corresp
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June 9, 2010
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Writers Direct Contact |
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212.468.8179 |
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apinedo@mofo.com |
Mary Cole, Esq.
Senior Counsel
Division of Investment Management
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
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Re: |
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Pre-Effective Amendment No. 1 to Form N-2 for Medley Capital BDC LLC
File No.: 333-166491 |
Dear Ms. Cole:
On behalf of our client, Medley Capital BDC LLC (the Company), we are filing with the Securities
and Exchange Commission (the Commission) Pre-Effective Amendment No. 1 (Amendment No. 1) to the
Registration Statement on Form N-2 (the Registration Statement), which has been marked to show
changes from the Companys initial filing. Below, we provide responses to the comments raised by
the staff (the Staff) in its comment letter dated June 3, 2010. Below we have noted the comments
from the Staff in bold face type and the responses in regular type. Page number references are to
the marked copy of Amendment No. 1 enclosed herewith.
For purposes of clarification, we note that the Company has not yet filed an election to be
regulated as a business development company (BDC) under the Investment Company Act of 1940 (the
1940 Act). On May 3, 2010, the Company filed a Form N-6F Notice of Intent to Elect to be
Subject to Sections 55 through 65 of the Investment Company Act
of 1940. The Company has not yet
filed a Form N-54 Notification of Election to be Subject to Sections 55 through 65 of the
Investment Company Act of 1940 Filed Pursuant to Section 54(a) of the Act.
General
1. |
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Whenever a comment is made with respect to disclosure in one location of the filing, it
applies to similar disclosure found elsewhere. |
Mary Cole, Esq.
June 9, 2010
Page Two
We have noted the Staffs comments concerning disclosure and, as applicable, have revised the
disclosures throughout Amendment No. 1 in response to the Staffs comments.
2. |
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Certain items of disclosure were omitted from the registration statement. We may have
comments on such items when they are included in a pre-effective amendment to the registration
statement. |
We acknowledge the Staffs comment.
Prospectus
3. |
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CoverPlease make prominent the statement that the Company has no history of public trading.
See Item 1.1.i. of Form N-2. |
We have revised the disclosure on the prospectus cover page and have included in bold type face the
lack of a history of public trading.
4. |
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CoverDisclose here that purchasers in the initial offering will experience immediate
dilution. Include a cross-reference to that section of the prospectus that discusses the
dilutive effect of the offering on immediate purchasers. |
We have included disclosure on the cover page that purchasers in the offering will experience
immediate dilution and added a cross-reference to the Dilution section.
5. |
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The disclaimer after the Table of Contents should state that the Company will update the
prospectus to reflect any material changes. |
In the disclaimer, we have added that, to the extent required by applicable law, the Company will
update the prospectus to reflect any material changes.
6. |
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SummaryThis section is much too long. See Guide 7 to Form N-2, which describes the
contents of a synopsis. In addition, the whole summary section should follow The Offering
on page 29 and the fee table. See General Instructions to Form N-2, which state that charts
and graphs may not precede financial highlights (Item 4). |
We have reviewed and revised the Summary section with a view to shortening the section. We
respectfully note that it would be more helpful for prospective purchasers to review a summary in
order to gain an understanding of the Company, the adviser, the Companys strategy and the
investment opportunity prior to reviewing the summary of the Offering without any context. We
have reviewed the registration statements on Form N-2 for the last
Mary Cole, Esq.
June 9, 2010
Page Three
ten initial public offerings of
BDCs and have confirmed that it is general market practice to present a brief summary prior to a
summary of the offering.
7. |
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Medley Capital BDC LLC (page ii)The first paragraph in this section states that the Company
expects to deliver a targeted total return to investors on average of 15% over time. This
statement implies a guaranteed return. Either delete the statement or revise it to reflect the
high risks associated with this investment. |
We have revised the disclosure to indicate that this should not be construed as a reference to a
guaranteed return and that there can be no assurance that the target will be achieved.
