Duration Credit Opportunities |
|
|
Acquiring Fund |
|
|
Pro Forma Adjustments |
|
|
Acquiring Fund Pro Forma(1) |
|
Series A Taxable Fund Preferred (TFP) Shares, $1,000 stated value per share, at liquidation
value |
|
$ |
40,000,000 |
|
|
$ |
75,000,000 |
|
|
$ |
70,000,000 |
|
|
$ |
100,000,000 |
|
|
|
|
|
|
$ |
285,000,000 |
|
Common Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, $0.01 par value per share; 38,611,472 shares outstanding for Senior Income,
40,541,218 shares outstanding for Floating Rate Income Opportunity, 10,085,648 shares outstanding for Short Duration Credit Opportunities, 56,918,468 shares outstanding for the Acquiring Fund and 134,412,385 shares outstanding for the Combined Fund
Pro Forma |
|
$ |
386,115 |
|
|
$ |
405,412 |
|
|
$ |
100,856 |
|
|
$ |
569,185 |
|
|
$ |
(117,444) (2) |
|
|
$ |
1,344,124 |
|
Paid-in surplus |
|
|
284,366,145 |
|
|
|
497,991,631 |
|
|
|
189,933,072 |
|
|
|
702,200,544 |
|
|
|
(1,952,556)(3) |
|
|
|
1,672,538,836 |
|
Total distributable earnings |
|
|
(77,964,505 |
) |
|
|
(131,148,288 |
) |
|
|
(53,480,812 |
) |
|
|
(182,075,423 |
) |
|
|
|
|
|
|
(444,669,028 |
) |
Net assets applicable to common shares |
|
$ |
206,787,755 |
|
|
$ |
367,248,755 |
|
|
$ |
136,553,116 |
|
|
$ |
520,694,306 |
|
|
$ |
(2,070,000) |
|
|
$ |
1,229,213,932 |
|
Net asset value per common share outstanding (net assets attributable to common shares, divided by
common shares outstanding) |
|
$ |
5.36 |
|
|
$ |
9.06 |
|
|
$ |
13.54 |
|
|
$ |
9.15 |
|
|
|
|
|
|
$ |
9.15 |
|
Authorized shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
Preferred |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
(1) |
The pro forma balances are presented as if the Mergers were effective as of November 30, 2022, are
presented for informational purposes only and assume the issuance of preferred shares in the amounts set forth above, which amounts may change prior to the Closing Date. The actual Closing Date of the Mergers is expected to be on or about June 5,
2023, or such later time agreed to by the parties at which time the results would be reflective of the actual composition of shareholders equity as of that date. All pro forma adjustments are directly attributable to the Mergers.
|
(2) |
Assumes the issuance of 22,534,773, 40,112,055 and 14,847,089 Acquiring Fund common shares to Senior Income
common shareholders, Floating Rate Income Opportunity common shareholders and Short Duration Credit Opportunities common shareholders, |
28
|
respectively, in connection with the Mergers. These numbers are based on the net asset values of the Acquiring Fund and the Target Funds as of November 30, 2022, adjusted for estimated
Merger costs. |
(3) |
Includes the impact of estimated total Merger costs of $2,070,000 which are currently expected to be borne by
Senior Income, Floating Rate Income Opportunity, Short Duration Credit Opportunities and the Acquiring Fund in the amounts of $705,000, $420,000, $775,000 and $170,000, respectively. |
2. |
Capitalization TableMerger of Senior Income Only |
The table reflects a pro forma exchange ratio of approximately 0.58362402 common shares of the Acquiring Fund issued for each common share of Senior Income.
If the Merger is consummated, the actual exchange ratio may vary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Income |
|
|
Acquiring Fund |
|
|
Pro Forma Adjustments |
|
|
Acquiring Fund Pro Forma(1) |
|
Series A Taxable Fund Preferred (TFP) Shares, $1,000 stated value per share, at liquidation
value |
|
$ |
40,000,000 |
|
|
$ |
100,000,000 |
|
|
|
|
|
|
$ |
140,000,000 |
|
Common Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, $0.01 par value per share; 38,611,472 shares outstanding for Senior Income,
56,918,468 shares outstanding for the Acquiring Fund and 79,453,241 shares outstanding for the Combined Fund Pro Forma |
|
$ |
386,115 |
|
|
$ |
569,185 |
|
|
$ |
(160,768 |
)(2) |
|
$ |
794,532 |
|
Paid-in surplus |
|
|
284,366,145 |
|
|
|
702,200,544 |
|
|
|
(714,232 |
)(3) |
|
|
985,852,457 |
|
Total distributable earnings |
|
|
(77,964,505 |
) |
|
|
(182,075,423 |
) |
|
|
|
|
|
|
(260,039,928 |
) |
Net assets applicable to common shares |
|
$ |
206,787,755 |
|
|
$ |
520,694,306 |
|
|
$ |
(875,000 |
) |
|
$ |
726,607,061 |
|
Net asset value per common share outstanding (net assets attributable to common shares, divided by
common shares outstanding) |
|
$ |
5.36 |
|
|
$ |
9.15 |
|
|
|
|
|
|
$ |
9.15 |
|
Authorized shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
Preferred |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
(1) |
The pro forma balances are presented as if the Merger was effective as of November 30, 2022, are presented
for informational purposes only and assume the issuance of preferred shares in the amounts set forth above, which amounts may change prior to the Closing Date. The actual Closing Date of the Merger is expected to be on or about June 5, 2023, or such
later time agreed to by the parties at which time the results would be reflective of the actual composition of shareholders equity as of that date. All pro forma adjustments are directly attributable to the Merger. |
(2) |
Assumes the issuance of 22,534,773 Acquiring Fund common shares to Senior Income common shareholders in
connection with the Merger. These numbers are based on the net asset values of the Acquiring Fund and Senior Income as of November 30, 2022, adjusted for estimated Merger costs. |
(3) |
Includes the impact of estimated total Merger costs of $875,000 allocable to Senior Income and the Acquiring
Fund which are currently expected to be borne by Senior Income and the Acquiring Fund in the amounts of $705,000 and $170,000, respectively. |
29
3. |
Capitalization TableMerger of Floating Rate Income Opportunity Only |
The table reflects a pro forma exchange ratio of approximately 0.98941510 common shares of the Acquiring Fund issued for each common share of
Floating Rate Income Opportunity. If the Merger is consummated, the actual exchange ratio may vary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate Income Opportunity |
|
|
Acquiring Fund |
|
|
Pro Forma Adjustments |
|
|
Acquiring Fund Pro Forma(1) |
|
Series A Taxable Fund Preferred (TFP) Shares, $1,000 stated value per share, at liquidation
value |
|
$ |
75,000,000 |
|
|
$ |
100,000,000 |
|
|
|
|
|
|
$ |
175,000,000 |
|
Common Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, $0.01 par value per share; 40,541,218 shares outstanding for Floating Rate Income
Opportunity, 56,918,468 shares outstanding for the Acquiring Fund and 97,030,523 shares outstanding for the Combined Fund Pro Forma |
|
$ |
405,412 |
|
|
$ |
569,185 |
|
|
$ |
(4,292 |
)(2) |
|
$ |
970,305 |
|
Paid-in surplus |
|
|
497,991,631 |
|
|
|
702,200,544 |
|
|
|
(585,708 |
)(3) |
|
|
1,199,606,467 |
|
Total distributable earnings |
|
|
(131,148,288 |
) |
|
|
(182,075,423 |
) |
|
|
|
|
|
|
(313,223,711 |
) |
Net assets applicable to common shares |
|
$ |
367,248,755 |
|
|
$ |
520,694,306 |
|
|
$ |
(590,000 |
) |
|
$ |
887,353,061 |
|
Net asset value per common share outstanding (net assets attributable to common shares, divided by
common shares outstanding) |
|
$ |
9.06 |
|
|
$ |
9.15 |
|
|
|
|
|
|
$ |
9.15 |
|
Authorized shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
Preferred |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
(1) |
The pro forma balances are presented as if the Merger was effective as of November 30, 2022, are presented
for informational purposes only and assume the issuance of preferred shares in the amounts set forth above, which amounts may change prior to the Closing Date. The actual Closing Date of the Merger is expected to be on or about June 5, 2023, or such
later time agreed to by the parties at which time the results would be reflective of the actual composition of shareholders equity as of that date. All pro forma adjustments are directly attributable to the Merger. |
(2) |
Assumes the issuance of 40,112,055 Acquiring Fund common shares to Floating Rate Income Opportunity common
shareholders in connection with the Merger. These numbers are based on the net asset values of the Acquiring Fund and Floating Rate Income Opportunity as of November 30, 2022, adjusted for estimated Merger costs. |
(3) |
Includes the impact of estimated total Merger costs of $590,000 allocable to Floating Rate Income Opportunity
and the Acquiring Fund, which are currently expected to be borne by Floating Rate Income Opportunity and the Acquiring Fund in the amounts of $420,000 and $170,000, respectively. |
30
4. |
Capitalization TableMerger of Short Duration Credit Opportunities Only |
The table reflects a pro forma exchange ratio of approximately 1.47209981 common shares of the Acquiring Fund issued for each common share of
Short Duration Credit Opportunities. If the Merger is consummated, the actual exchange ratio may vary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Duration Credit Opportunities |
|
|
Acquiring Fund |
|
|
Pro Forma Adjustments |
|
|
Acquiring Fund Pro Forma(1) |
|
Series A Taxable Fund Preferred (TFP) Shares, $1,000 stated value per share, at liquidation
value |
|
$ |
70,000,000 |
|
|
$ |
100,000,000 |
|
|
|
|
|
|
$ |
170,000,000 |
|
Common Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, $0.01 par value per share; 10,085,648 shares outstanding for Short Duration Credit
Opportunities, 56,918,468 shares outstanding for the Acquiring Fund and 71,765,557 shares outstanding for the Combined Fund Pro Forma |
|
$ |
100,856 |
|
|
$ |
569,185 |
|
|
$ |
47,615 |
(2) |
|
$ |
717,656 |
|
Paid-in surplus |
|
|
189,933,072 |
|
|
|
702,200,544 |
|
|
|
(992,615 |
)(3) |
|
|
891,141,001 |
|
Total distributable earnings |
|
|
(53,480,812 |
) |
|
|
(182,075,423 |
) |
|
|
|
|
|
|
(235,556,235 |
) |
Net assets applicable to common shares |
|
$ |
136,553,116 |
|
|
$ |
520,694,306 |
|
|
$ |
(945,000 |
) |
|
$ |
656,302,422 |
|
Net asset value per common share outstanding (net assets attributable to common shares, divided by
common shares outstanding) |
|
$ |
13.54 |
|
|
$ |
9.15 |
|
|
|
|
|
|
$ |
9.15 |
|
Authorized shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
Preferred |
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
|
|
Unlimited |
|
(1) |
The pro forma balances are presented as if the Merger was effective as of November 30, 2022, are presented
for informational purposes only and assumes the issuance of preferred shares in the amounts set forth above, which amounts may change prior to the Closing Date. The actual Closing Date of the Merger is expected to be on or about June 5, 2023, or
such later time agreed to by the parties at which time the results would be reflective of the actual composition of shareholders equity as of that date. All pro forma adjustments are directly attributable to the Merger. |
(2) |
Assumes the issuance of 14,847,089 Acquiring Fund common shares to Short Duration Credit Opportunities common
shareholders in connection with the Merger. These numbers are based on the net asset values of the Acquiring Fund and Short Duration Credit Opportunities as of November 30, 2022, adjusted for estimated Merger costs. |
(3) |
Includes the impact of estimated total Merger costs of $945,000 allocable to Short Duration Credit Opportunities
and the Acquiring Fund, which are currently expected to be borne by Short Duration Credit Opportunities and the Acquiring Fund in the amounts of $775,000 and $170,000, respectively. |
Expenses Associated with the Mergers
Preferred shareholders will not bear any costs of the Mergers. The costs of the Mergers are estimated to be $2,070,000, but the actual costs
may be higher or lower than that amount. These costs represent the estimated nonrecurring expenses of the Funds in carrying out their obligations under the Agreement and consist of managements estimate of professional service fees, printing
costs and mailing charges related to the proposed Mergers. Based on the expected benefits of the Mergers to each Fund, each of Senior Income, Floating Rate Income Opportunity, Short Duration Credit Opportunities and the Acquiring Fund is expected to
be allocated $705,000, $420,000, $775,000 and $170,000, respectively, of the estimated expenses in connection with the Mergers (0.31%, 0.10%, 0.51% and 0.03%, respectively, of Senior Incomes, Floating Rate Income Opportunitys, Short
Duration Credit Opportunities and the Acquiring Funds average net assets applicable to common shares for the twelve months ended July 31, 2022). If one or more Mergers are not consummated for any reason, including because the
requisite shareholder approvals are not obtained, each of the Funds, and common shareholders of each of the Funds indirectly, will still bear the costs of the Mergers.
31
The Funds have engaged Computershare Fund Services to assist in the solicitation of proxies at an
estimated aggregate cost of $7,500 per Fund plus reasonable expenses, which is included in the foregoing estimate.
Dissenting Shareholders Rights of Appraisal
Under the charter documents of the Funds, shareholders do not have dissenters rights of appraisal with respect to their shares in
connection with the Mergers.
Material Federal Income Tax Consequences of the Mergers
As a non-waivable condition to each Funds obligation to consummate the Mergers, each Fund will
receive a tax opinion from Vedder Price P.C. (which opinion will be based on certain factual representations and certain customary assumptions and exclusions) with respect to its Merger(s) substantially to the effect that, on the basis of the
existing provisions of the Code, current administrative rules and court decisions, for federal income tax purposes:
|
(a) |
The merger of the Target Fund with and into the Merger Sub pursuant to applicable state laws will constitute a
reorganization within the meaning of Section 368(a) of the Code and the Acquiring Fund and the Target Fund will each be a party to a reorganization, within the meaning of Section 368(b) of the Code, with respect to
the merger. |
|
(b) |
No gain or loss will be recognized by the Acquiring Fund or the Merger Sub upon the merger of the Target Fund
with and into the Merger Sub pursuant to applicable state laws or upon the liquidation of the Merger Sub. |
|
(c) |
No gain or loss will be recognized by the Target Fund upon the merger of the Target Fund with and into the
Merger Sub pursuant to applicable state laws. |
|
(d) |
No gain or loss will be recognized by the Target Fund shareholders upon the conversion of all their Target Fund
shares solely into Acquiring Fund shares in the merger of the Target Fund with and into the Merger Sub pursuant to applicable state laws, except to the extent the Target Fund common shareholders receive cash in lieu of a fractional Acquiring Fund
common share. |
|
(e) |
The aggregate basis of the Acquiring Fund shares received by each Target Fund shareholder pursuant to the
merger (including any fractional Acquiring Fund common share to which a Target Fund common shareholder would be entitled) will be the same as the aggregate basis of the Target Fund shares that were converted into such Acquiring Fund shares.
|
|
(f) |
The holding period of the Acquiring Fund shares received by each Target Fund shareholder in the merger
(including any fractional Acquiring Fund common share to which a Target Fund common shareholder would be entitled) will include the period during which the shares of the Target Fund that were converted into such Acquiring Fund shares were held by
such shareholder, provided the Target Fund shares are held as capital assets at the effective time of the merger. |
|
(g) |
The basis of the Target Funds assets received by the Merger Sub in the merger will be the same as the
basis of such assets in the hands of the Target Fund immediately before the merger. |
|
(h) |
The holding period of the assets of the Target Fund received by the Merger Sub in the merger will include the
period during which those assets were held by the Target Fund. |
With respect to each Merger, the opinion addressing the
federal income tax consequences of the Merger described above will rely on the assumption that the Acquiring Fund TFP Shares received in the Merger, if any,
32
will constitute equity of the Acquiring Fund. In that regard, special tax counsel to the Acquiring Fund will deliver an opinion to the Acquiring Fund, subject to certain representations,
assumptions and conditions, substantially to the effect that any Acquiring Fund TFP Shares received in the Merger by the holders of TFP Shares of the Target Fund will qualify as equity of the Acquiring Fund for federal income tax purposes. As a
result, distributions with respect to the preferred shares (other than distributions in redemption of preferred shares subject to Section 302(b) of the Code) will generally constitute dividends to the extent of the Acquiring Funds
allocable current or accumulated earnings and profits, as calculated for federal income tax purposes. Because the treatment of a corporate security as debt or equity is determined on the basis of the facts and circumstances of each case, and no
controlling precedent exists for the preferred shares issued in the Mergers, there can be no assurance that the Internal Revenue Service (IRS) will not question special tax counsels opinion and the Acquiring Funds treatment
of the preferred shares as equity. If the IRS were to succeed in such a challenge, holders of preferred shares could be characterized as receiving taxable interest income, possibly requiring them to file amended income tax returns and retroactively
to recognize additional amounts of ordinary income and pay additional tax, interest and penalties, and the tax consequences of the Mergers could differ significantly from those described in this Proxy Statement.
No opinion will be expressed as to (1) the effect of the Mergers on a Target Fund, the Acquiring Fund, the Merger Sub or any Target Fund
shareholder with respect to any asset (including, without limitation, any stock held in a passive foreign investment company as defined in Section 1297(a) of the Code) as to which any gain or loss is required to be recognized under federal
income tax principles (i) at the end of a taxable year (or on the termination thereof) or (ii) upon the transfer of such asset regardless of whether such transfer would otherwise be a non-taxable
transaction under the Code, (2) the effect of the Mergers under the alternative minimum tax imposed under Section 55 of the Code on a direct or indirect shareholder of a Target Fund that is a corporation, and (3) any other federal tax
issues (except those set forth above) and all state, local or non-U.S. tax issues of any kind.
Each opinion will be based on certain factual representations and customary assumptions. The opinion will rely on such representations and
will assume the accuracy of such representations. If such representations and assumptions are incorrect, the Merger that is the subject of such opinion may not qualify as a reorganization within the meaning of Section 368(a) of the
Code, and the Target Fund involved in such Merger and Target Fund shareholders may recognize taxable gain or loss as a result of that Merger.
