Exhibit (k)(3)
AGREEMENT
AGREEMENT, dated as of December 4, 1996 by and among Sierra Prime Income
Fund, an unincorporated business trust, organized under the laws of the
Commonwealth of Massachusetts (the "Fund"), Sierra Investment Advisors
Corporation, a California corporation ("Sierra Advisors") and Xxx Xxxxxx
American Capital Management Inc., a Delaware corporation ("Management Inc.").
WITNESSETH:
WHEREAS, Sierra Advisors acts as the investment advisor to the Fund;
WHEREAS, Management Inc., pursuant to that certain Investment Sub-Advisory
Agreement by and among the Fund, Sierra Advisors and Management Inc. dated
October 31, 1996, acts as the investment sub-advisor to the Fund;
WHEREAS, the Fund invests principally in interests in floating or variable
rate senior loans made primary to United States corporations, partnerships and
other entities (the "Senior Loan Interests") which Senior Loan Interests
generally pay interest at rates which are periodically redetermined by reference
to a base lending rate plus a premium;
WHEREAS, the Board of Trustees of the Fund have established certain
procedures for the valuation of the Senior Loan Interests in the Fund's
portfolio (the "Senior Loan Interest Pricing Procedures") and credit quality
review procedures for Senior Loan Interests in the Fund's portfolio (the "Credit
Quality Review Procedures") in accordance with certain resolutions adopted by
the Board of Trustees of the Fund (the "Senior Loan Interest Valuation
Resolutions") and guidelines for valuing senior loan interests (the "Senior Loan
Interest Valuation Guidelines") utilized by Management Inc.;
WHEREAS, the Fund and Sierra Advisors desire that Management Inc. provide
to the Fund valuations for the Senior Loan Interests in the Fund's portfolio in
accordance with the Senior Loan Interest Pricing Procedures and the Senior Loan
Interest Valuation Guidelines, and oversee the credit quality of the Senior Loan
Interests in the Fund's portfolio pursuant to the Credit Quality Review
Procedures;
WHEREAS, Management Inc. desires to provide such Senior Loan Interest
valuations, and to oversee the credit quality of such Senior Loan Interests, to
the Fund and Sierra Advisors;
WHEREAS, each of the parties hereto desire to set forth their
understandings with respect to Management Inc.'s provision of valuations and
credit quality review for Senior Loan Interests in the Fund's portfolio.
THEREFORE, in consideration of the mutual agreements and covenants of the
parties set forth herein and such other good and valuable consideration, the
legally sufficiency of which is acknowledged, the parties hereto agree as
follows:
1. SERVICES.
For the term of this Agreement, Management Inc. agrees to provide to Fund,
Sierra Advisors as well as to such other appropriate service provider to
the Fund as the Fund or Sierra Advisors may direct, including State Street
Bank & Trust Company as Custodian and Administrator of the Fund, its
valuations for Senior Loan Interests in the Fund's portfolio in the time
and manner as specified in the Valuation Committee Procedures as more fully
set forth in Section 2 hereof. Further, Management Inc. agrees to provide
to the Fund and Sierra Advisors credit review of the Senior Loan Interests
in the Fund's portfolio pursuant to the Credit Quality Review Procedures as
more fully set forth in Section 2 hereof.
2. PRICING PROCEDURES/SENIOR LOAN INTEREST GUIDELINES.
Each of the Fund and Sierra Advisors represent and warrant to Management
Inc. that the Valuation Committee Procedures and the Senior Loan Interest
Valuation Guidelines attached hereto and made part hereof as Exhibit A and
Attachment 1 thereto, respectively, have been adopted by the Board of
Trustees of the Fund. Each of the Fund and Sierra Advisory further
represent and warrant to Management Inc. that the Credit Quality Review
Procedures attached hereto and made part hereof as Exhibit B have been
adopted by the Board of Trustees of the Fund. The Fund and Sierra Advisors
agree to provide copies of all amendments to or restatements of the
Valuation Committee Procedures, Senior Loan Interest Valuation Guidelines,
Credit Quality Review Procedures and Board resolutions affecting Senior
Loan interest valuations to Management Inc. on a timely and on-going basis,
but in all events prior to such time as said amendments become effective.