8. |
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Summary of Formation Transaction (page 7) |
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(a) |
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Explain in your response the accounting treatment to be accorded the
Companys wholly owned subsidiaries. For example, inform the staff whether the
subsidiaries financial statements will be consolidated with those of the Company. |
The accounts of the Companys wholly owned subsidiary, MOF I BDC LLC, will be consolidated with
those of the Company.
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(b) |
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After certain of the formation transactions, MOF LTD and MOF LP (the private
affiliated funds) will own membership interests in Medley Capital BDC LLP. Once
Medley Capital BDC LLP converts to a Delaware corporation (Medley Capital), will the
private affiliated funds own equity interests in Medley Capital? If so, provide an
estimate of the percentage equity ownership they are expected to own after the public
offering. In your response explain how the membership interests transferred to the
private affiliated funds will be valued and how those interests will be converted into
shares of the Company. |
The private affiliated funds will own equity interests in the Company, but only to the extent
permitted by the 1940 Act. The private affiliated funds will distribute equity interests in the Company in excess of those permitted to be owned by them, if any, to their respective limited
partners. Interests will be valued at the initial public offering price. It is estimated that
Medley Opportunity LTD and Medley Opportunity Fund LP will own 32.77%
and 1.72% of the outstanding
equity interests in the Company, respectively, after the initial public offering. This estimated
percentage equity ownership of the private affiliated funds is based upon a proposed aggregate offering price
of $200,000,000 and the aggregate value of the loans to be
contributed by the private affiliated funds as of
April 30, 2010.
Mary Cole, Esq.
June 9, 2010
Page Four
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(c) |
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Please provide an analysis of the formation transactions under Section 57 of
the 1940 Act; include a discussion of whether an exemption from the provisions of this
section is necessary. |
At the time of the formation transactions, the Company will not have elected BDC status and, as a
result, will not be subject to the application of the 1940 Act, including Section 57. Although the
Company has filed an intention to be regulated as a BDC, it will not file a Form N-54 until
immediately prior to the pricing of the proposed offering and subsequent to the consummation of the
formation transactions.
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(d) |
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The disclosure states that third party valuation firms will establish the
value of the loan assets to be transferred (Transfer Value) from the private
affiliated funds to the Company. Please identify these firms and disclose the
procedures to be used for valuing these assets. In addition, inform us in your
response whether a properly constituted board (with a majority of non-interested
members) will pass on the selection of the loan assets and their valuation. |
From time to time, the Company will engage valuation experts. Currently, two firms are engaged to
perform valuations: Valuation Research Corporation and BV Advisors LLC. These firms value the
loans by first valuing the companys enterprise value, so as to better understand the credit
quality of the loan in relation to the borrowers overall capital structure. Also considered in
assessing credit quality are loan-specific terms, such as asset liens
and covenants. Then the
valuation firms determine the yields at which loans with comparable credit qualities, issued by
comparable companies, trade in the market. Finally, the valuation firms use such yields to
discount the projected cash flows of the loan being valued.
The Transfer value will be approved by the Companys board of
directors, which will include a majority of independent directors.
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(e) |
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According to the disclosure in this section, the Transfer Value will be
approved by the Companys board of directors. Please disclose that at the time of the
approval, the composition of the board will be entirely of insiders, with no
independent directors. The prospectus should characterize the credit quality of the
loan assets that will be transferred to the Company and whether any of them ever
resulted in defaults or bankruptcies. In your response, explain the protections that
will ensure that the loan assets to be transferred to the public BDC will not be
composed of the private affiliated funds poorly performing assets. |
At the time of approval, the Board will include a majority of independent directors. In Amendment
No. 1, we have identified three of the four independent directors. In a future amendment, we will
include information regarding the fourth independent director. We have revised the disclosure in
the prospectus in order to include a risk factor on page 18 that
Mary Cole, Esq.
June 9, 2010
Page Five
explains that the loan assets are not rated by a credit rating agency, but that were the loan
assets to be rated, these would not be rated investment grade. In addition, under Portfolio
Companies we have included disclosure regarding the quality of the loan assets.