Opinions of counsel are not binding upon the IRS or the courts and there can be no assurance that the IRS or a court will concur on all or any
of the issues discussed above. If the Mergers occur but the IRS or the courts determine that a Merger does not qualify as a reorganization within the meaning of Section 368(a) of the Code, the Target Fund involved in such Merger may
recognize gain or loss on the transfer of its assets to the Acquiring Fund and/or the deemed distribution of Acquiring Fund shares to its shareholders and each shareholder of that Target Fund would recognize taxable gain or loss equal to the
difference between its basis in its Target Fund shares and the fair market value of the shares of the Acquiring Fund it receives.
Each
Fund designates distributions to common and preferred shareholders as consisting of particular types of income (such as ordinary income and capital gain) based on each classs proportionate share of the total distributions paid by the Fund with
respect to the year. Additional distributions may be made if necessary. As a result, such distribution could affect the character of the distributions received by holders of TFP Shares with respect to the year in which such distribution occurs for
federal income tax purposes.
After the Mergers, the Acquiring Funds ability to use a Target Funds or the Acquiring
Funds realized and unrealized pre-Merger capital losses may be limited under certain federal income tax rules applicable to reorganizations of this type. Therefore, in certain circumstances, shareholders
may pay federal income tax sooner, or pay more federal income tax, than they would have had the Mergers not occurred. The effect of these potential limitations, however, will depend on a number of factors including the amount of the losses, the
amount of gains to be offset, the exact timing of the Mergers and the amount of unrealized capital gains in the Funds at the time of the Mergers.
33
The table below sets forth, as of July 31, 2022 (each Funds tax year end), each
Funds unused capital loss carryforwards available for federal income tax purposes to be applied against future capital gains, if any.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Income |
|
|
Floating Rate Income Opportunity |
|
|
Short Duration Credit Opportunities |
|
|
Acquiring Fund |
|
Not subject to expiration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
$ |
3,053,867 |
|
|
$ |
4,606,728 |
|
|
$ |
3,100,613 |
|
|
$ |
6,507,557 |
|
Long-Term |
|
$ |
41,897,690 |
|
|
$ |
69,531,297 |
|
|
$ |
27,860,514 |
|
|
$ |
96,717,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
44,951,557 |
|
|
$ |
74,138,025 |
|
|
$ |
30,961,127 |
|
|
$ |
103,224,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the shareholders of the Target Funds will receive a proportionate share of any taxable income and
gains (after the application of any available capital loss carryforwards) realized by the Acquiring Fund and not distributed to its shareholders prior to the closing of a Merger when such income and gains are eventually distributed by the Acquiring
Fund. To the extent the Acquiring Fund sells portfolio investments after the Mergers, the Acquiring Fund may recognize gains or losses (including any built-in gain in the portfolio investments of a Target Fund
or the Acquiring Fund that was unrealized at the time of the Mergers), which also may result in taxable distributions to shareholders holding shares of the Acquiring Fund, including former Target Fund preferred shareholders who hold Acquiring Fund
preferred shares after the Mergers. As a result, shareholders of the Target Funds and the Acquiring Fund may receive a greater amount of taxable distributions than they would have had the Mergers not occurred.
The foregoing is intended to be only a summary of the principal federal income tax consequences of the Mergers and should not be considered to
be tax advice. This description of the federal income tax consequences of the Mergers is made without regard to the particular facts and circumstances of any shareholder. There can be no assurance that the IRS or a court will concur on all or any of
the issues discussed above. Shareholders are urged to consult their own tax advisers as to the specific consequences to them of the Mergers, including without limitation the federal, state, local, and non-U.S.
tax consequences with respect to the foregoing matters and any other considerations that may be applicable to them.
Shareholder Approval
With respect to each Merger, the Merger is required to be approved by the affirmative vote of the holders of a majority (more than 50%) of a
Target Funds outstanding common and preferred shares entitled to vote on the matter, voting together as a single class, and by the affirmative vote of the holders of a majority (more than 50%) of a Target Funds outstanding preferred
shares entitled to vote on the matter, voting together as a single class. Each Merger also is required to be approved by the affirmative vote of the holders of a majority (more than 50%) of the Acquiring Funds outstanding preferred shares
entitled to vote on the matter, voting together as a single class. Holders of each Target Funds common shares are being solicited separately on the foregoing proposal through a separate proxy statement. In addition, under the rules of the
NYSE, the Acquiring Funds common and preferred shareholders are required to approve the issuance of additional Acquiring Fund common shares in connection with the MergersSee Proposal 2.
Abstentions and broker non-votes, if any, will have the same effect as a vote against the approval of
a Merger. Broker non-votes are shares held by brokers or nominees, typically in street name, as to which (1) instructions have not been received from the beneficial owners or persons entitled
to vote and (2) the broker or nominee does not have discretionary voting power on a particular matter.
Preferred shareholders of the
Funds are separately being asked to approve the Agreement as a plan of reorganization under the 1940 Act. Section 18(a)(2)(D) of the 1940 Act provides that the terms of preferred shares issued by a registered closed-end management investment company must contain provisions requiring approval by the vote of a majority of such shares, voting as a class, of any plan of reorganization adversely
34
affecting such shares. Because the 1940 Act makes no distinction between a plan of reorganization that has an adverse effect as opposed to a materially adverse effect, the Funds are seeking
approval of the Agreement by the holders of their preferred shares.
The closing of each Merger is subject to the satisfaction or waiver
of certain closing conditions, which include customary closing conditions. In order for a Merger to occur, all requisite shareholder approvals must be obtained at the applicable Funds shareholder Meeting, and certain other consents,
confirmations and/or waivers from various third parties, including the liquidity provider with respect to outstanding preferred shares of the Acquiring Fund and lenders under the Acquiring Funds Credit Facility, must also be obtained. Because
the closing of each Merger is contingent upon the applicable Target Fund and the Acquiring Fund obtaining such shareholder approvals and satisfying (or obtaining the waiver of) other closing conditions, it is possible that a Merger will not occur
even if shareholders of a Fund entitled to vote approve the Merger and a Fund satisfies all of its closing conditions if the other Fund does not obtain its requisite shareholder approvals or satisfy (or obtain the waiver of) its closing conditions.
If a Merger is not consummated, the Board of the Target Fund involved in that Merger may take such actions as it deems in the best interests of the Fund, including conducting additional solicitations with respect to the Merger proposals or
continuing to operate the Target Fund as a standalone fund. The closing of one Merger is not contingent on the closing of any other Merger.
The TFP Shares of each Fund were issued on a private placement basis to one or a small number of institutional shareholders. To the extent
that one or more preferred shareholders of a Fund owns, holds or controls, individually or in the aggregate, all or a significant portion of a Funds outstanding preferred shares, the approval by a Funds preferred shareholders required
for a Merger to occur may turn on the exercise of voting or consent rights by such particular shareholder(s) and its or their determination as to the favorable view of the Merger with respect to its or their interests. The Funds exercise no
influence or control over the determinations of such shareholders with respect to a Merger; there is no guarantee that such shareholders will vote to approve a Merger proposal.
Description of Common Shares to Be Issued by the Acquiring Fund; Comparison to Target Funds
General
As a general matter, the
common shares of the Acquiring Fund and the Target Funds have equal voting rights and equal rights with respect to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of their Fund and
have no preemptive, conversion or exchange rights, except as the Trustees may authorize, or rights to cumulative voting. Holders of whole common shares of each Fund are entitled to one vote per share on any matter on which they are entitled to vote,
while each fractional share entitles its holder to a proportional fractional vote. Furthermore, the provisions set forth in each Funds declaration of trust and by-laws include, among other things,
substantially identical super-majority voting provisions and other anti-takeover provisions, as described under Additional Information About the Acquiring FundCertain Provisions in the Acquiring Funds Declaration of Trust and By-Laws. The full text of each Funds declaration of trust and by-laws are on file with the SEC.
The Acquiring Funds declaration of trust authorizes an unlimited number of common shares, par value $0.01 per share. If the Mergers are
consummated, the Acquiring Fund will issue additional common shares on the Closing Date to each Target Fund based on the relative per share net asset value of the Acquiring Fund and the aggregate net assets of each Target Fund that are transferred
in connection with the Mergers, in each case as of the Valuation Time. The value of the Acquiring Funds net assets will be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all of the Acquiring
Funds outstanding preferred shares.
The terms of the Acquiring Fund common shares to be issued pursuant to the Mergers will be
identical to the terms of the Acquiring Fund common shares that are then outstanding. The Acquiring Fund common shares,
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when issued, will be fully paid and non-assessable except as described under Summary Description of Massachusetts Business Trusts below.
Distributions
So long as
preferred shares are outstanding, the Acquiring Fund may not declare a dividend or distribution to common shareholders (other than a dividend in common shares of the Fund) or purchase outstanding common shares unless all accumulated dividends on
preferred shares have been paid and unless the asset coverage, as defined in the 1940 Act, with respect to its preferred shares at the time of the declaration of such dividend or distribution or at the time of such purchase would be at least 200%
after giving effect to the dividend or distribution or purchase price. In addition, the Acquiring Fund may not declare or make payment of a dividend or distribution to common shareholders (other than a dividend in common shares of the Fund) or
purchase outstanding common shares unless, at the time of the declaration or making of such dividend or distribution or at the time of such purchase, the Acquiring Fund is in compliance with certain asset coverage requirements, and no event of
default exists or would occur, under the Credit Facility.
Affiliated Brokerage and Other Fees
None of the Target Funds or the Acquiring Fund paid brokerage commissions within the last fiscal year to (i) any broker that is an
affiliated person of such Fund or an affiliated person of such person, or (ii) any broker an affiliated person of which is an affiliated person of such Fund, the Adviser, or the Sub-Adviser of such Fund.
Description of TFP Shares to Be Issued by the Acquiring Fund
If any of the Mergers take place, the Acquiring Fund will issue TFP Shares (New TFP Shares) pursuant to the Agreement if TFP
Shares of the merging Target Fund are outstanding immediately prior to the closing. TFP Shares of the Target Funds are subject to redemption in accordance with the respective Target Funds statement establishing and fixing the rights and
preferences of TFP Shares. The following description applies if New TFP Shares are issued in the Mergers.
The terms of the New TFP Shares
of the applicable series will be substantially similar, as of the time of the closing of the Merger, to the terms of the TFP Shares of the applicable Target Fund outstanding immediately prior to the closing of the Merger. The aggregate liquidation
preference of the New TFP Shares to be received in the Merger, if any, will equal the aggregate liquidation preference of the applicable Target Funds TFP Shares held immediately prior to the closing of the Merger. The economic terms of any New
TFP Shares likely may not be the same as the terms of the outstanding TFP Shares of the Acquiring Fund. The number of TFP Shares of a Target Fund currently outstanding may change prior to its Merger due to market or other conditions. See also
Additional Information About the Acquiring FundDescription of Outstanding Acquiring Fund Series A TFP Shares.
The
Acquiring Fund currently expects that the New TFP Shares issued in connection with the Senior Income Fund Merger will be designated Series B TFP Shares, the New TFP Shares issued in connection with the Floating Rate Income Opportunity
Merger will be designated Series C TFP Shares and the New TFP Shares issued in connection with the Short Duration Credit Opportunities Merger will be designated Series D TFP Shares.
The New TFP Shares of each series will be senior in priority to the Acquiring Funds common shares as to the payment of dividends and as
to the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The New TFP Shares of each series will have equal priority with the other preferred shares of the Acquiring Fund, including the Acquiring
Funds outstanding TFP Shares, any other New TFP Shares to be issued by the Acquiring Fund in the Mergers and any other preferred shares that the Acquiring Fund may issue in the future, as to the payment of dividends and as to distribution of
assets upon dissolution,
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liquidation or winding up of the affairs of the Acquiring Fund. The rights of lenders under the Credit Facility and any other creditors to receive payments of interest on and repayments of
principal of any borrowings are senior to the rights of holders of preferred shares, including the existing TFP Shares of the Acquiring Fund and any New TFP Shares, and common shares with respect to the payment of dividends and as to distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund.
New Series B TFP Shares
The TFP Shares of Senior Income are (and the new Series B TFP Shares will be) in the Variable Rate Mode. The Variable Rate Mode
for the TFP Shares of Senior Income currently ends on October 2, 2023, subject to early transition to a new mode, or scheduled extension or transition to a new mode. A new mode may provide for the modification of the economic terms of the TFP
Shares. Modified terms for a new mode may include provisions with respect to (but not limited to) optional tender provisions, mandatory tender provisions, a liquidity facility or other credit enhancement, mandatory purchase provisions, the dividend
rate setting provisions (including as to any maximum rate), and, if the dividend may be determined by reference to an index, formula or other method, the manner in which it will be determined and redemption provisions.
Holders of the Series B TFP Shares will be entitled to receive cash dividends when, as and if declared by the Acquiring Funds Board. The
amount of dividends per Series B TFP Share will equal the sum of dividends accumulated for each day but not yet paid during the relevant monthly dividend period.
The amount of dividends will be calculated monthly based on an index rate equal to one-month Term SOFR
or another index plus an applicable spread. The applicable spread will be subject to adjustment in certain circumstances, including a change in the credit rating assigned to the Series B TFP Shares. The dividend rate shall in no circumstances exceed
15% per year.
The Series B TFP Shares will be subject to optional and mandatory redemption by the Fund in certain circumstances.
The Acquiring Fund will be obligated to redeem the Series B TFP Shares on the term redemption date unless earlier redeemed or repurchased by
the Acquiring Fund, at a redemption price per share equal to the liquidation preference per share ($1,000) plus any accumulated but unpaid dividends (whether or not earned or declared). The outstanding TFP Shares of Senior Income have a term
redemption date of November 1, 2030. The new Series B TFP Shares will have the same term redemption date as the corresponding Senior Income TFP Shares.
During the Variable Rate Mode for the Series B TFP Shares, in the event the Acquiring Fund fails to comply with asset coverage and/or
effective leverage ratio requirements and any such failure is not cured within the applicable cure period, the Acquiring Fund may become obligated to redeem such number of preferred shares as are necessary to achieve compliance with such
requirements. Also, during the Variable Rate Mode for the Series B TFP Shares, the Acquiring Fund will be obligated to redeem all of the outstanding Series B TFP Shares in the event a mode transition is initiated and a failed transition occurs, if
such failure is not cured within the applicable cure period.
Series B TFP Shares also may be redeemed in whole at any time or in part
from time to time at the option of the Acquiring Fund at a redemption price per share equal to the liquidation preference per share plus any accumulated but unpaid dividends (whether or not earned or declared).
New Series C TFP Shares
The TFP Shares of Floating Rate Income Opportunity are (and the new Series C TFP Shares will be) in the Variable Rate Mode. The
Variable Rate Mode for the TFP Shares of Floating Rate Income currently ends on November 2, 2023, subject to early transition to a new mode, or scheduled extension or transition to a new mode. A new mode may provide for the modification of the
economic terms of the TFP Shares. Modified terms
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for a new mode may include provisions with respect to (but not limited to) optional tender provisions, mandatory tender provisions, a liquidity facility or other credit enhancement, mandatory
purchase provisions, the dividend rate setting provisions (including as to any maximum rate), and, if the dividend may be determined by reference to an index, formula or other method, the manner in which it will be determined and redemption
provisions.
Holders of the Series C TFP Shares will be entitled to receive cash dividends when, as and if declared by the Acquiring
Funds Board. The amount of dividends per Series C TFP Share will equal the sum of dividends accumulated for each day but not yet paid during the relevant monthly dividend period.
The amount of dividends will be calculated monthly based on an index rate equal to one-month Term SOFR
or another index plus an applicable spread. The applicable spread will be subject to adjustment in certain circumstances, including a change in the credit rating assigned to the Series C TFP Shares. The dividend rate shall in no circumstances exceed
15% per year.
The Series C TFP Shares will be subject to optional and mandatory redemption by the Fund in certain circumstances.
The Acquiring Fund will be obligated to redeem the Series C TFP Shares on the term redemption date unless earlier redeemed or repurchased by
the Acquiring Fund, at a redemption price per share equal to the liquidation preference per share ($1,000) plus any accumulated but unpaid dividends (whether or not earned or declared).The outstanding TFP Shares of Floating Rate Income Opportunity
have a term redemption date of December 1, 2030. The new Series C TFP Shares will have the same term redemption date as the corresponding Floating Rate Income Opportunity TFP Shares.
During the Variable Rate Mode for the Series C TFP Shares, in the event the Acquiring Fund fails to comply with asset coverage and/or
effective leverage ratio requirements and any such failure is not cured within the applicable cure period, the Acquiring Fund may become obligated to redeem such number of preferred shares as are necessary to achieve compliance with such
requirements. Also, during the Variable Rate Mode for the Series C TFP Shares, the Acquiring Fund will be obligated to redeem all of the outstanding Series C TFP Shares, in the event a mode transition is initiated and a failed transition occurs, if
such failure is not cured within the applicable cure period.
Series C TFP Shares also may be redeemed in whole at any time or in part
from time to time at the option of the Acquiring Fund at a redemption price per share equal to the liquidation preference per share plus any accumulated but unpaid dividends (whether or not earned or declared).
New Series D TFP Shares
The TFP Shares of Short Duration Credit Opportunities are (and the new Series D TFP Shares will be) in the Variable Rate Demand
Mode. The Variable Rate Demand Mode for the TFP Shares of Short Duration Credit Opportunities currently ends on November 1, 2029, subject to early transition to a new mode. A new mode may provide for the modification of the economic terms
of the TFP Shares. Modified terms for a new mode may include provisions with respect to (but not limited to) optional tender provisions, mandatory tender provisions, a liquidity facility or other credit enhancement, mandatory purchase provisions,
the dividend rate setting provisions (including as to any maximum rate), and, if the dividend may be determined by reference to an index, formula or other method, the manner in which it will be determined and redemption provisions.
Holders of the Series D TFP Shares will be entitled to receive cash dividends when, as and if declared by the Acquiring Funds Board. The
amount of dividends per Series D TFP Share will equal the sum of dividends accumulated for each day but not yet paid during the relevant monthly dividend period.