Management Inc. is entitled to rely on all such documents furnished to it
by the Fund and Sierra Advisors.
3. TERM.
The term of this Agreement shall be coterminous with the term of the
Investment Sub-Advisory Agreement and shall be terminable as set forth in
Section 9 of said Investment Sub-Advisory Agreement.
4. FEES.
In consideration of its retention as the investment sub-advisor for the
Fund, Management Inc. shall provide the Services indicated herein at no
cost to the Fund or Sierra Advisors.
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5. NO WARRANTIES AND LIMITATION OF LIABILITY.
Management Inc. will use its best efforts to provide accurate, complete and
timely Senior Loan Interest valuations to the Fund and Sierra Advisors.
Subject to Management Inc.'s contractual obligation to use reasonable
efforts as set forth in the preceding sentence, Management Inc. does not
warrant the accuracy or completeness or timeliness of any of the
recommendations supplied by it under this Agreement. THERE ARE NO
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER
WARRANTY IN CONNECTION WITH ANYTHING DONE OR SUPPLIED BY MANAGEMENT INC.
PURSUANT TO THIS AGREEMENT.
EXCEPT IN THE CASE OF A BREACH OF FIDUCIARY DUTY, GROSS NEGLIGENCE, BAD
FAITH AND/OR WILLFUL MISFEASANCE ON THE PART OF MANAGEMENT, INC.,
MANAGEMENT INC. WILL NOT BE LIABLE FOR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOST PROFITS OR GOOD
WILL, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR
OTHERWISE AND WHETHER OR NOT SUCH DAMAGES ARE FORESEEN OR UNFORESEEN, WITH
RESPECT TO ANY CLAIM BY THE FUND, SIERRA ADVISORS OR MANAGEMENT INC. AS THE
CASE MAY BE OR ANY THIRD PARTY ARISING FROM OR RELATING TO THIS AGREEMENT
OR ANY OF THE SERVICES PROVIDED UNDER THIS AGREEMENT INCLUDING WITHOUT
LIMITATION CLAIMS RELATING TO THE COMPLETENESS OR ACCURACY OR TIMELINESS OR
DELIVERY OF ANY RECOMMENDATIONS SUPPLIED, THE RESULTS OBTAINED FROM THE USE
OF THE RECOMMENDATIONS, TRANSMISSION DELAYS OR OMISSIONS, INTERRUPTIONS IN
SERVICE, OR ANY OTHER CLAIM ARISING OUT OF THE USE OF THE DATA OR THE
FAILURE TO SUPPLY ANY DATA.
6. REPRESENTATIONS AND WARRANTIES.
Each of the parties hereto represents and warrants to the other party
hereto as follows:
(a) it has full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform its
obligations hereunder and this Agreement constitutes the valid and
legally binding obligation of such party, enforceable in accordance
with its terms and conditions; and
(b) the execution, delivery and performance of this Agreement and the
transactions contemplated hereby do not conflict with or violate in
any material respect: (i) said party's charter or by-laws; (ii) any
contract or agreement to which it is a party;
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(iii) any order, decree or judgment of any court or governmental
authority; or (iv) any Federal or State statute, rule or regulation.
7. COVENANTS.
During the term of this Agreement, each of the parties agree:
(a) to consult with the other parties hereto prior to recommending any
changes or modifications in the Guidelines;
(b) to comply with all codes, regulations and laws applicable to the
provision of the services to be provided by it under this Agreement;
(c) to execute and deliver such further documents and instruments and take
such other actions as the other parties hereto may reasonably request
to more effectively carry out the Services to be provided pursuant to
this Agreement; and
(d) to take no action that would be expected to result in any of its
representations and warranties set forth in this Agreement being or
becoming untrue in any material respect.