It would be against the interests of the principals of the Adviser to transfer to the public BDC
poorly performing assets. If poorly performing assets were transferred to the BDC, the Company
would not be able to achieve its targeted return and the Advisers fees from the Company would be
adversely affected.
9. |
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Conflicts of Interest (page 8)The disclosure in this section implies that the Company may
engage in certain co-investments with funds affiliated with the adviser and will seek SEC
exemptive relief to permit more flexibility with the terms of such co-investments. Please
revise this section to clarify that any co-investments between the Company and affiliated
funds require SEC exemptive relief, which relief is not guaranteed. |
As we discussed with the Staff, the Company intends to seek exemptive relief. The Company has
revised the disclosure to make clear that co-investments cannot be undertaken in the absence of
obtaining exemptive relief.
10. |
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The OfferingInvestment Management Agreement (page 12)The disclosure in this section
states that the Company will seek SEC exemptive relief to pay 50% of the net after-tax
incentive fee earned by the adviser in the form of shares of the Companys common stock.
Please disclose that there is no precedent for such exemptive relief and, therefore, it is not
certain that it will be granted. |
We have added a risk factor on page 34 that discusses that SEC exemptive relief may not be granted.
Throughout, we have revised the disclosure relating to the payment in stock of a portion of the
incentive fee in order to make clear that the ability to do so is subject to obtaining exemptive
relief.
11. |
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The OfferingTrading at a DiscountPlease provide a separate section disclosing the fact
of, and the amount of, the dilutive effect of the offering on immediate purchasers. Explain
in your response why the Companys NAV will reflect reductions for offering expenses.
Typically, the adviser pays offering expenses and the company pays organizational expenses. |
We have revised the Offering section to include a separate section discussing the dilutive effect
of the offering on immediate purchasers. The Company will pay for organizational and offering
expenses incurred by it in connection with the proposed offering.
12. |
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The OfferingInclude a summary of risks in this section. |
Mary Cole, Esq.
June 9, 2010
Page Six
We have revised the Offering section to include a summary of risks in bullet form and a cross
reference to the Risks section.
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(a) |
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Fee TableBase Management FeesThe footnote states that the base management
fee is based on gross assets. The fee table line item must be shown as a percentage
of net assets. A footnote may provide an amount based on gross assets, but, if such
a footnote is included, it should include a definition of gross assets, representing
that the term includes amounts that may be borrowed to make investments. |
We have revised the fee table line item to be shown as a percentage of net assets.
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(b) |
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Fee TableInterest Payments on Borrowed FundsThe amount shown is none.
The amount should be based on an assumption of the amount expected to be borrowed by
the Company, estimating borrowings and prevailing interest rates. A footnote may
state that the actual number may be different from the amount shown in the fee table. |
We have revised the footnotes to the fee table to discuss the Companys intention with respect to
leverage and the expected amount to be borrowed by the Company, as well as the estimated interest
rate.
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(c) |
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Footnote 5 to the Fee Table states that the second component of the incentive
fee will be payable at the end of each calendar year or upon termination of the
investment management agreement. Please disclose here and in the management section
of the prospectus that this arrangement for realizing an incentive fee at termination
of the contract would require SEC exemptive relief, which is not guaranteed. |
Payment of the incentive fee at termination of the contract would not require SEC exemptive relief.
If the Company has not received exemptive relief permitting payment of a portion of the incentive
fee in shares of its common stock, then the Company will pay these amounts in cash.
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(d) |
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Footnote 5 to the Fee Table states that the first part of the incentive fee
will equal 20% of the excess of the net investment income that exceeds a hurdle rate.
Please disclose that, since the hurdle rate is fixed, as interest rates rise, it will
be easier for the adviser to surpass the hurdle rate and receive an incentive fee
based on net investment income. |
Mary Cole, Esq.
June 9, 2010
Page Seven
We have revised the disclosure.
14. |
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RisksIn the paragraph on investments in a single issuer (page 20), please disclose whether
there is any limitation on the amount of assets that may be invested in any one portfolio
company. |
We have revised to disclose that there is no limitation on the amount that may be invested in any
one portfolio company. In addition, we have added a risk factor on page 18 regarding portfolio
concentration.