The Series D TFP Shares will pay an adjustable dividend rate set weekly by a remarketing agent. Holders of the Series D TFP Shares will
have the right to give notice on any business day to tender the securities for
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remarketing in seven days. The Series D TFP Shares also will be subject to a mandatory tender for remarketing upon the occurrence of certain events, such as a mode change or the non-payment of dividends by the Acquiring Fund. Should a remarketing be unsuccessful, the dividend rate will reset to a maximum rate as defined in the governing documents of the Series D TFP
Shares. The dividend rate shall in no circumstances exceed 15% per year.
The Series D TFP Shares have the benefit of an
unconditional demand feature pursuant to a purchase agreement provided by a bank acting as liquidity provider to ensure full and timely repayment of the liquidation preference amount plus any accumulated and unpaid dividends to holders upon the
occurrence of certain events. The purchase agreement for the Series D TFP Shares will require the liquidity provider to purchase from holders all outstanding Series D TFP Shares tendered for sale that were not successfully remarketed. The
liquidity provider also must purchase all outstanding Series D TFP Shares prior to termination of the purchase agreement for such series, including by reason of the failure of the liquidity provider to maintain the requisite level of short-term
ratings, if the Acquiring Fund has not obtained an alternate purchase agreement before the termination date.
The obligation of the
liquidity provider for the Series D TFP Shares to purchase the outstanding Series D TFP Shares pursuant to the purchase agreement for such series will run to the benefit of the holders of the Series D TFP Shares and is unconditional
and irrevocable, and as such the short-term ratings assigned to the Series D TFP Shares will be directly linked to the short-term creditworthiness of the liquidity provider. The liquidity provider for the Series D TFP Shares will enter
into a purchase agreement with respect to the Series D TFP Shares, subject to periodic extension by agreement with the Acquiring Fund.
The Series D TFP Shares will be subject to optional and mandatory redemption by the Fund in certain circumstances.
The Acquiring Fund will be obligated to redeem the Series D TFP Shares on the term redemption date unless earlier redeemed or repurchased by
the Acquiring Fund, at a redemption price per share equal to the liquidation preference per share ($1,000) plus any accumulated but unpaid dividends (whether or not earned or declared). The outstanding TFP Shares of Short Duration Credit
Opportunities have a term redemption date of November 1, 2029. The new Series D TFP Shares will have the same term redemption date as the corresponding Short Duration Credit Opportunities TFP Shares.
The Acquiring Fund will have an obligation to redeem, at a redemption price equal to $1,000 per share plus accumulated but unpaid dividends
thereon (whether or not earned or declared) until, but excluding, the date fixed by the Board for redemption, Series D TFP Shares purchased by the liquidity provider pursuant to its obligations under the purchase agreement if the liquidity provider
continues to be the beneficial owner for a period of six months and such shares cannot be successfully remarketed. The Acquiring Fund also will redeem, at a redemption price equal to the liquidation preference per share plus accumulated but unpaid
dividends thereon (whether or not earned or declared) until, but excluding, the date fixed by the Board for redemption, such number of preferred shares as is necessary to achieve compliance, if the Acquiring Fund fails to maintain the minimum asset
coverage required under the 1940 Act and the Acquiring Funds fee agreement with the liquidity provider for the Series D TFP Shares, and such failure is not cured by the applicable cure date.
Series D TFP Shares also may be redeemed in whole at any time or in part from time to time at the option of the Acquiring Fund at a redemption
price per share equal to the liquidation preference per share plus any accumulated but unpaid dividends (whether or not earned or declared).
Summary Description of Massachusetts Business Trusts
The following description is based on relevant provisions of applicable
Massachusetts law and each Funds governing documents. This summary does not purport to be complete and we refer you to applicable Massachusetts law and each Funds operative documents.
General. Each Fund is a Massachusetts business trust. A fund organized as a Massachusetts business trust is governed by the
trusts declaration of trust or similar instrument, and its by-laws (its governing documents).
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Massachusetts law allows the trustees of a business trust to set the terms of a funds governance in its governing documents. All power and authority to manage the fund and its affairs
generally reside with the trustees, and shareholder voting and other rights are limited to those provided to the shareholders in the funds governing documents.
Because Massachusetts law governing business trusts provides more flexibility compared to typical state corporate statutes, the Massachusetts
business trust is a common form of organization for closed-end funds. However, some consider it less desirable than other entities because it relies on the terms of the applicable declaration of trust and by-laws and judicial interpretations rather than statutory provisions for substantive issues, such as the personal liability of shareholders and trustees, and does not provide the level of certitude that corporate
laws or newer statutory trust laws, such as those of Delaware, provide.
Shareholders of a Massachusetts business trust are not afforded
the statutory limitation of personal liability generally afforded to shareholders of a corporation from the trusts liabilities. Instead, the declaration of trust of a fund organized as a Massachusetts business trust typically provides that a
shareholder will not be personally liable, and further provides for indemnification to the extent that a shareholder is found personally liable, for the funds acts or obligations. The declaration of trust of each Fund contains such provisions.
Similarly, the trustees of a Massachusetts business trust are not afforded statutory protection from personal liability for the
obligations of the trust. However, courts in Massachusetts have recognized limitations of a trustees personal liability in contract actions for the obligations of a trust contained in the trusts declaration of trust, and declarations of
trust may also provide that trustees may be indemnified out of the assets of the trust to the extent held personally liable. The declaration of trust of each Fund contains such provisions.
The Funds
Each Fund is organized
as a Massachusetts business trust and is governed by its declaration of trust and by-laws. Under the declaration of trust of each Fund, any determination as to what is in the interests of the Fund made by the
trustees in good faith is conclusive, and in construing the provisions of the declaration of trust, there is a presumption in favor of a grant of power to the trustees. Further, the declaration of trust provides that certain determinations made in
good faith by the trustees are binding upon the Fund and all shareholders, and shares are issued and sold on the condition and understanding, evidenced by the purchase of shares, that any and all such determinations will be so binding. The by-laws of each Fund provide that each shareholder of the Fund, by virtue of having become a shareholder, shall be held to have expressly assented and agreed to be bound by the terms of the Funds governing
documents. The Funds declaration of trusts are substantially the same, and the Funds have adopted the same by-laws. The following is a summary of some of the key provisions of the Funds governing
documents.
Shareholder Voting. The declaration of trust of each Fund limits shareholder voting to certain enumerated matters,
including certain amendments to the declaration of trust, the election of trustees if required by the 1940 Act, the merger or consolidation of the Fund with any corporation or a reorganization or sales of assets in certain circumstances and matters
required to be voted on by the 1940 Act, or, for Senior Income, a recapitalization of the Fund (under certain circumstances) and, for each Fund, with respect to such additional matters relating to the Fund as the trustees may consider necessary or
desirable.
Meetings of shareholders may be called by the trustees and by the written request of shareholders owning at least 10% of the
outstanding shares entitled to vote. The holders of a majority (more than 50%) of the voting power of the shares of beneficial interest of the Fund entitled to vote at a meeting will constitute a quorum for the transaction of business.
Notwithstanding the foregoing, when the holders of preferred shares are entitled to elect any of a Funds trustees by class vote of such holders, the holders of thirty-three and one-third percent (33
1/3%) of the preferred shares entitled to vote at a meeting shall constitute a quorum for the purpose of such an election. Unless other voting provisions contained in the Funds governing documents or the 1940 Act apply, the
40
affirmative vote of the holders of a majority (more than 50%) of the shares present in person or by proxy and entitled to vote at a meeting of shareholders at which a quorum is present is
required to approve a matter. The governing documents require a super-majority vote in certain circumstances with respect to a merger, consolidation or dissolution of or sale of substantially all of the assets by, the Fund, or its conversion to an open-end investment company, unless such transaction has been approved by two-thirds of the Trustees, and that the affirmative vote of a majority (more than 50%) of the shares
outstanding and entitled to vote is required to elect trustees in a contested election (i.e., an election in which the number of trustees nominated in accordance with the by-laws exceeds the number
of trustees to be elected), but that a plurality vote applies in an uncontested election.
The
by-laws of each Fund provide that common shares held by a shareholder who obtains beneficial ownership of common shares in a Control Share Acquisition shall have the same voting rights as other
common shares only to the extent authorized by the Funds shareholders (the Control Share Provision). Such authorization shall require the affirmative vote of the holders of a majority (more than 50%) of the shares of the Fund
entitled to vote in the election of trustees, excluding Interested Shares. Interested Shares include shares held by Fund officers and any person who has acquired common shares in a Control Share Acquisition. The
by-laws define a Control Share Acquisition, subject to various conditions and exceptions, generally to mean an acquisition of common shares that would give the beneficial owner, upon the
acquisition of such shares, the ability to exercise voting power, but for the Control Share Provision, in the election of trustees (except for any elections of trustees by holders of preferred shares voting as a separate class) in any one of the
following ranges: (i) one-tenth or more, but less than one-fifth of all voting power; (ii) one-fifth or more, but less
than one-third of all voting power; (iii) one-third or more, but less than a majority of all voting power; or (iv) a majority or more of all voting power. For
this purpose, all common shares acquired by a person within ninety days before or after the date on which such person acquires shares that result in a Control Share Acquisition, and all common shares acquired by such person pursuant to a plan to
make a Control Share Acquisition, shall be deemed to have been acquired in the same Control Share Acquisition. Subject to various conditions and procedural requirements, including the delivery of a Control Share Acquisition Statement to
the Fund setting forth certain required information, a shareholder who obtains or proposes to obtain beneficial ownership of common shares in a Control Share Acquisition generally may request a vote of shareholders to approve the authorization of
voting rights of such shareholder with respect to such shares. See General InformationAdditional Information About the Solicitation at page 110 for a description of certain legal matters with respect to the Control Share
Provision.
Shareholder Meetings. Meetings of shareholders may be called by the trustees and must be called upon the written
request of shareholders entitled to cast at least 10% of all votes entitled to be cast at the meeting. Shareholder requests for special meetings are subject to various requirements under each Funds
by-laws, including as to the specific form of, and information required in, a shareholders request to call such a meeting. A shareholder may request a special meeting only to act on a matter upon which
such shareholder is entitled to vote under the terms of the Funds governing documents, and shareholders may not request special meetings for the purpose of electing trustees.
The by-laws of each Fund authorize the trustees or the chair of a shareholder meeting to adopt rules,
regulations and procedures appropriate for the proper conduct of the meeting, which may include (i) the establishment of an agenda or order of business for the meeting; (ii) the determination of when the polls shall open and close for any
given matter to be voted on by the shareholders present or represented at the meeting; (iii) rules and procedures for maintaining order at the meeting and the safety of those present; (iv) limitations on attendance at and participation in
the meeting by shareholders, their duly authorized and constituted proxies or such other persons as the chair of the meeting shall determine; (v) restrictions on entry to the meeting after the time fixed for the commencement thereof;
(vi) limitations on the time allotted to questions or comments by shareholders; and (vii) the extent to which, if any, other participants are permitted to speak.
The by-laws of each Fund establish qualification criteria applicable to prospective trustees and
require that advance notice be given to the Fund in the event a shareholder desires to nominate a person for election to
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the Board or to transact any other business at a meeting of shareholders. Any notice by a shareholder must be accompanied by certain information as required by the
by-laws. No shareholder proposal will be considered at any meeting of shareholders of a Fund if such proposal is submitted by a shareholder who does not satisfy all applicable requirements set forth in the by-laws, and unless otherwise required by applicable law, no matter may be considered at or brought before any meeting of shareholders unless such matter has been deemed a proper matter for shareholder action by
certain officers of the Fund or by at least sixty-six and two-thirds percent (66 2/3%) of the trustees.
Election and Removal of Trustees. The declaration of trust of each Fund provides that the trustees determine the size of the Board,
subject to a minimum and a maximum number. Subject to the provisions of the 1940 Act, the declaration of trust also provides that vacancies on the Board may be filled by the remaining trustees. A trustee may be removed only for cause and only by
action of at least two-thirds of the remaining trustees or by action of at least two-thirds of the outstanding shares of the class or classes that elected such trustee.
The by-laws of each Fund establish qualification requirements applicable to any person who is recommended, nominated, elected, appointed, qualified or seated as a trustee.
Pursuant to each Funds by-laws, the Funds Board is divided into three classes (Class I,
Class II and Class III) with staggered multi-year terms, and typically only the members of one of the three classes stand for election each year. The staggered board structure could delay for up to two years the election of a majority of
the Board of each Fund. The board structure of the Acquiring Fund will remain in place following the closing of the Mergers.
Issuance
of Shares. Under the declaration of trust of each Fund, the trustees are permitted to issue an unlimited number of shares for such consideration and on such terms as the trustees may determine. Shareholders are not entitled to any preemptive
rights or other rights to subscribe to additional shares, except as the trustees may determine. Shares are subject to such other preferences, conversion, exchange or similar rights, as the trustees may determine.
Classes. The declaration of trust of each Fund gives broad authority to the trustees to establish classes or series in addition to
those currently established and to determine the rights and preferences, conversion rights, voting powers, restrictions, limitations, qualifications or terms or conditions of redemptions of the shares of the classes or series. The trustees are also
authorized to terminate a class or series without a vote of shareholders under certain circumstances.
Amendments to Governing
Documents. Amendments to the declaration of trust generally require the consent of shareholders owning more than 50% of shares entitled to vote, voting in the aggregate. Certain amendments may be made by the trustees without a shareholder vote,
and any amendment to the voting requirements contained in the declaration of trust requires the approval of two-thirds of the outstanding common shares and preferred shares, if any, entitled to vote, voting in
the aggregate and not by class except to the extent that applicable law or the declaration of trust may require voting by class. Each Funds by-laws may be amended or repealed, or new by-laws may be adopted, by a vote of a majority of the trustees. The by-laws of each Fund may not be amended by shareholders.
Shareholder, Trustee and Officer Liability. The declaration of trust of each Fund provides that shareholders have no personal liability
for the acts or obligations of the Fund and requires the Fund to indemnify a shareholder from any loss or expense arising solely by reason of his or her being or having been a shareholder and not because of his or her acts or omissions or for some
other reason. In addition, each declaration of trust provides that the Fund will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. Similarly, each declaration of trust provides that any
person who is a trustee, officer or employee of the Fund is not personally liable to any person in connection with the affairs of the Fund, other than to the Fund and its shareholders arising from such trustees, officers or
employees bad faith, willful misfeasance, gross negligence or reckless disregard for his or her duty. Each declaration of trust further provides for indemnification
42
of such persons and advancement of the expenses of defending any such actions for which indemnification might be sought. Each declaration of trust also provides that the trustees may rely in good
faith on expert advice.
Forum Selection. Each Funds by-laws provide that, unless the
Fund consents in writing to the selection of an alternative forum, and except for certain claims brought under the federal securities laws, the sole and exclusive forum for any shareholder or group of shareholders to bring (i) any derivative
action or proceeding brought on behalf of the Fund, (ii) any action asserting a claim for breach of any duty owed by a trustee or officer or other employee of a Fund to the Fund or to the Funds shareholders, (iii) any action
asserting a claim arising pursuant to Massachusetts business trust law or the Funds governing documents, and (iv) any other action asserting a claim governed by the internal affairs doctrine, shall be within the United States District
Court for the District of Massachusetts (Boston Division) or, to the extent such court does not have jurisdiction, the Business Litigation Session of the Massachusetts Superior Court in Suffolk County. Each Funds
by-laws further provide that in any such covered action there is no right to a jury trial and the right to a jury trial is expressly waived to the fullest extent permitted by law.
Derivative and Direct Claims of Shareholders. Each Funds by-laws contain provisions
regarding derivative and direct claims of shareholders. Massachusetts has what is commonly referred to as a universal demand statute, which requires that a shareholder make a written demand on the board, requesting the trustees to bring
an action, before the shareholder is entitled to bring or maintain a derivative action in the right of or name of or on behalf of the trust. Under the Massachusetts statute, a shareholder whose demand has been refused by the trustees may bring the
claim only if the shareholder demonstrates to a court that the trustees decision not to pursue the requested action was not a good faith exercise of their business judgment on behalf of the Fund. The
by-laws of each Fund largely incorporate the substantive elements of the Massachusetts statute and establish procedures for shareholders to bring derivative actions and for the Board to consider shareholder
demands that the Fund commence a suit. In addition, the by-laws of each Fund distinguish direct actions from derivative claims and prohibit the latter from being brought directly by a shareholder.
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D. |
ADDITIONAL INFORMATION ABOUT THE INVESTMENT POLICIES |
Comparison of the Investment Objectives and Policies of the Acquiring Fund and the Target Funds
General
The
Funds have similar investment objectives, but there are differences. Each Fund seeks current income, primarily through investments in senior loans.
Senior Incomes investment objective is to achieve a high level of current income, consistent with preservation of capital. As a non-fundamental policy, under normal circumstances, Senior Income invests at least 80% of its Assets in adjustable rate, U.S. dollar-denominated secured and unsecured senior loans, which unsecured senior loans will
be, at the time of investment, investment grade quality. Investment grade quality securities are those securities that, at the time of investment, are rated by at least one nationally recognized statistical rating organization (NRSRO)
within the four highest grades or unrated but judged to be of comparable quality. With respect to the Funds senior loans included in the 80% policy, such instruments will at all times have a dollar weighted average time until the next interest
rate adjustment of 90 days or less. Senior Income invests primarily in adjustable rate U.S. dollar-denominated secured senior loans.
Floating Rate Income Opportunitys investment objective is to achieve a high level of current income. As a
non-fundamental policy, under normal circumstances, Floating Rate Income Opportunity invests at least 80% of its Assets in adjustable rate loans, primarily secured senior loans. With respect to Floating Rate
Income Opportunitys senior loans included in the 80% policy, such instruments will not at all times have a dollar-weighted average time until the next interest rate adjustment of 90 days or less. As part of the 80% requirement, Floating Rate
Income Opportunity also may invest in adjustable rate unsecured senior loans and adjustable rate secured and unsecured subordinated loans. Senior loans include floating or variable rate, U.S. dollar denominated secured and unsecured loans that hold
the most senior position in the capital structure of an issuer. Adjustable rate senior loans and adjustable rate subordinated loans are sometimes collectively referred to as adjustable rate loans. Adjustable rate loans pay interest at
rates that are redetermined periodically at short-term intervals by reference to a base lending rate, generally based on a percentage above LIBOR, SOFR, a U.S. banks prime or base rate, the overnight federal funds rate or another rate (of any
tenor, but typically between one month and six months, and currently), plus a premium.