8. CONFIDENTIALITY.
Management Inc. agrees to provide information in support of its valuations
of Senior Loan Interests to the Fund and Sierra Advisors pursuant to their
reasonable request from time to time. All information in support of the
valuation of Senior Loan Interests deemed to be significant by Management,
Inc. will be provided pursuant to the reasonable request noted above. Both
the Fund and Sierra Advisors acknowledge and agree that any such
information provided by Management Inc. will be treated as material
non-public information and will hold such information strictly
confidential. Further, the Fund and Sierra Advisors agree that any such
information provided by Management Inc. may have the effect of limiting the
Fund or Sierra Advisors' ability to trade in other securities of the
issuers of Senior Loan Interests pursuant to Federal Xxxxxxx Xxxxxxx laws
and other applicable law.
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9. INDEMNIFICATION.
(a) The Fund and Sierra Advisors shall indemnify and hold harmless
Management Inc., its affiliated persons (as defined in the Investment
Company Act of 1940, as amended) and its and their directors, officers,
employees, agents, advisors, representatives and affiliated persons,
control persons or any of its affiliates (each an "Indemnified Party")
against, and the Fund and Sierra Advisors agree that no Indemnified Party
shall have any liability to the Fund or Sierra Advisors or any of their
trustees, directors, officers, employees, agents, advisors, representatives
and affiliated persons and each person who controls either the Fund or
Sierra Advisors or any of each of their respective affiliated persons for,
any judgment, loss, claim, damage or liabilities, joint or several
(including litigation costs and reasonable attorneys' fees) arising from,
based upon or related to the services provided by Management Inc. (or any
other Indemnified Party) in good faith and in the absence of gross
negligence or willful misconduct under this Agreement. Management Inc. (or
such other Indemnified Party) shall have the right, at their expense, to
participate in the defense of any such claim through counsel of their own
choosing; provided, however, that neither the Fund or Sierra Advisor shall
be required to pay any settlement amount that it has not approved in
advance. Notwithstanding the above, neither Management Inc. (nor any other
Indemnified Party) shall be entitled to indemnification hereunder to the
extent that the judgment, loss, claim, damage or liabilities arising from a
claim for which indemnification is sought hereunder results directly or
indirectly from the gross negligence or willful misconduct of Management
Inc. (or such other Indemnified Party).
(b) Except for any judgment, loss, claim, damage or liability arising from
the conduct of Management, Inc. deemed to be grossly negligent or willful
or wanton, if the foregoing indemnification is unavailable to an
Indemnified Party with respect to any judgment, loss, claim, damage,
liability or expense referred to therein, then in lieu of indemnification,
the Fund and Sierra Advisors shall contribute to the amount paid or payable
by an Indemnified Party.
10. NOTICES.
All notices hereunder shall be in writing and shall be delivered in person,
or sent by overnight courier service, to the address of the party set forth
below, or to such other address as may be stipulated in writing by the
parties pursuant hereto. Unless otherwise provided, notice shall be
effective on the date it is officially recorded as delivered.
(a) If to the Fund:
Sierra Prime Income Fund
0000 Xxxxxx Xxxxxx
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Xxxxxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxx X. Xxxxx
(b) If to Sierra Advisors:
Sierra Investment Advisors Corporation
0000 Xxxxxx Xxxxxx
Xxxxxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxxxx X. Goth
with a copy to:
Xxxxxx, Xxxxx & Xxxxxxx LLP
0000 Xxx Xxxxx Xxxxxx
Xxxxxxxxxxxx, XX 00000-0000
Attention: Xxxxxxx X. Xxxxx, Esq.
(b) If to Management Inc.:
Xxx Xxxxxx American Capital Management, Inc.
Xxx Xxxxxxxx Xxxxx
Xxxxxxxx Xxxxxxx, Xxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxxxx
with a copy to:
Xxx Xxxxxx American Capital, Inc.