15. |
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RisksOur portfolio companies may prepay loans... (page 28)The second sentence of this
section states that while it is not clear at this time when each loan may be called, some of
these loans are to companies that are controlled by an affiliate of the Adviser. Clarify the
meaning of this statement. |
We have deleted this language.
16. |
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RisksFollow-on InvestmentsDisclose that follow-on investments in portfolio companies will
require SEC exemptive relief. |
We have revised the disclosure.
17. |
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RisksAbility to invest in public companiesDisclose how the Company will invest the 30% of
its assets that do not need to be qualifying assets. |
We have revised the disclosure.
18. |
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RisksIncentive Fee/Speculative InvestmentsThe disclosure states that under certain
circumstances, the use of leverage may increase the likelihood of default... In your
response, please explain the meaning of this statement. |
We have revised the disclosure to make clear that the use of leverage is risky and that if we
borrow from banks or other lenders, upon the occurrence of an event of default, these lenders will
have priority over our assets by comparison to our common stockholders.
19. |
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The Company (page 44)The first paragraph in this section states that the Company will seek
to deliver equity-like returns to our investors on investments with the risk profile of
secured debt. Disclose how equity-like returns will be generated by investments in secured
debt. |
We have added disclosure in the first paragraph; however, we believe that we provide a complete
explanation in the first paragraph under Investment Strategy on page 46.
Mary Cole, Esq.
June 9, 2010
Page Eight
20. |
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Portfolio Composition (page 45)Please define LTV. |
We have defined LTV.
21. |
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Predictable Exit (page 46)This paragraph describes the development of potential exit
strategies. The disclosure does not appear to support the heading predictable exit since it
describes the lack of M&A or public equity markets to deliver returns on investments. |
We have added additional disclosure. As we discuss, in negotiating the original investments in the
portfolio companies, the Company negotiates for itself the right to be repaid upon the occurrence
of certain events, which may include asset sales or restructurings, but also may include being
first in line to receive loan principal paydowns from operating cash flows of the business or the
proceeds from debt refinancings. Liquidity events are not limited to M&A transactions or initial
public offerings. To minimize the possibility of confusion, we have revised the sub-heading of the
paragraph to Predictability of Returns.
22. |
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Managerial Assistance (page 55)This section states that the Company may receive fees for
providing managerial assistance to portfolio companies and, out of these fees, it will
reimburse the adviser for its allocated costs in providing such assistance. It is expected
that the adviser will provide such managerial assistance on the Companys behalf to portfolio
companies that request this assistance. In your response please address the issue of whether
it is appropriate for the managers of business development companies to obtain fee income for
providing managerial assistance. The legislative history of the Small Business Investment
Incentive Act of 1980 indicates that it was the intent of Congress to liberalize the treatment
of venture capital investment companies to permit incentive compensation because of the
managerial assistance such managers provided to small businesses. BDC managers were
permitted to receive incentive compensation in the form of an incentive fee (for external
managers) or stock options (in the case of internal managers) to bring their expertise to
fledgling or foundering companies. Why is it appropriate for BDC managers or their affiliates
to receive both incentive compensation (in the Companys case incentive fees against capital
gains and investment income), as well as fees for providing the assistance that was the
justification for the allowance of incentive compensation in the first place? |
The 1940 Act does not restrict the payment of fees for providing management assistance. Our review
of current market practice suggests that many BDC managers receive fees for providing management
assistance. Furthermore, in the calculation of incentive fees the fees
Mary Cole, Esq.
June 9, 2010
Page Nine
collected for providing managerial assistance are excluded from the definition of pre-incentive fee
net investment income, as disclosed on
page 73.
23. |
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Portfolio Companies (page 56) |
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(a) |
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Please provide a detailed description of how the loan assets were valued. |
The seven loans were valued by determining market yields for comparable middle market and small
company loans. The credit quality of each loan was evaluated and the appropriate market yield used
as the discount rate for loans projected cash flows. Market yields and subsequent loan valuations
are confirmed by the independent valuation firm.