Short Duration Credit Opportunities
investment objective is to provide current income and the potential for capital appreciation. As a non-fundamental policy, under normal circumstances, Short Duration Credit Opportunities invests at least 80%
of Assets, at time of purchase, in loans or securities in the issuing companys capital structure that are senior to its common equity, including but not limited to debt securities and preferred securities. Short Duration Credit
Opportunities portfolio will be invested primarily in below investment grade adjustable rate corporate debt instruments, including senior secured loans, second lien loans, and other adjustable rate corporate debt instruments. Short Duration
Credit Opportunities also may invest in other types of debt instruments and enter into short positions consisting primarily of high yield debt. Under normal circumstances, Short Duration Credit Opportunities will invest at least 70% of its Managed
Assets in adjustable rate senior loans and second lien loans.
The Acquiring Funds investment objective is to achieve a high level
of current income. As a non-fundamental policy, under normal circumstances, the Acquiring Fund invests at least 80% of its Assets in secured senior loans and unsecured senior loans, which unsecured senior
loans will be, at the time of investment, investment grade quality. With respect to the Acquiring Funds senior loans included in the 80% policy, such instruments will at times have a dollar-weighted average time until the next interest rate
adjustment of 90 days or less.
Note that each Funds investment objective may not be changed without shareholder approval of the
holders of a majority of the outstanding common and preferred shares voting together as a single class, and the
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approval of the holders of a majority of the outstanding preferred shares, voting separately as a single class. When used with respect to particular shares of a Fund, a majority of the
outstanding shares means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present in person (including participation by means of remote or virtual communication) or
represented by proxy, or (2) more than 50% of the shares, whichever is less.
Also note that (1) Senior Incomes policy to
invest at least 80% of its Assets in adjustable rate, U.S. dollar-denominated, secured and unsecured senior loans, which unsecured senior loans will be, at the time of investment, investment grade quality; (2) Floating Rate Income
Opportunitys policy to invest at least 80% of its Assets in adjustable rate loans; (3) Short Duration Credit Opportunities policy to invest at least 80% of its Assets in loans or securities in the issuing companys capital
structure that are senior to its common equity and (4) the Acquiring Funds policy to invest at least 80% of its Assets in secured senior loans and unsecured senior loans, which unsecured senior loans will be, at the time of investment,
investment grade quality, may not be changed without 60 days prior written notice.
Investment Policies of the Acquiring Fund
In addition to the Acquiring Funds investment policies discussed above, the following
non-fundamental investment policies also apply to the Acquiring Fund, under normal circumstances:
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The Acquiring Fund invests at least 65% of its Managed Assets in senior loans that are secured by specific
collateral. |
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The Acquiring Fund may invest its Managed Assets without limit in senior loans and other debt instruments that
are, at the time of investment, rated below investment grade or unrated but judged to be of comparable quality. Investment grade quality securities are those securities that, at the time of investment, are (i) rated by at least one nationally
recognized statistical rating organization (NRSRO) within the four highest grades (BBB- or Baa3 or better) by S&P, Moodys or Fitch, or (ii) unrated but judged to be of comparable
quality. However, no more than 30% of the Acquiring Funds Managed Assets may be invested in senior loans and other debt securities that are, at the time of investment, rated CCC+ or Caa or below by S&P, Moodys or Fitch or that are
unrated but judged to be of comparable quality. |
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The Acquiring Fund may invest up to 20% of its Managed Assets in (i) other debt securities such as
investment and non-investment grade debt securities, convertible securities and structured notes (other than structured notes that are designed to provide returns and risks that emulate those of senior loans,
which may be treated as an investment in senior loans for purposes of the 80% requirement set forth above), (ii) mortgage-related and other asset-backed securities (including collateralized loan obligations and collateralized debt obligations), and
(iii) debt securities and other instruments issued by government, government-related or supranational issuers (commonly referred to as sovereign debt securities). No more than 5% of the Acquiring Funds Managed Assets may be invested in
each of convertible securities, mortgage-related and other asset-backed securities, and sovereign debt securities. The debt securities in which the Acquiring Fund may invest may have short-term, intermediate-term or long-term maturities. The
Acquiring Fund also may receive warrants and equity securities issued by a borrower or its affiliates in connection with the Funds other investments in such entities. |
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The Acquiring Fund maintains an average duration of one year or less for its portfolio investments in senior
loans and other debt instruments. |
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The Acquiring Fund will not invest in inverse floating rate securities. |
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The Acquiring Fund may invest up to 20% of its Managed Assets in securities of
non-U.S. issuers (which includes borrowers) that are U.S. dollar or non-U.S. dollar denominated. The Acquiring Funds Managed Assets to be invested in senior loans
and other debt instruments of non-U.S. |
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issuers may include debt securities of issuers located, or conducting their business in, emerging markets countries. |
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The Acquiring Fund may not invest more than 20% of its Managed Assets in securities from an industry which (for
the purposes of this policy) generally refers to the classification of companies in the same or similar lines of business such as the automotive, textiles and apparel, hotels, media production and consumer retailing industries. The Acquiring Fund
may invest more than 20% of its Managed Assets in sectors which (for the purposes of this policy) generally refers to broader classifications of industries, such as the consumer discretionary sector which includes the automotive, textiles and
apparel, hotels, media production and consumer retailing industries, provided the Funds investment in a particular industry within the sector does not exceed the industry limitation. |
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The Acquiring Fund may invest up to 5% of its Managed Assets in iBoxx Loan Total Return Swaps. An iBoxx Loan
Total Return Swap is a specific type of total return swap on an index that is designed to provide exposure to the senior loan market. The iBoxx Loan Total Return Swaps underlying index is the Markit iBoxx USD Liquid Leveraged Loans Total
Return Index, which is one of a subset of indices designed to track the broader, rules-based Markit iBoxx USD Liquid Leveraged Loan Index. iBoxx Loan Total Return Swaps means total return swaps written on the Markit iBoxx USD Liquid
Leveraged Loans Total Return Index. |
Investment Policies of Senior Income
In addition to Senior Incomes investment policies discussed above, the following non-fundamental
investment policies also apply to Senior Income, under normal circumstances:
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No more than 30% of Senior Incomes Managed Assets may be invested in senior loans and other debt securities
that are, at the time of investment, rated CCC+ or Caa or below by Standard & Poors Corporation, a division of The McGraw-Hill Companies (S&P), Moodys Investor Service, Inc. (Moodys) or Fitch
Ratings, part of the Fitch Group (Fitch) or that are unrated but judged to be of comparable quality. |
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Senior Income invests at least 65% of its Managed Assets in senior loans that are secured by specific collateral.
Such collateral consists of assets and/or stock of the borrower. |
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Senior Income may invest up to 20% of its Managed Assets in U.S. dollar-denominated senior loans of borrowers
that are organized or located in countries outside the United States. |
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Senior Income may invest up to 20% of its Managed Assets, in the aggregate, in: |
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other income producing securities such as investment and non-investment
grade corporate debt securities, of corporate or governmental issuers; and |
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equity securities and warrants acquired in connection with the Funds investments in senior loans.
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Senior Income will not invest more than 10% of its Managed Assets in senior loans with interest rates that adjust
less often than semi-annually. |
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Senior Incomes portfolio of senior loans will at all times have a dollar-weighted average time until the
next interest rate adjustment of 90 days or less. The Fund may use interest rate swaps and other investment practices to shorten the effective interest rate adjustment period of senior loans. If the Fund does so, it considers the shortened period to
be the adjustment period of the senior loans. |
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Senior Income has no policy limiting the maturity of the senior loans that it purchases. |
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Senior Income does not intend to invest more than 5% of its Managed Assets in senior loans or other securities of
a single borrower. In addition, the Fund will not invest more than 25% of its Managed Assets in borrowers that conduct their principal businesses in the same industry. |
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Senior Income invests no more than 20% of its total assets in senior loans in which it acts as an agent or co-agent, and the size of any such individual senior loan will not exceed 5% of the Funds total assets. |
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Senior Income does not currently intend to invest more than 20% of its Managed Assets in participations.
Participations are when the Fund acquires from a lender a portion of a lenders rights under a loan agreement. |
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Senior Income will only acquire participations if the lender selling the participation, and any other persons
interpositioned between the Fund and the lender, (i) at the time of investment has outstanding debt or deposit obligations rated investment grade (BBB or A-3 or higher by S&P, Baa or P-3 or higher by Moodys or BBB or F3 or higher by Fitch or has debt or obligations that are unrated by S&P, Moodys and Fitch and determined by the Funds investment adviser to be of comparable
quality and (ii) has entered into an agreement which provides for the holding of assets in safekeeping for, or the prompt disbursement of assets to, the Fund. |
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Senior Income may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies (including exchange-traded funds (ETFs)) that invest primarily in the types in which the Fund may invest directly. |
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Senior Income may invest up to 5% of its Managed Assets in iBoxx Loan Total Return Swaps. Such swaps are
standardized total return swaps on loan indices that are designed to provide exposure to the senior loan market. |
Investment Policies of Floating Rate Income Opportunity
In addition to Floating Rate Income Opportunitys investment policies discussed above, the following
non-fundamental investment policies also apply to Floating Rate Income Opportunity, under normal circumstances:
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Floating Rate Income Opportunity invests no more than 20% of its total assets in senior loans in which it acts as
an agent or co-agent and the size of any such individual senior loan will not exceed 5% of the Funds total assets. |
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Floating Rate Income Opportunity may invest its Managed Assets without limit in adjustable rate loans and other
debt instruments that are, at the time of investment, rated below investment grade or unrated but judged to be of comparable quality. Investment grade quality securities are those securities that, at the time of investment, are (i) rated by at
least one NRSRO within the four highest grades (BBB- or Baa3 or better by S&P, Moodys or Fitch, or (ii) unrated but judged to be of comparable quality. However, Floating Rate Income Opportunity
may not invest, at the time of investment, more than 30% of its Managed Assets in securities rated below CCC+ or Caa by any NRSRO that rate such security or are unrated but judged to be of comparable quality, including securities in default.
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Floating Rate Income Opportunity may invest up to 20% of its Managed Assets in the following adjustable or fixed
rate securities: (i) other debt securities such as investment and non-investment grade debt securities, fixed rate senior loans or subordinated loans, convertible securities and structured notes (other
than structured notes that are designed to provide returns and risks that emulate those of adjustable rate loans, which may be treated as an investment in adjustable rate loans for purposes of the 80% requirement set forth above); (ii)
mortgage-related and other asset-backed securities (including collateralized loan obligations and collateralized debt obligations); and (iii) debt securities and other instruments issued by government, government-related or supranational
issuers (commonly referred to as sovereign debt securities). |
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No more than 5% of Floating Rate Income Opportunitys Managed Assets may be invested in each of convertible
securities, mortgage-related and other asset- backed securities, and sovereign debt securities. |
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Floating Rate Income Opportunity also may receive warrants and equity securities issued by an issuer or its
affiliates in connection with the Funds other investments in such entities. |
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Floating Rate Income Opportunity invests at least 65% of its Managed Assets in senior loans that are secured by
specific collateral. Such collateral consists of assets and/or stock of the borrower. |
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Floating Rate Income Opportunity maintains an average duration of one year or less for its portfolio investments
in adjustable rate loans and other debt instruments. |
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Floating Rate Income Opportunity will not invest in inverse floating rate securities. |
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Floating Rate Income Opportunity may invest up to 20% of its Managed Assets in securities of non-U.S. issuers that are U.S. dollar or non-U.S. dollar denominated. The Funds Managed Assets to be invested in adjustable rate loans and other debt instruments of non-U.S. issuers may include debt securities of issuers located, or conducting their business in, emerging markets countries. |
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Floating Rate Income Opportunity may not invest more than 20% of its Managed Assets in securities from an
industry which (for these purposes ) generally refers to the classification of companies in the same or similar lines of business such as the automotive, textiles and apparel, hotels, media production and consumer retailing industries. Floating Rate
Income Opportunity may invest more than 20% of its Managed Assets in sectors which (for these purposes) generally refers to broader classifications of industries, such as the consumer discretionary sector which includes the automotive, textiles and
apparel, hotels, media production and consumer retailing industries, provided the Funds investment in a particular industry within the sector does not exceed the industry limitation. |
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Floating Rate Income Opportunity may invest up to 5% of its Managed Assets in iBoxx Loan Total Return Swaps. An
iBoxx Loan Total Return Swap is a specific type of total return swap on an index that is designed to provide exposure to the senior loan market. The iBoxx Loan Total Return Swaps underlying index is the Markit iBoxx USD Liquid Leveraged Loans
Total Return Index, which is one of a subset of indices designed to track the broader, rules-based Markit iBoxx USD Liquid Leveraged Loan Index. iBoxx Loan Total Return Swaps means total return swaps written on the Markit iBoxx USD
Liquid Leveraged Loans Total Return Index. |
Investment Policies of Short Duration Credit Opportunities
In addition to Short Duration Credit Opportunities investment policies discussed above, the following non-fundamental investment policies also apply to Short Duration Credit Opportunities, under normal circumstances:
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Short Duration Credit Opportunities invests at least 70% of its Managed Assets in adjustable rate corporate debt
instruments, including senior secured loans, second lien loans, and other adjustable rate corporate debt instruments. |
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Short Duration Credit Opportunities may invest in high yield debt and other debt instruments as described herein
in an aggregate amount of up to 30% of its Managed Assets. |
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Short Duration Credit Opportunities invests at least 80% of its Managed Assets in corporate debt instruments that
are, at the time of investment, rated below investment grade or unrated but judged by the Funds sub-adviser to be of comparable quality. Investment grade quality securities are those securities that, at
the time of investment, are (i) rated by at least one NRSRO within the four highest grades (BBB- or Baa3 or better by S&P, Moodys or Fitch, or (ii) unrated but judged to be of comparable
quality. However, Short Duration Credit Opportunities may not invest, at the time of investment, more than 30% of its Managed Assets in securities rated below CCC+ or Caa by any NRSRO that rate such security or are unrated but judged to be of
comparable quality, including securities in default. |
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Short Duration Credit Opportunities may enter into short positions, consisting primarily of high yield debt,
either directly or through the use of derivatives, including credit default swaps, creating a negative investment exposure or hedging existing long (positive) investment exposure in a notional amount up to 20% of its Managed Assets.
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Short Duration Credit Opportunities will maintain an average duration of two years or less for its portfolio
(including the effect of leverage, but after the effect of derivatives used to shorten duration). Average duration and average portfolio duration are each defined to be the modified duration of the Funds portfolio,
which is the measure of a debt instruments or a portfolios price sensitivity with respect to changes in market yields adjusted to reflect the effect of the Funds use of leverage. |
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Short Duration Credit Opportunities may invest up to 20% of its Managed Assets in debt instruments of non-U.S. issuers (which term includes borrowers) that are U.S. dollar or non-U.S. dollar denominated. The Funds investments in debt instruments of non-U.S. issuers may include debt instruments located, or conducting their business, in emerging market countries. |
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Short Duration Credit Opportunities may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies (including ETFs) that invest primarily in the types in which the Fund may invest directly. |
Use of Leverage
Each Fund uses leverage to pursue its investment objective. The Funds may use leverage to the extent permitted by the 1940 Act. The Funds may
source leverage through a number of methods including through borrowings, issuing preferred shares of beneficial interest, the issuance of debt securities, and entering into reverse repurchase agreements (effectively a borrowing). In addition, the
Funds may use derivatives that may have the economic effect of leverage, such as certain credit default swaps, total return swaps and bond futures. The amount and sources of leverage will vary depending on market conditions.
Temporary Defensive Periods
During temporary defensive periods (e.g., times when, in the Advisers and/or the
Sub-Advisers opinion, temporary imbalances of supply and demand or other temporary dislocations in the senior loan market adversely affect the price at which senior loans are available), each Fund may
invest up to 100% of its assets in high quality, short-term securities, and in short-, intermediate- or long-term U.S. Treasury securities. There can be no assurance that such techniques will be successful. Accordingly, during such periods, the
Funds may not achieve their investment objectives.
Portfolio Investments
The Acquiring Funds portfolio is composed principally of the following investments.
Senior Loans
The
Acquiring Fund may invest in (i) senior loans made by banks or other financial institutions to borrowers, (ii) assignments of such interests in senior loans, or (iii) participation interests in senior loans. senior loans hold the most
senior position in the capital structure of a borrower, are typically secured with specific collateral and have a claim on the assets and/or stock of the borrower that is senior to that held by subordinated debt holders and stockholders of the
borrower. The capital structure of a borrower may include senior loans, senior and junior subordinated debt, preferred stock and common stock issued by the borrower, typically in descending order of seniority with respect to claims on the
borrowers assets. The proceeds of senior loans primarily are used by borrowers to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock
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repurchases, re-financings, internal growth and for other corporate purposes. A senior loan is typically originated, negotiated and structured by a U.S. or
non-U.S. commercial bank, insurance company, finance company or other financial institution (Agent) for a lending syndicate of financial institutions which typically includes the Agent
(Lenders). The Agent typically administers and enforces the senior loan on behalf of the other Lenders in the syndicate. In addition, an institution, typically but not always the Agent, holds any collateral on behalf of the Lenders. The
Acquiring Fund normally will rely primarily on the Agent to collect principal of and interest on a senior loan. Also, the Acquiring Fund usually will rely on the Agent to monitor compliance by the borrower with the restrictive covenants in a loan
agreement.
Senior loans in which the Acquiring Fund invests generally pay interest at rates that are redetermined periodically at
short-term intervals by reference to a base lending rate, plus a premium. senior loans typically have rates of interest that are redetermined either daily, monthly, quarterly or semiannually by reference to a base lending rate plus a premium or
credit spread. These base lending rates are primarily LIBOR (of any tenor, but typically between one month and six months, and currency), and secondarily the prime rate offered by one or more major U.S. banks and the certificate of deposit
(CD) rate or other base lending rates used by commercial lenders. The frequency of how often a senior loan resets its interest rate will impact how closely such senior loans track current market interest rates. The senior loans held by
the Acquiring Fund will have a dollar-weighted average period until the next interest rate adjustment of approximately 90 days or less. As a result, as short-term interest rates increase, interest payable to the Acquiring Fund from its investments
in senior loans should increase, and as short-term interest rates decrease, interest payable to the Acquiring Fund from its investments in senior loans should decrease. The Acquiring Fund may utilize derivative instruments to shorten the effective
interest rate redetermination period of senior loans in its portfolio. senior loans typically have a stated term of between one and eight years.