Xxx Xxxxxxxx Xxxxx
Xxxxxxxx Xxxxxxx, Xxxxxxxx 00000
Attention: General Counsel
11. AMENDMENT: ASSIGNMENT.
This Agreement may not be amended except by written instrument executed by
each party hereto. No party may assign this Agreement to any third party,
without the express written consent of the other party hereto.
12. SURVIVAL OF CERTAIN PROVISIONS.
Notwithstanding the termination of this Agreement, those provisions of
this Agreement that by their nature are intended to survive such
termination shall survive, including without limitation, the provisions of
Sections 8 and 9.
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13. ENTIRE AGREEMENT.
This Agreement contains the entire understanding of the parties on the
subject hereof and terminates and supersedes all previous verbal and
written agreements on such subject.
14. RELATIONSHIP OF THE PARTIES.
It is understood that each party hereto that Management Inc. is an
independent contractor and that in performing services under this
Agreement, the employees of Management Inc. will in no sense be the
employees of the Fund or Sierra Advisors. It is further acknowledged and
agreed that the parties do not intend to constitute or establish a
partnership or any other business entity under any state law.
15. SEVERABILITY.
In the event any provision of this Agreement or application hereof to any
party or in any circumstances shall be determined to be invalid, unlawful
or unenforceable to any extent, the remainder of this Agreement and the
application of any provision to parties or circumstances other than those
as to which it is determined to be unlawful, invalid or unenforceable,
shall not be affected thereby, and each remaining provision of this
Agreement shall continue to be valid and may be enforced to the fullest
extent permitted by law.
16. NON-WAIVER.
No delay or failure by any party in exercising any right under this
Agreement and no partial or single exercise of that right shall constitute
a waiver of that or any other right.
17. ARBITRATION AND GOVERNING LAW.
(a) Any dispute, controversy or difference which may arise among the
parties hereto out of or in connection with this Agreement or any
agreement entered into among the parties pursuant to this Agreement or
any breach hereof or thereof shall, if possible, be settled by mutual
consultation in good faith between senior executive officers of the
parties having requisite decision making authority. Such mutual
consultation shall take place as soon as practicable after the receipt
by one party of a written notice from another party describing the
dispute, controversy or difference between them. Except as provided in
Section 8, in the event that the dispute is not resolved to the
satisfaction of such parties by such consultation within 90 days of
the written notice given to one party pursuant to this Section 17(a)
then by agreement of the parties such dispute may be subject to
arbitration procedures as agreed to by such parties.
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(b) Regardless of the situs of the arbitration, this Agreement shall be
governed by and construed and enforced in accordance with the laws of
the State of Illinois.
(c) An arbitration award rendered shall be final and binding upon the
parties hereto. The amount of the costs of any such arbitration and by
whom they shall be paid will be determined as part of the arbitration.
Judgment upon such arbitration award may be entered in any court
having jurisdiction over the parties or their assets.
18. CONSEQUENTIAL DAMAGES.
Except pursuant to Sections 8 and 9, no party shall be liable to any other
party for any consequential, indirect, incidental or special damages, even
if advised of the possibility of such damages.
19. NO THIRD PARTY BENEFICIARIES.
Except as provided in Section 9 with respect to indemnification, nothing in
this Agreement shall confer any rights upon any person or entity other than
the parties hereto and their respective heirs, successors and permitted
assigns.
20. CAPTIONS.
The captions used herein are for convenience only and constitute no part
of this Agreement.
IN WITNESS WHEREOF, the undersigned parties have duly executed this
Agreement as of the date first above written.
SIERRA PRIME INCOME FUND
By: /s/ Xxxxx X. Xxxxx
Name: Xxxxx X. Xxxxx
Title: Executive Vice President
SIERRA INVESTMENT ADVISORS CORPORATION
By: /s/ F. Xxxxx Xxxxxx
Name: F. Xxxxx Xxxxxx
Title: Chairman
XXX XXXXXX AMERICAN CAPITAL MANAGEMENT, INC.