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(b) |
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Provide supplementally an explanation of the determination of fair value in
the table. For example, the senior secured term loan from Aurora Flight Sciences Inc.
that matures at 9/27/10 has the same interest rate as the senior secured term loan
from Timely Medical Innovations, LLC, which matures at 6/30/13, yet the latter is
valued at par while the former is valued at a discount. |
The primary determination of whether a loan is valued at a premium or at a discount is whether or
not its contractual yield (cash interest, original issue discount accretion or payment in kind
interest) is greater than or less than its appropriate market yield (i.e., discount rate). Other
factors such as call protection, call premium and remaining term are also included in this
analysis. In the case of Timely Medical Innovations, for example, the loan has no call protection
or call premium, but its contractual yield is higher than a comparable market yield for the loan.
Aurora Flight Sciences Inc., on the other hand, has a contractual yield lower than a comparable
market yield for the loan, leaving the loan priced at a discount to the full amount due at
maturity.
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(c) |
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With respect to the column LTV (loan to value), either delete this column
or provide a context to explain its relevance to investors. Similarly, delete the
paragraphs describing the weighted average LTV of the loan assets or explain the
relevance of this concept. |
We have added additional disclosure that explains why the Company believes that the LTV/weighted
average LTV calculations are useful to investors. The SECs guidance suggests that a registrants
management should discuss calculations and indicators of trends that are used by management in
evaluating performance. As discussed in the Registration Statement, in evaluating investments and
subsequently in evaluating performance of investments, management uses these ratios. Management
believes that the LTV information will provide investors with the ability to assess the Companys
capacity to realize the value
Mary Cole, Esq.
June 9, 2010
Page Ten
of the loan in the case of a default or foreclosure. Given that all of the Loan Assets are senior
positions, which carry first liens on the assets or the enterprise, management believes that LTV is
a relevant measure of the excess asset or enterprise value above the fair value of the loan as
determined by third party valuation firms.
24. |
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Brief Description of Portfolio Company (page 59)The paragraph under the table in this
section states that the Company may be subject to restrictions regarding restructuring of
investments absent exemptive or other relief... In your response, please describe the other
relief contemplated. |
We have revised the disclosure to note that restructuring of investments in portfolio companies in
which affiliates own equity interests will require exemptive relief or no-action letter guidance.
25. |
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Independent Directors (page 62)At present, the Companys board of directors is not composed
of a majority of non-interested members. Disclose if it is expected that the future board, a
majority of whom will be non-interested, will vote on the transfers of loan assets to the
Company and approve of their valuations. |
In Amendment No. 1 we have identified three independent directors. In a future amendment, we will
update the disclosure to add information regarding the fourth independent director. The board will
be composed of a majority of independent directors.
26. |
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Incentive Fee (page 71)This paragraph states that the pre-incentive fee will involve a
percentage taken against net investment income with net investment income defined to include
interest income, dividend income, and any other income including any other fees (other than
fees for providing managerial assistance), such as commitment, origination, structuring,
diligence and consulting fees or other fees that are received from portfolio companies. |
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Footnotes in Investment Adviser Act Releases 996 and 721 (the IA Releases) appear to
permit fees taken against investment income, which is defined in the IA Releases as
interest and dividend income. Please provide a supplemental memorandum to the staff
discussing the following issues: |
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(a) |
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Explain why it is appropriate to include in net investment income amounts
representing fee income. |
We have reviewed the IA Releases, and there is no prohibition against including in net investment
income amounts representing fee income.
Mary Cole, Esq.
June 9, 2010
Page Eleven
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(b) |
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The pre-incentive fee sets up a formula in which the adviser earns 100% of
the pre-incentive fee when net investment income fits within the band of 2.00% and
2.5%. Explain why this formula does not lead to a conflict of interest whereby the
adviser may be motivated to switch portfolio companies income distributions among
calendar quarters. Might not such a formula also provide an inducement for management
to take inordinate risks with the capital requirements of the Companys portfolio
companies over which it exercises a degree of control? |
The Adviser will be subject to fiduciary duties, which would prevent the Adviser from being induced
to take inordinate risks. We have included risk factor disclosure on pages 22 to 24 that explains
that the Adviser may face certain conflicts of interest.