The Acquiring Fund primarily purchases senior loans by assignment from a participant in the original syndicate of lenders or from subsequent
assignees of such interests. The purchaser of an assignment typically succeeds to all the rights and obligations under the loan agreement with the same rights and obligations as the assigning Lender. Assignments may, however, be arranged through
private negotiations between potential assignees and potential assignors, and the rights and obligations acquired by the purchaser of an assignment may differ from, and be more limited than, those held by the assigning Lender.
The Acquiring Fund may purchase participation interests in the original syndicate making senior loans. Loan participation interests typically
represent direct participations in a loan to a corporate borrower, and generally are offered by banks or other financial institutions or lending syndicates. The Acquiring Fund may participate in such syndications, or can buy part of a senior loan,
becoming a part Lender. When purchasing a participation interest, the Acquiring Fund assumes the credit risk associated with the corporate borrower and may assume the credit risk associated with an interposed bank or other financial intermediary.
The participation interests in which the Acquiring Fund may invest may not be rated by any NRSRO. See Risk FactorsSenior Loan Risks.
Although senior loans have the most senior position in a borrowers capital structure and are often secured by specific collateral, they
are typically below investment grade quality and may have below investment grade ratings; these ratings are associated with securities having speculative characteristics. Senior loans rated below investment grade may therefore be regarded as
junk, despite their senior capital structure position or specific collateral pledged to secure such loans. The Acquiring Fund may purchase and retain in its portfolio senior loans where the borrowers have experienced, or may be perceived
to be likely to experience, credit problems, including involvement in or recent emergence from bankruptcy reorganization proceedings or other forms of debt restructuring. Such investments may provide opportunities for enhanced income as well as
capital appreciation. At times, in connection with the restructuring of a senior loan either outside of bankruptcy court or in the context of bankruptcy court proceedings, the Acquiring Fund may determine or be required to accept equity securities
or junior debt securities in exchange for all or a portion of a senior loan. See Warrants and Equity Securities. Given the Acquiring Funds policy to invest up to 30% of its Managed Assets in senior loans
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and other debt securities that are, at the time of investment, rated CCC+ or Caa or below by S&P, Moodys or Fitch, the Acquiring Fund may invest no more than 30% of its Managed Assets
in borrowers that, at the time of investment, have filed for protection under the federal bankruptcy laws or that have had involuntary bankruptcy petitions filed against them by creditors. Investment rating limitations are considered to apply only
at the time of investment and the Acquiring Fund is under no obligation to sell securities as a result of changes in market values or ratings. You should expect the Acquiring Funds net asset value to fluctuate as a result of changes in the
credit quality of borrowers and other factors. A serious deterioration in the credit quality of one or more borrowers could cause a permanent decrease in the Acquiring Funds net asset value. See Risk FactorsLoan Participation
Risk.
Non-Senior Loan Investments
Second Lien Loans and Unsecured Loans. The Acquiring Fund may invest in second lien loans and other unsecured loans. Such loans are
made by public and private corporations and other non-governmental borrowers for a variety of purposes. As in the case of senior loans, the Acquiring Fund may purchase interests in second lien loans and
unsecured loans through assignments or participations.
Second lien loans have similar characteristics as senior loans except that such
interests are second in lien property rather than first. Second lien loans are second in priority of payment to one or more senior loans of the related borrower and are typically secured by a second priority security interest or lien to or on
specified collateral securing the borrowers obligation under the interest. They typically have similar protections and rights as senior loans. Second lien loans are not (and by their terms cannot become) subordinate in priority of payment to
any obligation of the related borrower other than senior loans of such borrower. Second lien loans may feature fixed or floating rate interest payments. Because second lien loans are second to senior loans, they present a greater degree of
investment risk but often pay interest at higher rates reflecting this additional risk. In addition, second lien loans of below investment grade quality share many of the risk characteristics of other below investment grade debt instruments.
Unsecured loans generally have lower priority in right of payment compared to holders of secured interests of the borrower. Unsecured loans
are not secured by a security interest or lien to or on specified collateral securing the borrowers obligation under the interest. Unsecured loans by their terms may be or may become subordinate in right of payment to other obligations of the
borrower, including senior loans, second lien loans and other interests. Unsecured loans may have fixed or adjustable floating rate interest payments. Because unsecured loans are subordinate to senior loans and other secured debt of the borrower,
they present a greater degree of investment risk but often pay interest at higher rates reflecting this additional risk. Such investments generally are of below investment grade quality. Unsecured loans of below investment grade quality share the
same risks of other below investment grade debt instruments.
Corporate Bonds. Corporate bonds generally are used by corporations
to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are perpetual in that they have no maturity date. The
Acquiring Fund may invest in bonds and other debt securities of any quality.
Structured Notes. The Acquiring Fund may utilize
structured notes, which are privately negotiated debt obligations or economically equivalent instruments where the principal and/or interest to be received by the investor is determined by reference to the performance of a benchmark asset, market or
interest rate (an embedded index), such as selected securities or loans, an index of securities or loans, or specified interest rates, or the differential performance of two assets or markets. Structured notes may be issued by
corporations, including banks, as well as by governmental agencies. Structured notes frequently are assembled in the form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The terms of such
structured notes normally provide that their principal and/or interest payments are to be adjusted upwards or index while the structured notes are outstanding. As a result, the interest and/or principal payments that may
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be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal
and/or interest payments. If the Acquiring Fund invests in structured notes that are designed to provide returns and risks that emulate those of senior loans, the Acquiring Fund may treat the value of (or, if applicable, the notional amount of) such
investment as an investment in senior loans for purposes of determining compliance with the requirement set forth above that at least 80% of the Acquiring Funds Assets be invested under normal market circumstances in senior loans, except to
the extent that the value (or notional amount) of such investments exceeds 5% of the Acquiring Funds Managed Assets. Any such investment amounts that exceed 5% of Managed Assets will be treated as a type of other debt instruments
which, in the aggregate, are limited to 20% of Managed Assets. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s).
Application of the multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss. The Sub-Adviser may utilize structured notes for investment purposes and also for risk
management purposes, such as to reduce the duration and interest rate sensitivity of the Acquiring Funds portfolio. While structured notes may offer the potential for a favorable rate of return from time to time, they also entail certain
risks. Structured notes may be less liquid than other debt securities, and the price of structured notes may be more volatile. In some cases, depending on the terms of the embedded index, a structured note may provide that the principal and/or
interest payments may be adjusted below zero. Structured notes also may involve significant credit risk and risk of default by the counterparty. Although structured notes are not necessarily illiquid, the Adviser believes that currently most
structured notes are illiquid. Like other sophisticated strategies, the Acquiring Funds use of structured notes may not work as intended. If the value of the embedded index changes in a manner other than that expected by the Sub-Adviser, principal and/or interest payments received on the structured notes may be substantially less than expected. Also, if the Sub-Adviser uses structured notes to
reduce the duration of the Acquiring Funds portfolio, this may limit the Acquiring Funds return when having a longer duration of the Acquiring Funds portfolio, this may limit the Acquiring Funds return when having a longer
duration would be beneficial (for instance, when interest rates decline).
U.S. Government Securities. U.S. Government securities
include (1) U.S. Treasury obligations, which differ in their interest rates, maturities and times of issuance: U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes (maturities of one year to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years) and (2) obligations issued or guaranteed by U.S. Government agencies and instrumentalities that are supported by any of the following: (i) the full faith and credit of the U.S.
Treasury, (ii) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Treasury, (iii) discretionary authority of the U.S. Government to purchase certain obligations of the U.S. Government agency or
instrumentality or (iv) the credit of the agency or instrumentality. The Acquiring Fund also may invest in any other security or agreement collateralized or otherwise secured by U.S. Government securities. Agencies and instrumentalities of the
U.S. Government include but are not limited to: Federal Land Banks, Federal Financing Banks, Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks, Federal Home Loan Banks, FHLMC, FNMA, GNMA, Student Loan Marketing
Association, United States Postal Service, Small Business Administration, Tennessee Valley Authority and any other enterprise established or sponsored by the U.S. Government. Because the U.S. Government generally is not obligated to provide support
to its instrumentalities, the Acquiring Fund will invest in obligations issued by these instrumentalities only if the Sub-Adviser determines that the credit risk with respect to such obligations is minimal.
The principal of and/or interest on certain U.S. Government securities which may be purchased by the Acquiring Fund could be
(i) payable in non-U.S. currencies rather than U.S. dollars or (b) increased or diminished as a result of changes in the value of the U.S. dollar relative to the value of non-U.S. currencies. The value of such portfolio securities may be affected by changes in the exchange rate between foreign currencies and the U.S. dollar.
Commercial Paper. Commercial paper represents short-term unsecured promissory notes issued in bearer form by corporations such as banks
or bank holding companies and finance companies. The rate of return on
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commercial paper may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
Warrants and Equity Securities. The Acquiring Fund may acquire equity securities and warrants issued by a borrower or its affiliates as
part of a package of investments in the borrower or its affiliates issued in connection with a senior loan of the borrower. The Acquiring Fund also may convert a warrant so acquired into the underlying security. Investments in warrants and equity
securities entail certain risks in addition to those associated with investments in senior loans. The value of these securities may be affected more rapidly, and to a greater extent, by company-specific developments and general market conditions.
These risks may increase fluctuations in the Acquiring Funds net asset value. The Acquiring Fund may possess material non-public information about a borrower as a result of its ownership of a senior loan
of such borrower. Because of prohibitions on trading in securities of issuers while in possession of such information the Acquiring Fund might be unable to enter into a transaction in a security of such a borrower when it would otherwise be
advantageous to do so.
Repurchase Agreements. For cash management purposes, the Acquiring Fund may invest in repurchase
agreements. A repurchase agreement is a contractual agreement whereby the seller of securities (U.S. Government securities or municipal bonds) agrees to repurchase the same security at a specified price on a future date agreed upon by the parties.
The agreed-upon repurchase price determines the yield during the Acquiring Funds holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. The
Acquiring Fund will only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Sub-Adviser, present minimal credit risk. The risk to the Acquiring
Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon
repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Acquiring Fund might incur a loss if the value of the collateral declines,
and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Acquiring
Fund may be delayed or limited. The Sub-Adviser will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in
an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Sub-Adviser will demand
additional collateral from the issuer to increase the Sub-Adviser of the collateral to at least that of the repurchase price, including interest.
Convertible Securities. Convertible securities are bonds, debentures, notes, preferred securities or other securities that may be
converted or exchanged (by the holder or the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio or predetermined price (the conversion price). Convertible securities
have general characteristics similar to both debt securities and common stock. The interest paid on convertible securities may be fixed or floating rate. Floating rate convertible securities may specify an interest rate or rates that are conditioned
upon changes to the market price of the underlying common stock. Convertible securities also may be issued in zero coupon form with an original issue discount. See Zero Coupon and Payment-In-Kind Securities. Although to a lesser extent than with debt securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock and, therefore, will also react to
variations in the general market for common stock. Depending upon the relationship of the conversion price to the market value of the underlying common stock, a convertible security may trade more like a common stock than a debt instrument. A
convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Convertible securities rank senior to common stock in a corporations capital
structure and, therefore, generally entail less risk than the corporations common stock, although the extent to which such risk is reduced depends in
53
large measure upon the degree to which the convertible security sells above its value as a debt obligation. Before conversion, convertible securities have characteristics similar to non-convertible debt obligations and can provide for a stable stream of income with generally higher yields than common stock. However, convertible securities fall below debt obligations of the same issuer in order
of preference or priority in the event of a liquidation, and are typically unrated or rated lower than such debt obligations. In addition, contingent payment convertible securities allow the issuer to claim deductions based on its nonconvertible
cost of debt which generally will result in deductions in excess of the actual cash payments made on the securities (and accordingly, holders will recognize income in amounts in excess of the cash payments received). There can be no assurance of
current income because the issuers of the convertible securities may default on their obligations. The convertible securities in which the Acquiring Fund may invest may be below investment grade quality.
Convertible securities generally offer lower interest or dividend yields than non-convertible
securities of similar credit quality because of the potential for capital appreciation. A convertible security, in addition to providing current income, offers the potential for capital appreciation through the conversion feature, which enables the
holder to benefit from any increases in the market price of the underlying common stock. The common stock underlying convertible securities may be issued by a different entity than the issuer of the convertible securities.
The value of convertible securities is influenced by both the yield of non-convertible securities of
comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is sometimes referred to as its investment
value. The investment value of the convertible security typically will fluctuate based on the credit quality of the issuer and will fluctuate inversely with changes in prevailing interest rates. However, at the same time, the convertible
security will be influenced by its conversion value, which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the
underlying common stock, and will therefore be subject to risks relating to the activities of the issuer and/or general market and economic conditions. Depending upon the relationship of the conversion price to the market value of the underlying
security, a convertible security may trade more like an equity security than a debt instrument.
If, because of a low price of the common
stock, the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value. If the conversion value of a convertible security increases
to a point that approximates or exceeds its investment value, the value of the security will be principally influenced by its conversion value. A convertible security will sell at a premium over its conversion value to the extent investors place
value on the right to acquire the underlying common stock while holding a fixed-income security.
Mandatory convertible securities are
distinguished as a subset of convertible securities because the conversion is not optional and the conversion price at maturity (or redemption) is based solely upon the market price of the underlying common stock, which may be significantly less
than par or the price (above or below par) paid. Mandatory convertible securities may be called for conversion by the issuer after a particular date and under certain circumstances (including at a specified price) established upon its issuance. For
these reasons, the risks associated with the investing in mandatory convertible securities most closely resemble the risks inherent in common stock. Mandatory convertible securities customarily pay a higher coupon yield to compensate for the
potential risk of additional price volatility and loss upon redemption. Since the correlation of common stock risk increases as the security approaches its redemption date, there can be no assurance that the higher coupon will compensate for the
potential loss. If a mandatory convertible security is called for conversion, the Acquiring Fund will be required to either convert it into the underlying common stock or sell it to a third party, which may have an adverse effect on the Acquiring
Funds ability to achieve its investment objective. Convertible securities generally offer lower interest or dividend yields than non-convertible fixed-income securities of similar credit quality because
of the potential for capital appreciation. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, a convertible
54
securitys market value also tends to reflect the market price of the common stock of the issuing company, particularly when the stock price is greater than the convertible securitys
conversion price. The conversion price is defined as the predetermined price or exchange ratio at which the convertible security can be converted or exchanged for the underlying common stock. As the market price of the underlying common stock
declines below the conversion price, the price of the convertible security tends to be increasingly influenced more by the yield of the convertible security than by the market price of the underlying common stock.
Mortgage-Related and Other Asset-Backed Securities. Mortgage-related securities are debt instruments that provide periodic payments
consisting of interest and/or principal that are derived from or related to payments of interest and/or principal on underlying mortgages. Additional payments on mortgage-related securities may be made out of unscheduled prepayments of principal
resulting from the sale of the underlying property, or from refinancing or foreclosure, net of fees or costs that may be incurred. The mortgage-related securities in which the Acquiring Fund invests will typically pay variable rates of interest,
although the Acquiring Fund may invest in fixed-rate obligations as well.
The Acquiring Fund may invest in certain asset-backed
securities as discussed below. Asset-backed securities are payment claims that are securitized in the form of negotiable paper that is issued by a financing company (generally called a special purpose vehicle or SPV). These securitized
payment claims are, as a rule, corporate financial assets brought into a pool according to specific diversification rules. The SPV is a company founded solely for the purpose of securitizing these claims and its only asset is the risk arising out of
this diversified asset pool. On this basis, marketable securities are issued which, due to the diversification of the underlying risk, generally represent a lower level of risk than the original assets. The redemption of the securities issued by the
SPV takes place at maturity out of the cash flow generated by the collected claims.
A collateralized loan obligation (CLO) is
a structured credit security issued by an SPV that was created to reapportion the risk and return characteristics of a pool of assets. The assets, typically senior loans, are used as collateral supporting the various debt tranches issued by the SPV.
The key feature of the CLO structure is the prioritization of the cash flows from a pool of debt securities among the several classes of CLO holders, thereby creating a series of obligations with varying rates and maturities appealing to a wide
range of investors. CLOs generally are secured by an assignment to a trustee under an indenture pursuant to which the bonds are issued of collateral consisting of a pool of debt instruments, usually,
non-investment grade bank loans. Payments with respect to the underlying debt securities generally are made to the trustee under the indenture. CLOs are designed to be retired as the underlying debt
instruments are repaid. In the event of sufficient early prepayments on such debt instruments, the class or series of CLO first to mature generally will be retired prior to maturity. Therefore, although in most cases the issuer of CLOs will not
supply additional collateral in the event of such prepayments, there will be sufficient collateral to secure their priority with respect to other CLO tranches that remain outstanding. The credit quality of these securities depends primarily upon the
quality of the underlying assets, their priority with respect to other CLO tranches and the level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which shorten the securities maturity and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may result if the required payments of principal and interest are not made. The value of these securities also may change because of changes in the markets perception of
the creditworthiness of the servicing agent for the pool, the originator of the pool, or the financial institution or fund providing the credit support or enhancement.
The Acquiring Fund also may invest in collateralized debt obligations (CDOs). A CDO is a structured credit security issued by an
SPV that was created to reapportion the risk and return characteristics of a pool of assets. The assets, typically non-investment grade bonds, leveraged loans, and other asset-backed obligations, are used as
collateral supporting the various debt and equity tranches issued by the SPV. CDOs operate similarly to CLOs and are subject to the same inherent risks.