By: /s/ Xxxxxx X. Xxxxxxxx
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Name: Xxxxxx X. Xxxxxxxx
Title: Senior Vice President
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EXHIBIT A
SIERRA PRIME INCOME FUND
VALUATION COMMITTEE PROCEDURES
A. VALUATION COMMITTEE
1. Function and Responsibility
a. The Valuation Committee is generally responsible for overseeing
the valuation of assets held by the Sierra Prime Income Fund (the
"Trust") to ensure that such valuations are consistent with
valuation resolutions adopted by the Board of Trustees and Senior
Loan Interest ("SLI") Valuation Guidelines utilized by the
sub-advisor, Xxx Xxxxxx American Capital Management Inc. (the "Xxx
Xxxxxx" or "Sub-Advisor") (the "Guidelines").
x. Xxx Xxxxxx is responsible for recommending to the Board, or its
agents, and Sierra Investment Advisors Corporation ("Sierra
Advisors" or "Advisor") the valuations for the SLIs held by the
Trust, which Board may accept or reject such valuation
recommendation.
c. The valuations recommended by Xxx Xxxxxx for the SLIs held by the
Trust will be used unless rejected by the Board or any of its
agents, such as the Advisor.
2. Composition
a. The Valuation Committee of the Trust will consist of the members
of the Investment Policy Committee of Sierra Advisors. A majority
of the members of the Valuation Committee must be present in order
for such Committee to achieve a quorum to transact business.
B. MEETINGS
1. The Valuation Committee shall have special meetings:
a. If called by any member of the Valuation Committee, or
b. If, as determined by the Portfolio Manager (discussed below), any
of the following events occurs with respect to any SLI in the
Trust's portfolio ("Special Situations"):
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I. Sierra-Advisors or Sub-Advisor becomes aware that obligor
announces intent to file bankruptcy;
II. Sierra-Advisors or Sub-Advisor becomes aware that obligor
announces inability to make payments on Senior Loan;
III. Sierra-Advisors or Sub-Advisor becomes aware that obligor
is negotiating for debtor-in-possession financing;
IV. Sierra-Advisors or Sub-Advisor becomes aware that agent (or
other intermediary) may be insolvent.
2. The Valuation Committee shall determine, at each special meeting called:
a. The current Credit Component value (as such term is utilized in
the Guidelines) for each SLI that, just prior to commencement of
such meeting, had a Credit Component value of less than par (the
"troubled credits") and each SLI which is on the "Watch List", as
discussed below; and
b. The appropriateness of assumptions used in connection with the
Interest Rate Component (as such term is utilized in the
Guidelines);
C. REFERENCE FROM THE VALUATION COMMITTEE TO THE CREDIT COMMITTEE
1. The Valuation Committee shall promptly refer to the Credit Committee for
the Credit Committee's determination as to a sale recommendation if:
a. Any SLI with respect to which a Special Situation shall have
occurred; and
b. Any other SLI with respect to which the Valuation Committee
determines it to be appropriate to refer such SLI to the Credit
Committee for such determination.