27. |
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Examples of Quarterly Incentive Fee Calculation (page 72)Footnote 3 in Example 1 shows that
offering expenses are excluded from the calculation of the incentive fee. This seems to imply
that offering expenses are expenses charged to the Company. Please confirm in your response
that this assumption is correct and, if correct, why the Company will be paying the offering
expenses. |
This assumption is correct. Offering expenses will be charged to the Company.
28. |
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Payment of Incentive Fee in Stock (page 75)Unless you obtain assurance from the Divisions
Office of Applications that it will likely grant exemptive relief to permit the payment of
stock for services, please delete all references to this concept. |
As we have discussed, we are engaged in conversations with the Staff regarding exemptive relief.
We have included risk factor disclosure on page 34 that discloses the risk that this relief may not
be obtained and, if not obtained, the fee will be paid in cash.
29. |
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Determination of Net Asset Value (page 78)Please provide more robust disclosure of the
Companys valuation procedures. Name the third-party valuation firms that will be assisting
the adviser and board in valuing the assets and provide the standards such firms will be
using. |
Supplementally, we note that the following third-party valuation firms may be engaged to assist the
adviser and the board in valuing assets. Two firms have been retained to date as noted in the
response to comment 8(d) above. These valuation firms will be asked to conduct their valuation
procedures and provide a negative assurance. These experts will not be asked to provide fairness
opinions.
Mary Cole, Esq.
June 9, 2010
Page Twelve
Third party valuation firms vary from industry to industry and MCC Advisors
LLC, the investment adviser of the Company,
does not expect to use
a single firm to provide valuations for each of the Companys transactions. Firms which
have valued related collateral and enterprise values of legacy transactions include Valuation
Research Corporation and BV Advisors LLC. MCC Advisors may contract, but is not limited to
contracting, these valuation firms in future valuation exercises.
Intent
The Company is to apply a consistent and transparent approach to the valuation of fund
investments in a manner consistent with Generally Accepted Accounting Principles in the United
States of America (US GAAP) in accordance with the requirements of Statement of Financial
Accounting Standard 157 (SFAS 157), which requires that investments be valued at fair value for
purposes of computing Net Asset Value (NAV).
Definitions
Fair value is defined under SFAS 157 as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. It is an exit price approach. SFAS 157 requires that investments be
categorized according to the nature of secondary market activity and observable inputs associated
with the investment: Level I investments are traded on exchanges where prices are publicly
available; Level II investments are generally traded over-the-counter and, thus, have observable,
if not publicly listed, prices; and Level III investments are those for which no secondary market
exists of any sort, where the use of directly attributable observable inputs is not possible, but
where independent, indirectly-attributable inputs from comparable investments may be observable and
can be used in conjunction with other factors in determining the fair value of the Level III
investment in question. Directly attributable inputs are defined as inputs that are observable
for exactly the same security as that being valued. Indirectly attributable inputs are defined as
inputs that are observable for a sufficiently similar, but not identical, security as that being
valued.
Purpose
Substantially all of the assets of the Company are Level III investments. MCC Advisors
has established this valuation
policy to be in accordance with US GAAP, for the benefit of the shareholders of the Company,
the administrator, for the purposes of accurately calculating an NAV, and the auditor of the Company, for the purposes of conducting its audit.
Mary Cole, Esq.
June 9, 2010
Page Thirteen
Valuation Policy
Liquid Investments for Which a Ready Market Exists
Although the investment focus of the Company is not on liquid financial instruments,
the Company may have exposure to liquid financial instruments as upside or for hedging
of other investments. In such cases, the Company will use directly attributable inputs to value such
investments. If these investments are encumbered by selling restrictions or other liquidity
constraints not applicable to the directly attributable inputs used, valuation adjustments are also
considered in order to determine the fair value of these investments.