Generally, rising interest rates tend to extend the duration of fixed-rate mortgage-related securities, making them more sensitive to changes
in interest rates. As a result, in a period of rising interest rates, mortgage-
55
related securities held by the Acquiring Fund may exhibit additional volatility. This is known as extension risk. The Sub-Adviser expects that the
Acquiring Fund will focus its mortgage-related investments principally in adjustable rate mortgage-related and other asset- backed securities, which should minimize the Acquiring Funds overall sensitivity to interest rate volatility and
extension risk. However, because interest rates on most adjustable rate mortgage-related and other asset-backed securities typically only reset periodically (e.g., monthly or quarterly), changes in prevailing interest rates (and particularly sudden
and significant changes) can be expected to cause some fluctuation in the market value of these securities, including declines in market value as interest rates rise. In addition, adjustable and fixed rate mortgage-related securities are subject to
prepayment risk. This can reduce the Acquiring Funds returns because the Acquiring Fund may have to reinvest that money at lower prevailing interest rates. Below investment grade securities frequently have call features that allow an issuer to
redeem a security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (commonly referred to as call protection). An issuer may redeem a lower grade security if, for
example, the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. senior loans typically have no such call protection. For premium bonds (bonds acquired at prices that
exceed their par or principal value) purchased by the Acquiring Fund, prepayment risk may be increased. The Acquiring Funds investments in other asset-backed securities are subject to risks similar to those associated with mortgage-related
securities, as well as additional risks associated with the nature of the assets and the servicing of those assets.
Sovereign Debt
Securities. The Acquiring Fund may invest in debt securities and other instruments that are issued by, or that are related to, government, government-related and supranational issuers, including those located, or conducting their
business, in emerging markets countries.
The ability of a non-U.S. sovereign issuer, especially
in an emerging market country, to make timely and ultimate payments on its debt obligations will be strongly influenced by the sovereign issuers balance of payments, including export performance, its access to international credits and
investments, fluctuations of interest rate and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in
international prices of these commodities or imports. To the extent that a country receives payment for its export in currencies other than dollars, its ability to make debt payments denominated in dollars could be adversely affected. If a sovereign
issuer cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks and multinational organizations. There may be no bankruptcy
proceedings similar to those in the U.S. by which defaulted interest may be collected.
Additional factors that may influence the ability
or willingness to service debt include, but are not limited to, a countrys cash flow situation, the availability or sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a
whole, and its governments policy towards the International Monetary Fund, the International Bank for Reconstruction and Development and other international agencies to which a government debtor may be subject. The Acquiring Fund may invest in
debt securities issued by issuers located, or conducting their business in, emerging market countries, and investments in such debt securities are particularly speculative. Heightened risks of investing in emerging markets sovereign debt include:
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Risk of default by a governmental issuer or guarantor. In the event of a default, the Acquiring Fund may have
limited legal recourse against the issuer and/or guarantor. |
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Risk of restructuring certain debt obligations. This may include reducing and rescheduling interest and principal
payments or requiring lenders to extend additional credit, which may adversely affect the value of these investments. |
In addition, risks of investing in emerging markets securities include: smaller market capitalization of securities markets, which may suffer
periods of relative illiquidity, significant price volatility, restrictions on
56
foreign investment, and possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales, future economic or political
crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the
U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Acquiring Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities
markets of certain emerging markets countries.
Below Investment Grade Securities. Investments in below investment grade
securities, commonly referred to as junk bonds or high yield debt, generally provide greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price
volatility and principal and income risk, including the possibility of issuer default and bankruptcy. Issuers of below investment grade securities may be highly leveraged and may not have available to them more traditional methods of financing.
Securities in the lowest investment grade category also may be considered to possess some speculative characteristics by certain rating agencies. In addition, analysis of the creditworthiness of issuers of below investment grade securities may be
more complex than for issuers of higher quality securities.
Below investment grade securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment grade securities. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in lower-grade security prices because
the advent of a recession could lessen the ability of an issuer to make principal and interest payments on its debt obligations. If an issuer of below investment grade securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Acquiring Fund may incur additional expenses to seek recovery. In the case of below investment grade securities structured as zero coupon or
payment-in-kind securities, their market prices will normally be affected to a greater extent by interest rate changes, and therefore tend to be more volatile than
securities which pay interest currently and in cash. The Sub-Adviser seeks to reduce these risks through diversification, credit analysis and attention to current developments and trends in both the economy
and financial markets.
The secondary market for below investment grade securities may not be as liquid as the secondary market for more
highly rated securities, a factor which may have an adverse effect on the Acquiring Funds ability to dispose of a particular security. There are fewer dealers in the market for below investment grade securities than for investment grade
obligations. The prices quoted by different dealers may vary significantly and the spread between the bid and ask price is generally much larger than for higher quality instruments. Under adverse market or economic conditions, the secondary market
for below investment grade securities could contract further, independent of any specific adverse changes in the condition of a particular issuer, and these instruments may become illiquid. As a result, the Acquiring Fund could find it more
difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Acquiring Funds net asset value.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of below investment grade securities, especially in a thinly traded market. When secondary markets for below investment grade securities are less liquid than the market for
investment grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data
available. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and the Acquiring Fund may have greater difficulty selling its portfolio securities. The Acquiring Fund will be
more dependent on the Sub-Advisers research and analysis when investing in below investment grade securities. The Sub-Adviser seeks to minimize the risks of
investing in all securities through in-depth credit analysis and attention to current developments in interest rates and market conditions.
57
The ratings of Moodys, S&P and Fitch represent their opinions as to the quality of the
securities they rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, in the case of debt obligations, certain debt obligations with the same maturity, coupon and rating may have
different yields while debt obligations with the same maturity and coupon with different ratings may have the same yield. For these reasons, the use of credit ratings as the sole method of evaluating lower-grade securities can involve certain risks.
For example, credit ratings evaluate the safety of principal and interest payments, not the market value risk of lower-grade securities. Also, credit rating agencies may fail to change credit ratings in a timely fashion to reflect events since the
security was last rated. The Sub-Adviser does not rely solely on credit ratings when selecting securities for the Acquiring Fund, and develops its own independent analysis of issuer credit quality.
The Acquiring Funds credit quality policies apply only at the time a security is purchased, and the Acquiring Fund is not required to
dispose of a security in the event that a rating agency or the Sub-Adviser downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell such a
security, the Sub-Adviser may consider such factors as its assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any, assigned to
such security by other rating agencies. However, analysis of the creditworthiness of issuers of below investment grade securities may be more complex than for issuers of higher quality debt securities.
Debtor-In-Possession Financings. The Acquiring Fund may
invest in debtor-in-possession financings (commonly called DIP financings). DIP financings are arranged when an entity seeks the protections of the
bankruptcy court under chapter 11 of the U.S. Bankruptcy Code. These financings allow the entity to continue its business operations while reorganizing under chapter 11. Such financings are senior liens on unencumbered security (i.e., security not
subject to other creditors claims). There is a risk that the entity will not emerge from chapter 11 and be forced to liquidate its assets under chapter 7 of the Bankruptcy Code. In such event, the Acquiring Funds only recourse will be
against the property securing the DIP financing.
Securities Issued by Non-U.S. Issuers
General. The Acquiring Fund may invest in securities of non-U.S. Issuers that are
U.S. dollar or non-U.S. dollar denominated. The Acquiring Fund may invest in any region of the world and invest in companies operating in developed countries such as Canada, Japan, Australia, New Zealand and
most Western European countries. An emerging market country is any country determined to have an emerging markets economy, considering, among other things, factors such as whether the country has a low-to-middle income economy according to the World Bank or its related organizations, the countrys credit rating, its political and economic stability and the development of its financial and capital
markets. These countries generally include countries located in Latin America, the Caribbean, Asia, Africa, the Middle East and Eastern and Central Europe. Securities of non-U.S. Issuers include ADRs, Global
Depositary Receipts (GDRs) or other securities representing underlying shares of non-U.S. Issuers. Positions in those securities are not necessarily denominated in the same currency as the common stock into
which they may be converted. ADRs are receipts typically issued by an American bank or trust company evidencing ownership of the underlying securities. GDRs are U.S. dollar- denominated receipts evidencing ownership of
non-U.S. securities. Generally, ADRs, in registered form, are designed for the U.S. securities markets and GDRs, in bearer form, are designed for use in non-U.S.
securities markets. The Acquiring Fund may invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the Acquiring Fund is likely to bear its proportionate share of the expenses of the depository and it may have greater difficulty
in receiving shareholder communications than it would have with a sponsored ADR.
Investors should understand and consider carefully the
risks involved in investing in securities of non-U.S. Issuers. Investing in securities of non-U.S. Issuers involves certain considerations comprising both risks and
opportunities not typically associated with investing in securities of U.S. Issuers. These considerations include: (i) less publicly available information about non-U.S. Issuers or markets due to less
rigorous disclosure or accounting standards or regulatory practices; (ii) many non-U.S. markets are smaller, less liquid and more
58
volatile, meaning that, in a changing market, the Sub-Adviser may not be able to sell the Acquiring Funds portfolio securities at times, in amounts
or at prices it considers reasonable; (iii) potential adverse effects of fluctuations in currency exchange rates or controls on the value of the Acquiring Funds investments; (iv) the economies of
non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; (v) the impact of economic, political, social or diplomatic developments may adversely affect the
securities markets; (vi) withholding and other non-U.S. taxes may decrease the Acquiring Funds return; (vii) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. Issuers to make payments of principal and/or interest to investors located outside the U.S. due to blockage of foreign currency exchanges or otherwise; and
(viii) possible seizure, expropriation or nationalization of the company or its assets. These risks are more pronounced to the extent that the Acquiring Fund invests a significant amount of its investments in issuers located in one region and
to the extent that the Acquiring Fund invests in securities of issuers in emerging markets.
Although the Acquiring Fund may hedge its
exposure to certain of these risks, including the foreign currency exchange rate risk, there can be no assurance that the Acquiring Fund will enter into hedging transactions at any time or at times or under circumstances in which it might be
advisable to do so.
Debt Obligations of Non-US Governments. An investment in debt
obligations of non-U.S. governments and their political subdivisions (sovereign debt) involves special risks that are not present in corporate debt obligations. The
non-U.S. Issuer of the sovereign debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or
interest when due, and the Acquiring Fund may have limited recourse in the event of a default. During periods of economic uncertainty, the market prices of sovereign debt may be more volatile than prices of debt obligations of U.S. Issuers. In the
past, certain non-U.S. countries have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of principal and interest
on their sovereign debt.
A sovereign debtors willingness or ability to repay principal and pay interest in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its non-U.S. currency reserves, the availability of sufficient non-U.S. currency, the relative
size of the debt service burden, the sovereign debtors policy toward its principal international lenders and local political constraints. Sovereign debtors may also be dependent on expected disbursements from
non-U.S. governments, multilateral agencies and other entities to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic reforms, achieve specified
levels of economic performance or repay principal or interest when due may result in the cancellation of third-party commitments to lend funds to the sovereign debtor, which may further impair such debtors ability or willingness to service its
debts.
Eurodollar Instruments and Yankee Bonds. The Acquiring Fund may invest in Eurodollar instruments and Yankee bonds. Yankee
bonds are U.S. dollar denominated bonds typically issued in the U.S. by non-U.S. governments and their agencies and non-U.S. banks and corporations. These investments
involve risks that are different from investments in securities issued by U.S. Issuers, including potential unfavorable political and economic developments, non-U.S. withholding or other taxes, seizure of non-U.S. deposits, currency controls, interest limitations or other governmental restrictions which might affect payment of principal or interest.
Zero Coupon and Payment-In-Kind Securities
The Acquiring Funds investments in debt securities may be in the form of a zero coupon bond. Zero coupon bonds are debt obligations that
do not entitle the holder to any periodic payments of interest for the entire life of the obligation. When held to its maturity, its return comes from the difference between the purchase price and its maturity value.
Payment-in-kind securities (PIKs) pay dividends or interest in the form of additional securities of the issuer, rather than in cash. Each of these
instruments is typically issued and traded at a deep discount from its face amount. The amount of the discount varies depending on such factors as the time remaining until maturity of the securities, prevailing interest rates, the liquidity of the
security and the perceived
59
credit quality of the issuer. The market prices of zero coupon bonds and PIKs generally are more volatile than the market prices of debt instruments that pay interest currently and in cash and
are likely to respond to changes in interest rates to a greater degree than do other types of securities having similar maturities and credit quality. In order to qualify for treatment as a regulated investment company (RIC) under the
Code, the Acquiring Fund must generally distribute for each year at least 90% of its net investment income, including the original issue discount accrued on zero coupon bonds and PIKs. Because the Acquiring Fund will not on a current basis receive
cash payments from the issuer of these securities in respect of any accrued original issue discount, in some years the Acquiring Fund may have to distribute cash obtained from selling portfolio holdings of the Acquiring Fund in order to avoid
unfavorable tax consequences. In some circumstances, such sales might be necessary in order to satisfy cash distribution requirements even though investment considerations might otherwise make it undesirable for the Acquiring Fund to sell securities
at such time. Under many market conditions, investments in zero coupon bonds and PIKs may be illiquid, making it difficult for the Acquiring Fund to dispose of them or determine their current value.
When-Issued and Delayed-Delivery Transactions
The Acquiring Fund may purchase and sell interests in senior loans and other portfolio securities on a when issued or
delayed delivery basis, making payment or taking delivery at a later date, normally within 15-45 days of the trade date. On such transactions the payment obligation and the interest rate are fixed
at the time the buyer enters into the commitment. Beginning on the date the Acquiring Fund enters into a commitment to purchase securities on a when- issued or delayed delivery basis, the Acquiring Fund is required under rules of the SEC to maintain
in a separate account liquid assets, consisting of cash, cash equivalents or liquid securities having a market value at all times of at least equal to the amount of any delayed payment commitment. The Acquiring Fund may enter into contracts to
purchase securities on a forward basis (i.e., where settlement will occur more than 60 days from the date of the transaction) only to the extent that the Acquiring Fund specifically collateralizes such obligations with a security that is expected to
be called or mature within sixty days before or after the settlement date of the forward transaction. The commitment to purchase securities on a when issued, delayed delivery or forward basis may involve an element of risk because no interest
accrues on the bonds prior to settlement and at the time of delivery the market value may be less than their cost.
No Inverse
Floating Rate Securities
The Acquiring Fund will not invest in inverse floating rate securities, which are securities that pay
interest at rates that vary inversely with changes in prevailing interest rates and which represent a leveraged investment in an underlying security.
Derivatives
The
Acquiring Fund may invest in derivative instruments including total return swaps; interest rate swaps; credit default swaps; interest rate caps; interest rate floors; interest rate collars; swaptions; credit-linked notes; securities indices; other
indices or other financial instruments; stock and bond index futures; futures contracts on securities; options on securities; options on futures contracts; options on stock and bond indexes; interest rate futures; exchange-traded and over-the-counter options on securities or indices; index linked securities; currency exchange transactions; financial futures; options on financial futures; index futures;
index options; index options on futures contracts; interest rate options; interest rate option on futures contracts; short sales; structured notes; options on U.S. Treasury security or U.S. Government Agency securities; U.S. Treasury security or
U.S. Government Agency security futures contracts; and options on U.S. Treasury security or U.S. Government Agency security futures contracts.
The Acquiring Fund may invest in certain derivative instruments as a hedging technique to protect against potential adverse changes in the
market value of portfolio securities. The Acquiring Fund also may use derivatives to attempt to protect the net asset value of the Acquiring Fund, to facilitate the sale of certain
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portfolio securities, to manage the Acquiring Funds effective interest rate exposure, or as a means of gaining investment exposure.
Total Return Swaps. Such instruments may include total return swaps whose prices, in The
Sub-Advisers opinion, correlate with the prices of the senior loan instruments, in which the Acquiring Fund may primarily invest. Total return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset(s), which may include indices, securities or baskets of securities during the specified period, in return for payments equal to a fixed or floating rate of interest or the total return from
other underlying asset(s).
The Acquiring Fund may utilize total return swaps as a component of synthetic investments. A
synthetic investment is comprised of two components that, when combined, replicate or emulate the economic exposure of a third investment. The Acquiring Fund may use the combination of a total return swap and cash equivalents to
replicate or emulate exposure to senior loans. The cash equivalent market value effectively represents the principal portion of such synthetic senior loan exposure, and the total return swap market value (not notional value)
represents the interest and/or return portion of such senior loan exposure. When combined, these two components provide the investment profile of a direct investment in senior loans.
For purposes of the investment policy requiring the Acquiring Fund to invest at least 80% of its Assets in senior loans, the Acquiring Fund
will treat only the positive valuation of the total return swap portion of a synthetic investment as counting towards the 80% policy, and will value such swap using
mark-to-market principles in accordance with generally accepted accounting principles. In the event that applicable rules or SEC guidance change, the Acquiring Fund may,
to the extent permitted, incorporate such change in the calculation of a synthetic investment as a senior loan for purposes of the Acquiring Funds 80% policy.
The Acquiring Fund may invest up to 5% of its Managed Assets in iBoxx Loan Total Return Swaps (as defined below). An iBoxx Loan Total Return
Swap is a specific type of total return swap on an index that is designed to provide exposure to the senior loan market. The iBoxx Loan Total Return Swaps underlying index is the Markit iBoxx USD Liquid Leveraged Loans Total Return Index,
which is one of a subset of indices designed to track the broader, rules-based Markit iBoxx USD Liquid Leveraged Loan Index. iBoxx Loan Total Return Swaps means total return swaps written on the Markit iBoxx USD Liquid Leveraged Loans
Total Return Index. Markit, which is not affiliated with Nuveen Investments or the Acquiring Fund, created this rules-based index to seek to track the broader senior loan market with a smaller subset of the more liquid index constituents
(i.e., constituents with greater transparent price discovery, smaller bid-offer spreads, and larger tradeable sizes at particular price quotes). The Acquiring Fund believes that iBoxx Loan Total Return
Swaps provide an efficient and cost-effective basis for obtaining exposure to the senior loan market. These total return swaps use standardized trading and short form, electronic conformations, which offer increased efficiency and lower costs than
traditional total return swaps, which use variable or customized trading documentation and paper confirmations. The Acquiring Fund anticipates using iBoxx Loan Total Return Swaps as a component of synthetic investments that, when
combined with cash equivalents, replicate or emulate exposure to senior loans, as described above. iBoxx Loan Total Return Swaps share risks that are similar to other derivative instruments in which the Acquiring Fund may invest. See Risk
FactorsDerivatives Risk, Including the Risk of Swaps.