Exchange-Traded Securities, Futures Contracts and Option Contracts
The fair value of a security, futures contract or option contract traded on a nationally recognized
exchange, such as the NASDAQ, Chicago Mercantile Exchange (CME) or Chicago Board Options Exchange
(CBOE), respectively, is the market price of that security or futures contract on the valuation
date. These are generally considered Level I investments.
Over-the-Counter Securities
The fair value of a security (e.g., bond, note), financial instrument (e.g., loan, trade claim) or
financial contract (e.g., swap contract, currency forward) not listed or traded on national
exchanges are valued based upon middle-market quotes provided by a reliable pricing service. If
the Company deems such valuation of a particular position to be inaccurate, the
valuation is determined based upon the arithmetic average of the mean bid and asked prices
received from two or more broker dealers. These are generally considered Level II investments.
Illiquid Investments for Which no Ready Market Exists
The fair value of illiquid securities, financial instruments or financial contracts for which no
ready market exists and, thus, for which no directly attributable inputs are available is
determined based upon, to the extent they exist, transactions in the same securities that are
timely, independent and material, and/or observable valuation factors indirectly attributable
inputs such as those discussed below, that MCC Advisors believes provide an independent,
unbiased basis for valuation consistent with SFAS 157. Where there are no transactions in the same
securities, the fair value of illiquid securities are determined as described below.
Loans In determining the fair value of loans, MCC Advisors considers factors such as,
without limitation, cost, principal balance, rates of interest, remaining term, any call
Mary Cole, Esq.
June 9, 2010
Page Fourteen
protection, other fixed or contingent payments due on an investment, accrued interest or other
charges, changes in relevant interest or foreign exchange rates, issuer compliance with covenants
and payment schedules on its debt, credit risk metrics such as leverage or coverage ratios, the
value of the assets or the enterprise supporting the securities, reports of historical and
projected financial results of operations of the issuer, including such metrics as revenue, EBITDA,
or cash flow, observable market yields, credit risk metrics, financial results and valuation
multiples for sufficiently comparable securities issued by sufficiently comparable companies and
market events determined to be relevant to the valuation of the particular security. In addition,
for companies that are in distress or insolvent, the Company considers the present value of the
probabilistic recovery value, based upon appraisals of loan collateral and/or other company assets
and expectations regarding the timing and likelihood of ultimate outcomes, to be the fair value of
the loan.
Equity Participation In determining the fair value of equities or equity participations
of any sort, MCC Advisors considers factors such as, without limitation, the borrowers enterprise
value, the value of its liabilities and the value of its non-operating assets and any cash in
excess of that required to support projected operations. The determination of enterprise value
considers such factors as the historical and projected financial performance, capital structure and
capital costs of the company and any observable historical and projected financial performance,
market multiples, capital structures, borrowing costs and equity costs of capital for comparable
companies, among other indications of value, such as transactions for control of such comparable
companies.
The value of warrants and options on equity securities will be determined considering both the
intrinsic value and time value of the instrument. The time value will be determined using an option
valuation model(s) that considers, among other variables, the likely term of the instrument, the
implied volatility of comparable public market options, adjusted downward for the illiquid nature
of our instruments, the strike price, the current market value or fair value of the underlying
equity and interest rates. Warrants and options, such as penny warrants, deemed to be
deep-in-the-money are generally carried at a value that reflects only the intrinsic value of the
option.
We appreciate in advance your time and attention to this amendment, as well as to our comment
responses. Should you have any additional questions or concerns, please call me at 212-468-8179.
Separately, in connection with the filing of an acceleration request (later in the process), the
Company will submit a letter to the Staff acknowledging that the Company is responsible for the
adequacy and accuracy of the disclosures in its filings, that Staff comments do not foreclose the
Commission from taking any action with respect to those filings and that the
Mary Cole, Esq.
June 9, 2010
Page Fifteen
Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or
any person under the federal securities laws of the United States.
Sincerely,
Anna T. Pinedo
cc: Steven Boehm
Brian Cavanaugh
Harry Pangas
Brook Taube
Seth Taube