Interest Rate Swaps. Interest rate swaps involve the exchange by
the Acquiring Fund with a counterparty of their respective commitments to pay or receive interest of different rates and tenors, such as an exchange of fixed-rate payments for floating rate payments. The Acquiring Fund will usually enter into
interest rate swaps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified in the instrument, with the Acquiring Fund receiving or paying, as the case may be, only the net
amount of the two payments.
Other derivative instruments that may be used, or other transactions that may be entered into, by the
Acquiring Fund may include the purchase or sale of futures contracts on securities, credit-linked notes, securities
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indices, other indices or other financial instruments; options on futures contracts; exchange-traded and
over-the-counter options on securities or indices; index-linked securities; total return swaps; and currency exchange transactions. Some, but not all, of the derivative
instruments may be traded and listed on an exchange. The positions in derivatives will be marked-to-market daily at the closing price established on the exchange or at a
fair value.
There is no assurance that these derivative strategies will be available at any time, that the Adviser and the Sub-Adviser will determine to use them for the Acquiring Fund or, if used, that the strategies will be successful.
Derivatives and Hedging Strategies
The Acquiring Fund may periodically engage in hedging transactions, and otherwise use various types of derivative instruments, described
below, to reduce risk, to effectively gain particular market exposures, to seek to enhance returns, and to reduce transaction costs, among other reasons.
Hedging is a term used for various methods of seeking to preserve portfolio capital value by offsetting price changes in one
investment through making another investment whose price should tend to move in the opposite direction.
A derivative is a
financial contract whose value is based on (or derived from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index. Some forms of derivatives may trade on exchanges, while non-standardized derivatives, which tend to be more specialized and complex, trade in over-the-counter or a one-on-one basis. It may be desirable and possible in various market environments to partially hedge the portfolio against fluctuations in market value due to market interest
rate or credit quality fluctuations, or instead to gain a desired investment exposure, by entering into various types of derivative transactions, including financial futures and index futures as well as related put and call options on such
instruments, structured notes, or interest rate swaps on taxable or tax-exempt securities or indexes (which may be forward- starting), credit default swaps, and options on interest rate swaps,
among others.
These transactions present certain risks. In particular, the imperfect correlation between price movements in the futures
contract and price movements in the securities being hedged creates the possibility that losses on the hedge by the Acquiring Fund may be greater than gains in the value of the securities in the Acquiring Funds portfolio. In addition, futures
and options markets may not be liquid in all circumstances. As a result, in volatile markets, the Acquiring Fund may not be able to close out the transaction without incurring losses substantially greater than the initial deposit. Finally, the
potential deposit requirements in futures contracts create an ongoing greater potential financial risk than do options transactions, where the exposure is limited to the cost of the initial premium. Losses due to hedging transactions will reduce
yield. Net gains, if any, from hedging and other portfolio transactions will be distributed as taxable distributions to shareholders, including shareholders of TFP Shares.
Short Sales. The Acquiring Fund may make short sales of securities if, at all times when a short position is open, the Acquiring Fund
owns at least an equal amount of such securities or securities convertible into or exchangeable for, without payment of any further consideration, securities of the same issuer as, and equal in amount to, the securities sold short. This technique is
called selling short against the box.
In a short sale, the Acquiring Fund will not deliver from its portfolio the securities
sold and will not receive immediately the proceeds from the sale. Instead, the Acquiring Fund will borrow the securities sold short from a broker-dealer through which the short sale is executed and the broker-dealer will deliver such securities, on
behalf of the Acquiring Fund, to the purchaser of such securities. Such broker-dealer will be entitled to retain the proceeds from the short sale until the Acquiring Fund delivers to such broker-dealer the securities sold short. In addition, the
Acquiring Fund will be required to pay the broker-dealer the amount of any dividends paid on
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shares sold short. Finally, to secure its obligation to deliver to such broker-dealer the securities sold short, the Acquiring Fund must deposit and continuously maintain in a separate account
with its custodian an equivalent amount of the securities sold short or securities convertible into or exchangeable for such securities without the payment of additional consideration. The Acquiring Fund is said to have a short position in the
securities sold until it delivers to the broker-dealer the securities sold, at which time the Acquiring Fund will receive the proceeds of the sale. Because the Acquiring Fund ordinarily will want to continue to hold securities in its portfolio that
are sold short, the Acquiring Fund will normally close out a short position by purchasing on the open market and delivering to the broker-dealer an equal amount of the securities sold short, rather than delivering portfolio securities.
Short sales may protect the Acquiring Fund against the risk of losses in the value of its portfolio securities because any unrealized losses
with respect to such portfolio securities should be wholly or partially offset by a corresponding gain in the short position. However, any potential gain in such portfolio securities should be wholly or partially offset by a corresponding loss in
the short position. The extent to which such gains or losses are offset will depend upon the amount of securities sold short relative to the amount the Acquiring Fund owns, either directly or indirectly, and, in the case where the Acquiring Fund
owns convertible securities, changes in the conversion premium. The Acquiring Fund will incur transaction costs in connection with short sales.
In addition to enabling the Acquiring Fund to hedge against market risk, short sales may afford the Acquiring Fund an opportunity to earn
additional current income to the extent the Acquiring Fund is able to enter into arrangements with broker- dealers through which the short sales are executed to receive income with respect to the proceeds of the short sales during the period the
Acquiring Funds short positions remain open.
The Code imposes constructive sale treatment for federal income tax purposes on
certain hedging strategies with respect to appreciated financial positions. Under these rules, the Acquiring Fund will recognize gain, but not loss, with respect to securities if it enters into short sales or offsetting notional principal
contracts (as defined by the Code) with respect to, or futures or forward contracts to deliver, the same or substantially identical property, or if it enters into such transactions and then acquires the same or substantially identical
property.
Options on Securities. In order to hedge against adverse market shifts, the Acquiring Fund may purchase put and call
options on stock, bonds or other securities. In addition, the Acquiring Fund may seek to hedge a portion of its portfolio investments through writing (i.e., selling) covered put and call options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying security or its equivalent at a specified price at any time during the option period. In contrast, a call option gives the purchaser the right to buy the underlying
security covered by the option or its equivalent from the writer of the option at the stated exercise price at any time during the option period.
As a holder of a put option, the Acquiring Fund will have the right to sell the securities underlying the option and as the holder of a call
option, the Acquiring Fund will have the right to purchase the securities underlying the option, in each case at their exercise price at any time during the option period prior to the options expiration date. The Acquiring Fund may choose to
exercise the options it holds, permit them to expire or terminate them prior to their expiration by entering into closing sale or purchase transactions. In entering into a closing sale or purchase transaction, the Acquiring Fund would sell an option
of the same series as the one it has purchased. The ability of the Acquiring Fund to enter into a closing sale transaction with respect to options purchased and to enter into a closing purchase transaction with respect to options sold depends on the
existence of a liquid secondary market. There can be no assurance that a closing purchase or sale transaction can be effected when the Acquiring Fund so desires. The Acquiring Funds ability to terminate option positions established in the over-the-counter market may be more limited than in the case of exchange-traded options and may also involve the risk that securities dealers participating in such
transactions would fail to meet their obligations to the Acquiring Fund.
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In purchasing a put option, the Acquiring Fund seeks to benefit from a decline in the market
price of the underlying security, while in purchasing a call option, the Acquiring Fund seeks to benefit from an increase in the market price of the underlying security. If an option purchased is not sold or exercised when it has remaining value, or
if the market price of the underlying security remains equal to or greater than the exercise price, in the case of a put, or remains equal to or below the exercise price, in the case of a call, during the life of the option, the option will expire
worthless. For the purchase of an option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price, in the case of a put, and must increase sufficiently above the exercise price, in the case of
a call, to cover the premium and transaction costs. Because option premiums paid by the Acquiring Fund are small in relation to the market value of the instruments underlying the options, buying options can result in additional amounts of leverage
to the Acquiring Fund. The leverage caused by trading in options could cause the Acquiring Funds net asset value to be subject to more frequent and wider fluctuation than would be the case if the Acquiring Fund did not invest in options.
The Acquiring Fund will receive a premium when it writes put and call options, which increases the Acquiring Funds return on the
underlying security in the event the option expires unexercised or is closed out at a profit. By writing a call, the Acquiring Fund will limit its opportunity to profit from an increase in the market value of the underlying security above the
exercise price of the option for as long as the Acquiring Funds obligation as the writer of the option continues. Upon the exercise of a put option written by the Acquiring Fund, the Acquiring Fund may suffer an economic loss equal to the
difference between the price at which the Acquiring Fund is required to purchase the underlying security and its market value at the time of the option exercise, less the premium received for writing the option. Upon the exercise of a call option
written by the Acquiring Fund, the Acquiring Fund may suffer an economic loss equal to an amount not less than the excess of the securitys market value at the time of the option exercise over the Acquiring Funds acquisition cost of the
security, less the sum of the premium received for writing the option and the difference, if any, between the call price paid to the Acquiring Fund and the Acquiring Funds acquisition cost of the security. Thus, in some periods the Acquiring
Fund might receive less total return and in other periods greater total return from its hedged positions than it would have received from its underlying securities unhedged.
Options on Stock and Bond Indexes. The Acquiring Fund may purchase put and call options on stock and bond indexes to hedge against
risks of market-wide price movements affecting its assets. In addition, the Acquiring Fund may write covered put and call options on stock and bond indexes. A stock or bond index measures the movement of a certain group of stocks or bonds by
assigning relative values to the stocks or bonds included in the index. Options on a stock or bond index are similar to options on securities. Because no underlying security can be delivered, however, the option represents the holders right to
obtain from the writer, in cash, a fixed multiple of the amount by which the exercise price exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the exercise date. The advisability of
using stock or bond index options to hedge against the risk of market-wide movements will depend on the extent of diversification of the Acquiring Funds investments and the sensitivity of its investments to factors influencing the underlying
index. The effectiveness of purchasing or writing stock or bond index options as a hedging technique will depend upon the extent to which price movements in the Acquiring Funds investments correlate with price movements in the stock or bond
index selected. In addition, successful use by the Acquiring Fund of options on stock or bond indexes will be subject to the ability of the Sub-Adviser to predict correctly changes in the relationship of the
underlying index to the Acquiring Funds portfolio holdings. No assurance can be given that the Sub-Advisers judgment in this respect will be correct.
Stock and Bond Index Futures Contracts. The Acquiring Fund may purchase and sell stock index futures as a hedge against movements in
the equity markets. Stock and bond index futures contracts are agreements in which one party agrees to deliver to the other an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock or bond index
at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of securities is made. For example, if the Sub-Adviser expects general stock or bond
market prices to decline, it might sell a futures contract on a particular stock or bond index. If that index does in fact decline, the value of some or all of the securities in the
64
Acquiring Funds portfolio may also be expected to decline, but that decrease would be offset in part by the increase in the value of the Acquiring Funds position in such futures
contract. If, on the other hand, the Sub-Adviser expects general stock or bond market prices to rise, it might purchase a stock or bond index futures contract as a hedge against an increase in prices of
particular securities it wants ultimately to buy. If in fact the stock or bond index does rise, the price of the particular securities intended to be purchased may also increase, but that increase would be offset in part by the increase in the value
of the Acquiring Funds futures contract resulting from the increase in the index. The Acquiring Fund may purchase futures contracts on a stock or bond index to enable the Sub-Adviser to gain immediate
exposure to the underlying securities market pending the investment in individual securities of the Acquiring Funds portfolio.
Under regulations of the Commodity Futures Trading Commission (CFTC), the Acquiring Fund and the Adviser have claimed an exclusion
from registration as a commodity pool and as a commodity trading advisor under the Commodity Exchange Act (the CEA) and, therefore, neither the Acquiring Fund nor the Adviser, or their officers and directors, are subject to the
registration requirements of the CEA. The Acquiring Fund reserves the right to engage in transactions involving futures and options thereon to the extent allowed by CFTC regulations in effect from time to time and in accordance with the Acquiring
Funds policies. In addition, certain provisions of the Code may limit the extent to which the Acquiring Fund may enter into futures contracts or engage in options transactions.
The potential loss related to the purchase of an option on a futures contract is limited to the premium paid for the option (plus transaction
costs). With respect to options purchased by the Acquiring Fund, there are no daily cash payments made by the Acquiring Fund to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Acquiring Fund
Other Futures Contracts and Options on Futures Contracts.
The Acquiring Funds use of derivative instruments also may include (i) U.S. Treasury security or U.S. Government Agency security futures contracts; (ii) options on U.S. Treasury security or U.S. Government Agency security futures
contracts; (iii) interest rate futures contracts; (iv) index call option on futures contracts; (v) index put option on futures contracts; (vi) interest rate call option on futures contracts; and (vii) interest rate put
option on futures contracts. All such instruments must be traded and listed on an exchange. U.S. Treasury and U.S. Government Agency futures contracts are standardized contracts for the future delivery of a U.S. Treasury Bond or U.S. Treasury Note
or a U.S. Government Agency security or their equivalent at a future date at a price set at the time of the contract. An option on a U.S. Treasury or U.S. Government Agency futures contract, as contrasted with the direct investment in such a
contract, gives the purchaser of the option the right, in return for the premium paid, to assume a position in a U.S. Treasury or U.S. Government Agency futures contract at a specified exercise price at any time on or before the expiration date of
the option. An interest rate future is a contract where the buyer and seller agree to the future delivery of any interest-bearing asset with the price locked in for a future date. A call option on futures is a contract where the buyer has the right
to enter into a specified futures contract at a certain price in the future. A put option on futures is a contract where the buyer has the right to sell a specified futures contract at a certain price in the future. An index call option on futures
is a contract where the buyer has the right to assume a particular futures position at a certain price in the future. An index put option on futures is a contract where the buyer has the right to assume a particular futures position at a certain
price in the future. An interest rate call option on futures is a contract where the buyer has the right to assume a particular futures position at a certain price in the future. An interest rate put option on futures is contract where the buyer has
the right to assume a particular futures position at a certain price in the future. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writers future margin account, which represents the amount by which the market price of the futures contract exceeds the exercise price of the option on the futures contract.
Risks Associated with Futures Contracts and Options on Futures Contracts. Futures prices are affected by many factors, such as current
and anticipated short-term interest rates, changes in volatility of the underlying
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instrument and the time remaining until expiration of the contract. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. While
the Acquiring Fund may enter into futures contracts and options on futures contracts for hedging purposes, the use of futures contracts and options on futures contracts might result in a poorer overall performance for the Acquiring Fund than if it
had not engaged in any such transactions. If, for example, the Acquiring Fund had insufficient cash, it might have to sell a portion of its underlying portfolio of securities in order to meet daily variation margin requirements on its futures
contracts or options on futures contracts at a time when it might be disadvantageous to do so. There may be an imperfect correlation between the Acquiring Funds portfolio holdings and futures contracts or options on futures contracts entered
into by the Acquiring Fund, which may prevent the Acquiring Fund from achieving the intended hedge or expose the Acquiring Fund to risk of loss. The degree of imperfection of correlation depends on circumstances such as: variations in speculative
market demand for futures, futures options and the related securities, including technical influences in futures and futures options trading and differences between the securities markets and the securities underlying the standard contracts
available for trading. Futures prices are affected by many factors, such as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time remaining until the expiration of the contract. Further,
the Acquiring Funds use of futures contracts and options on futures contracts to reduce risk involves costs and will be subject to the Sub-Advisers ability to predict correctly changes in interest
rate relationships or other factors. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment, and even a well- conceived transaction may be unsuccessful to some degree because of market behavior or
unexpected stock price or interest rate trends. No assurance can be given that the Sub-Advisers judgment in this respect will be correct.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous days settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract
subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Stock index futures contracts are not normally subject to such daily price change limitations.
The Acquiring Fund may invest in other options. An option is an instrument that gives the holder of the instrument the right, but not the
obligation, to buy or sell a predetermined number of specific securities (i.e. preferred stocks, common stocks or bonds) at a stated price within the expiration period of the instrument, which is generally less than 12 months from its issuance. If
the right is not exercised after a specified period but prior to the expiration, the option expires. Both put and call options may be used by the Acquiring Fund.
Structured Notes. The Acquiring Fund may use structured notes and similar instruments for hedging purposes. Structured notes are
privately negotiated debt obligations or economically equivalent instruments where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an embedded index), such as
selected securities or loans, an index of securities or loans or specified interest rates or the differential performance of two assets or markets. The terms of such structured instruments normally provide that their principal and/or interest
payments are to be adjusted upwards or downwards (but not ordinarily below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a
structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may
be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of
loss.
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The Acquiring Fund may purchase and sell various other kinds of financial futures contracts and
options thereon. Futures contracts may be based on various debt securities and securities indices. Such transactions involve a risk of loss or depreciation due to unanticipated adverse changes in securities prices, which may exceed the Acquiring
Funds initial investment in these contracts. The Acquiring Fund will only purchase or sell futures contracts or related options in compliance with the rules of the CFTC. These transactions involve transaction costs. There can be no assurance
that the Acquiring Funds use of futures will be advantageous to the Acquiring Fund. Guidelines established by one or more NRSROs that rate any preferred shares issued by the Acquiring Fund may limit use of these transactions.
Credit-Linked Notes. The Acquiring Fund may invest in credit-linked notes (CLN) for risk management purposes, including
diversification. A CLN is a derivative instrument that is a synthetic obligation between two or more parties where the payment of principal and/or interest is based on the performance of some obligation (a reference obligation). In addition to
credit risk of the reference obligation and interest rate risk, the buyer/seller of the CLN is subject to counterparty risk. See Risk FactorsCounterparty Risk.
Swaps. Swap contracts may be purchased or sold to hedge against fluctuations in securities prices, interest rates or market conditions,
to change the duration of the overall portfolio, or to mitigate default risk. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) to be exchanged or swapped between
the parties, which returns are calculated with respect to a notional amount, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a basket of securities
representing a particular index.
Swaptions. A swaption is an
over-the-counter traded option that gives the seller the right, but not the obligation, to enter into an interest rate swap at a set rate on an agreed upon future date.
Although the typical swaption is an option on an interest rate swap, a swaption could be an option on any type of swap. In return for this flexibility, the purchaser of the swaption pays a premium determined by taking into account the duration of
the option period, the term and strike rate of the swap and the volatility of interest rates. If interest rates fall, the purchaser of the swaption will let the swaption expire and transact an interest rate swap at the prevailing market rate. There
are three styles of swaptions: American, in which the holder is allowed to enter the swap on any day that fall within a range of two dates; Bermudian, in which the holder is allowed to enter the swap on a sequence of dates; and European, in which
the holder is allowed to enter the swap on one specified date.
Credit Default Swaps. The Acquiring Fund may enter into credit
default swap contracts for risk management purposes, including diversification. When the Acquiring Fund is the buyer of a credit default swap contract, the Acquiring Fund is entitled to receive the par (or other agreed-upon) value of a referenced
debt obligation from the counterparty to the contract in the event of a default by a third party, such as a U.S. or non-U.S. corporate issuer, on the debt obligation. In return, the Acquiring Fund would pay
the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Acquiring Fund would have spent the stream of payments and received no benefit from the contract.
When the Acquiring Fund is the seller of a credit default swap contract, it receives the stream of payments, but is obligated to pay upon default of the referenced debt obligation. As the seller, the Acquiring Fund would effectively add leverage to
its portfolio because, in addition to its total net assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap. These transactions involve certain risks, including the risk that the seller may be unable to
fulfill the transaction. The tax treatment of certain credit default swaps is uncertain.
Interest Rate Swaps. The Acquiring Fund
will enter into interest rate and total return swaps only on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for floating rate payments). If the other party to an interest rate swap defaults, the Funds risk of
loss consists of the net amount of payments that the Fund is contractually entitled to receive. The Acquiring Fund will not enter into any interest
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rate swap unless the claims-paying ability of the other party thereto is considered to be investment grade by the Adviser. If there is a default by the other party to such a transaction, the
Acquiring Fund will have contractual remedies pursuant to the agreements related to the transaction.
These instruments are traded in the over-the-counter market. The Acquiring Fund may use interest rate swaps for risk management purposes only and not as a speculative investment and would typically use interest
rate swaps to shorten the average interest rate reset time of the Acquiring Funds holdings. Interest rate swaps involve the exchange by the Acquiring Fund with another party of their respective commitments to pay or receive interest (e.g., an
exchange of fixed rate payments for floating rate payments). The use of interest rate swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. If the Sub-Adviser is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Acquiring Fund would be unfavorably affected.
Total Return Swaps. As stated above, the Acquiring Fund will enter into total return swaps only on a net basis. Total return swaps
are contracts in which one party agrees to make payments of the total return from the underlying asset(s), which may include securities, baskets of securities, or securities indices during the specified period, in return for payments equal to a
fixed or floating rate of interest or the total return from other underlying asset(s).
Currency Exchange Transactions. The
Acquiring Fund may enter into currency exchange transactions to hedge the Acquiring Funds exposure to foreign currency exchange rate risk in the event the Acquiring Fund invests in non-U.S. dollar
denominated securities of non-U.S. Issuers. The Acquiring Funds currency transactions will be limited to portfolio hedging involving portfolio positions. Portfolio hedging is the use of a forward
contract with respect to a portfolio security position denominated or quoted in a particular currency. A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and
price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange- traded, and are usually for less than one year, but may be renewed. At the maturity of a
forward contract to deliver a particular currency, the Acquiring Fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market
or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract.
Accordingly, it may be necessary for the Acquiring Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the Acquiring Fund is
obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency received upon the sale of the portfolio security if its market
value exceeds the amount of currency the Acquiring Fund is obligated to deliver.
If the Acquiring Fund retains the portfolio security and
engages in an offsetting transaction, the Acquiring Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the Acquiring Fund engages in an offsetting transaction, it may subsequently enter into a
new forward contract to sell the currency. Should forward prices decline during the period between the Acquiring Funds entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Acquiring Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Acquiring Fund will
suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its
commitments for purchase or sale of currency, if any, at the current market price.
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Hedging against a decline in the value of a currency does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Fund to
hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to the Fund of engaging in currency exchange transactions varies
with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved.
Other Hedging Transactions. The Acquiring Fund may invest in relatively new instruments without a significant trading history for
purposes of hedging the Acquiring Funds portfolio risks. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
Limitations on the Use of Futures, Options on Futures and Swaps. The Adviser has claimed, with respect to the Acquiring Fund, the
exclusion from the definition of commodity pool operator under the CEA provided by CFTC Regulation 4.5 and is therefore not currently subject to registration or regulation as such under the CEA with respect to the Acquiring Fund. In
addition, the Sub-Adviser has claimed the exemption from registration as a commodity trading advisor provided by CFTC Regulation 4.14(a)(8) and is therefore not currently subject to registration or regulation
as such under the CEA with respect to the Acquiring Fund. In February 2012, the CFTC announced substantial amendments to certain exemptions, and to the conditions for reliance on those exemptions, from registration as a commodity pool operator.
Under amendments to the exemption provided under CFTC Regulation 4.5, if the Acquiring Fund uses futures, options on futures, or swaps other than for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums on
these positions (after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are
in-the-money at the time of purchase are in-the-money) may not
exceed 5% of the Acquiring Funds net asset value, or alternatively, the aggregate net notional value of those positions may not exceed 100% of the Acquiring Funds net asset value (after taking into account unrealized profits and
unrealized losses on any such positions). The CFTC amendments to Regulation 4.5 took effect on December 31, 2012, and the Acquiring Fund intends to comply with amended Regulation 4.5s requirements such that the Adviser will not be
required to register as a commodity pool operator with the CFTC with respect to the Acquiring Fund. The Acquiring Fund reserves the right to employ futures, options on futures and swaps to the extent allowed by CFTC regulations in effect from time
to time and in accordance with the Acquiring Funds policies. However, the requirements for qualification as a RIC under Subchapter M of the Code may limit the extent to which the Acquiring Fund may employ futures, options on futures or swaps.
Illiquid Securities
The Acquiring Fund may invest in illiquid securities (i.e., securities that are not readily marketable), including, but not limited to,
restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may be resold only pursuant to Rule 144A under the 1933 Act, and repurchase agreements with maturities in excess of seven
days.
Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a
registration statement is in effect under the 1933 Act. Where registration is required, the Acquiring Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell
and the time the Acquiring Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Acquiring Fund might obtain a less favorable price than that
which prevailed when it decided to sell. Illiquid securities will be priced at fair value as determined in good faith by the Board or its designee.
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Short-Term/Long-Term Debt Securities; Temporary Defensive Positions
During temporary defensive periods (e.g., during periods of adverse market, economic or political conditions), the Acquiring Fund may invest
up to 100% of its Managed Assets in cash equivalents and investment grade debt securities, including obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities. In such a case, the Acquiring Fund may not pursue or
achieve its investment objective. These investments are defined to include, without limitation, the following:
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(1) |
U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest
that are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government agency securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities do not
guarantee the market value of their securities. Consequently, the value of such securities may fluctuate. |
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(2) |
Certificates of Deposit issued against funds deposited in a bank or a savings and loan association. Such
certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date
specified thereon. Under current Federal Deposit Insurance Corporation (FDIC) regulations, the maximum insurance payable as to any one certificate of deposit is $250,000; therefore, certificates of deposit purchased by the Acquiring Fund
may not be fully insured. |
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(3) |
Repurchase agreements, which involve purchases of debt securities. At the time the Acquiring Fund purchases
securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield
for the Acquiring Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Acquiring Fund to invest temporarily available
cash. The Acquiring Fund may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the Acquiring Fund may invest.
Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Acquiring Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that the Acquiring Fund is entitled to sell the underlying collateral. If the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the
Acquiring Fund could incur a loss of both principal and interest. The Adviser monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Adviser does so in an effort
to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Acquiring Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Acquiring Fund to
liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws. |
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|
(4) |
Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master
demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Acquiring Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by
the Acquiring Fund at any time. The Sub-Adviser will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity measures) and will continuously monitor the
corporations ability to meet all of its financial obligations, because the Acquiring Funds liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be
limited to commercial paper rated in the highest categories by an NRSRO and which mature within one year of the date of purchase or carry a variable or floating rate of interest. |
Other Investment Companies
The Acquiring Fund may invest in securities of other open- or closed-end investment companies that
invest primarily in securities of the types in which the Acquiring Fund may invest directly. In addition, the Acquiring Fund may invest a portion of its Managed Assets in pooled investment vehicles (other than investment companies) that invest
primarily in securities of the types in which the Acquiring Fund may invest directly. The Acquiring Fund generally expects that it may invest in other investment companies and/or other pooled investment vehicles either during periods when it has
large amounts of uninvested cash, such as the period shortly after the Acquiring Fund receives the proceeds of a large purchase of common shares, preferred shares and/or borrowings, or during periods when there is a shortage of attractive securities
of the types in which the Acquiring Fund may invest in directly available in the market. The Acquiring Fund may invest in investment companies that are advised by the Adviser or its affiliates to the extent permitted by applicable law and/or
pursuant to exemptive relief from the SEC. As an investor in an investment company, the Acquiring Fund will bear its ratable share of that investment companys expenses, and would remain subject to payment of the Acquiring Funds advisory
and administrative fees with respect to assets so invested. The Sub-Adviser will take expenses into account when evaluating the investment merits of an investment in the investment company relative to
available securities of the types in which the Acquiring Fund may invest directly. In addition, the securities of other investment companies also may be leveraged and therefore will be subject to the same leverage risks described herein. The
Acquiring Fund will consider the investments of underlying investment companies when determining compliance with Rule 35d-1 under the 1940 Act. Moreover, the Acquiring Fund will consider the investments of
underlying investment companies when determining compliance with its own concentration policy, to the extent the Acquiring Fund has sufficient information about such investments.
Lending of Portfolio Securities
To increase its income, the Acquiring Fund may lend its portfolio securities to broker-dealers and banks. Any such loan must be continuously
secured by collateral in cash or cash equivalents maintained on a current basis in an amount at least equal to the market value of the securities loaned by the Acquiring Fund. The Acquiring Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned through payments from the borrower. The Acquiring Fund would also receive an additional return that may be in the form of a fixed fee or a percentage of the collateral. The Acquiring
Fund may pay reasonable fees to persons unaffiliated with the Acquiring Fund for services in arranging these loans. The Acquiring Fund would have the right to call the loan and obtain the securities loaned at any time on notice of not more than five
business days. As with other extensions of credit, risks of delay in recovery or even loss of rights in the collateral exist should the borrower of the financial instruments fail financially. However, the loans would be made only to firms deemed by
the Sub-Adviser to be creditworthy and when, in the judgment of the Sub-Adviser, the consideration which can be earned currently from loans of this type justifies the
attendant risk. The creditworthiness of firms to which the Acquiring Fund lends its portfolio holdings will be monitored on an ongoing basis by the Sub-Adviser. Although no specific policy limits the
percentage of the Acquiring Funds assets which the Acquiring Fund may lend, under current SEC guidance the Acquiring Fund may not have on loan at any given time securities representing more than
one-third of its total asset value.
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The Acquiring Fund would not have the right to vote the securities during the existence of the
loan but would call the loan to permit voting of the securities, if, in the Sub-Advisers judgment, a material event requiring a shareholder vote would otherwise occur before the loan was repaid. In the
event of bankruptcy or other default of the borrower, the Acquiring Fund could experience both delays in liquidating the loan collateral or recovering the loaned securities and losses, including (a) possible decline in the value of the
collateral or in the value of the securities loaned during the period while the Acquiring Fund seeks to enforce its rights thereto, (b) possible subnormal levels of income and lack of access to income during this period, and (c) expenses
of enforcing its rights.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment objective of the Acquiring Fund in relation to actual and anticipated
movements in interest rates. In addition, a security may be sold and another of comparable quality purchased at approximately the same time to take advantage of what the Sub-Adviser believes to be a temporary
price disparity between the two securities. Temporary price disparities between two comparable securities may result from supply and demand imbalances where, for example, a temporary oversupply of certain securities may cause a temporarily low price
for such securities, as compared with other securities of like quality and characteristics. A security also may be sold when the Sub-Adviser anticipates a change in the price of such security, the Sub-Adviser believes the price of a security has reached or is near a realistic maximum, or there are other securities that the Sub-Adviser believes are more attractive given
the Acquiring Funds investment objective. The Acquiring Fund also may engage to a limited extent in short-term trading consistent with its investment objective. Securities may be sold in anticipation of a market decline or purchased in
anticipation of a market rise and later sold, but the Acquiring Fund will not engage in trading solely to recognize a gain.
Subject to
the foregoing, the Acquiring Fund will attempt to achieve its investment objective by prudent selection of securities with a view to holding them for investment. While there can be no assurance thereof, the Acquiring Fund anticipates that its annual
portfolio turnover rate will generally not exceed 50%. However, the rate of turnover will not be a limiting factor when the Acquiring Fund deems it desirable to sell or purchase securities. Therefore, depending on market conditions, the annual
portfolio turnover rate of the Acquiring Fund may exceed 50% in particular years. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Acquiring Fund. High
portfolio turnover may result in the realization of net short-term capital gains by the Acquiring Fund which, when distributed to shareholders, will be taxable as ordinary income. For the fiscal year ended July 31, 2022, the Acquiring
Funds portfolio turnover rate was 37%.
Interest Rate Transactions
The Acquiring Fund expects that the Acquiring Funds portfolio investments in senior loans and other adjustable rate debt instruments in
which the Acquiring Fund may invest will serve as a hedge against the risk that common share net income and/or returns may decrease due to rising market dividend or interest rates on any preferred shares or borrowings. If market conditions are
deemed favorable, the Acquiring Fund also may enter into interest rate swap or cap transactions to attempt to protect itself from such interest rate risk on the remaining amount of any outstanding preferred shares and/or borrowings. Interest rate
swaps involve the Acquiring Funds agreement with the swap counterparty to pay a fixed rate payment in exchange for the counterparty agreeing to pay the Acquiring Fund a payment at a variable rate that is expected to approximate the rate on the
Acquiring Funds variable rate payment obligation on borrowings or any variable rate preferred shares, such as the TFP Shares. The payment obligations would be based on the notional amount of the swap. The Acquiring Fund may use an interest
rate cap, which would require it to pay a premium to the cap counterparty and would entitle it, to the extent that a specified variable rate index exceeds a predetermined fixed rate, to receive from the counterparty payment of the difference based
on the notional amount. The Acquiring Fund would use interest rate swaps or caps only with the intent to reduce or eliminate the risk that an increase in short-term interest rates could have on common share net earnings as a result of leverage.
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Because senior loans and other adjustable rate debt instruments in which the Acquiring Fund may
invest and the Acquiring Funds preferred shares and borrowings generally pay interest or dividends based on short-term market interest rates, the Acquiring Funds investments in senior loans and other adjustable rate debt instruments may
potentially offset the leverage risks borne by the Acquiring Fund relating to the fluctuations on common share income due to variations in the preferred share dividend rate and/or the interest rate on borrowings. The Acquiring Fund will usually
enter into swaps or caps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified in the instrument, with the Acquiring Fund receiving or paying, as the case may be, only the net
amount of the two payments.
The use of interest rate swaps and caps is a highly specialized activity that involves investment techniques
and risks different from those associated with ordinary portfolio security transactions. Depending on the state of interest rates in general, the Acquiring Funds use of interest rate swaps or caps could enhance or harm the overall performance
on the common shares. To the extent there is a decline in interest rates, the value of the interest rate swap or cap could decline, and could result in a decline in the net asset value of the common shares. In addition, if short-term interest rates
are lower than the Acquiring Funds fixed rate of payment on the interest rate swap, the swap will reduce common share net earnings. If, on the other hand, short-term interest rates are higher than the fixed rate of payment on the interest rate
swap, the swap will enhance common share net earnings. Buying interest rate caps could enhance the performance of the common shares by providing a maximum leverage expense. Buying interest rate caps could also decrease the net earnings of the common
shares in the event that the premium paid by the Acquiring Fund to the counterparty exceeds the additional amount the Acquiring Fund would have been required to pay had it not entered into the cap agreement. The Acquiring Fund will not enter into
interest rate swap or cap transactions in an aggregate notional amount that exceeds the remainder of the outstanding amount of the Acquiring Funds leverage, less the amount of senior loans in the Acquiring Funds portfolio. The Acquiring
Fund has no current intention of selling an interest rate swap or cap. The Acquiring Fund will monitor its interest rate swap and cap transactions with a view to insuring that it remains in compliance with all applicable tax requirements.
Interest rate swaps and caps do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount of interest payments that the Acquiring Fund is contractually obligated to make. If the counterparty defaults, the Acquiring Fund would not be able to use the anticipated net receipts
under the swap or cap to offset the interest payments on borrowings or dividend payments on the TFP Shares. Depending on whether the Acquiring Fund would be entitled to receive net payments from the counterparty on the swap or cap, which in turn
would depend on the general state of short-term interest rates at that point in time, such a default could negatively impact the performance of the common shares. Although this will not guarantee that the counterparty does not default, the Acquiring
Fund will not enter into an interest rate swap or cap transaction with any counter-party that the Adviser believes does not have the financial resources to honor its obligation under the interest rate swap or cap transaction. Further, the Adviser
will continually monitor the financial stability of a counterparty to an interest rate swap or cap transaction in an effort to proactively protect the Acquiring Funds investments.
In addition, at the time the interest rate swap or cap transaction reaches its scheduled termination date, there is a risk that the Acquiring
Fund would not be able to obtain a replacement transaction or that the terms of the replacement would not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the performance of the Acquiring Funds
common shares. The Acquiring Fund may choose or be required to prepay any borrowings or redeem some or all of the TFP Shares. This redemption would likely result in the Acquiring Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in termination payment by or to the Acquiring Fund. An early termination of a cap could result in a termination payment to the Acquiring Fund.
Each Board recommends that shareholders vote FOR the approval of the Agreement and Plan of Merger.
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