D. PORTFOLIO MANAGER
1. It shall be the responsibility of the Portfolio Manager to identify
"Special Situations" (as defined above) requiring the calling of a
special meeting of the Valuation Committee and to maintain a list (the
"Watch List") to be submitted to the Credit Committee of all SLIs for
which the following events, and other events of similar credit impact
have occurred:
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a. Sub-Advisor becomes aware that the obligor has filed, announced it
is considering filing or is reported to be considering filing for
bankruptcy protection;
b. Sub-Advisor becomes aware that the obligor has defaulted in, has
announced its inability to make, or is reported as being unable to
make scheduled payments or principal and/or interest with respect
to any debt obligations of such obligor;
c. Sub-Advisor becomes aware that the obligor or any creditor of the
obligor has proposed a plan of reorganization or restructuring
with respect to the obligor;
d. Sub-Advisor becomes aware that the obligor has violated any
covenant with respect to the Senior Loan Agreements;
e. Sub-Advisor becomes aware that the obligor has requested, has
indicated that it intends to request or is reported to be
considering requesting a commitment to-debtor-in-possession
financing;
f. Sub-Advisor becomes aware that the obligor has suspended, has
reported that it may suspend or is reported to be considering
suspending payments to its trade creditors;
g. Sub-Advisor becomes aware that the obligor has been denied credit
by its suppliers;
h. Sub-Advisor becomes aware that secondary market indications
suggest a principal value of less than par; or that facility fee
or interest rate spread (over base lending rate) indications
materially differ from general market indications;
i. Sub-Advisor becomes aware that the agent bank (or other
intermediary) is or is reported to be insolvent or has had its
short-term credit rating reduced, with respect to banks through
whom the Trust has purchased a participation to A-1/P-1 (or its
equivalent) or lower or, with respect to banks through whom the
Trust has purchased an assignment, to A-2/P-2 (or its equivalent)
or lower;
j. Sub-Advisor becomes aware of any material adverse change in
cashflow or liquidity of the obligor;
k. Sub-Advisor becomes aware of any material adverse change in the
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operating performance or results of obligor; or
l. A member of the Valuation Committee, the Credit Committee or the Board
of Trustees of the Trust or the Advisor has requested inclusion on the
"Watch List".
2. The Portfolio Manager shall submit the Watch List, together with the
factors causing each SLI to be placed on the Watch List, to each member
of the Valuation Committee or the Advisor prior to the next regularly
scheduled Valuation Committee meeting.
3. Once a SLI has been placed on the Watch List, it may be removed only by
a vote of the Valuation Committee.
E. DOCUMENTATION
1. For each date on which the Valuation Committee considers a change in the
Credit Component Value of a SLI held by the Trust, a memo (the "Pricing
Memo") with respect to such SLI shall be created and kept with the
pricing records of the Trust. One member of the Valuation Committee
shall be responsible for the Pricing Memo. The Pricing Memo shall
contain a brief description of the basis for the determination of the
estimated fair value of the principal amount of the SLI. For example,
the Pricing Memo may (to the extent applicable) include, but is not
limited to the following:
a. Any material events relative to the credit quality of the obligor
which have occurred since the date of the last Pricing Memo;
b. The estimated period of time that any lapse in payment of principal
or interest will last;
c. The adequacy of the Collateral Coverage for the Senior Loan
(equaling the difference between the collateral valuation of the
obligor and the aggregate stated principal amount of all senior
indebtedness of such obligor), including the calculation thereof;
d. Whether the Advisor or Sub-Advisor believes there is a risk of
liquidation of the obligor;
e. Market rates of interest for higher risk obligors, (e.g.,
----
contractual default rates; yield on "junk bond" index; yield with
respect to well secured debt obligations of non-investment grade
obligors); and
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f. The factors considered in the review of the Interest Rate Component,
and any adjustments thereto.
2. The Valuation Committee shall review the logs showing actual current
spreads and fees for representative transactions in both the primary and
secondary market for SLIs, and include in the Pricing Memo a summary of
such Review.
3. The Valuation Committee shall prepare a report summarizing adjustment to
the value of each SLI adjusted during a quarter, together with a brief
summary of the reasons for such adjustments, for submission to the Board
of Trustees of the Trust at each regularly scheduled quarterly meeting
of the Board. In addition, the records of the Valuation Committee,
including the Pricing Memos, shall be made available to the Board of
Trustees and the Advisor upon their request.
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ATTACHMENT 1
SIERRA PRIME INCOME FUND
Senior Loan Interest Valuation Guidelines
I. Introduction
These guidelines set forth the general valuation considerations utilized by
Xxx Xxxxxx American Capital Management, Inc., ("Xxx Xxxxxx" or
"Sub-Advisor"), the investment sub-adviser to Sierra Prime Income Fund (the
"Trust"), on behalf of the Trust with respect to interests (the "Senior
Loan Interests") in senior loans (the "Senior Loans") in which the Trust
invests. The Sub-Advisor with oversight and review by Sierra Investment
Advisors Corporation ("Sierra Advisors" or "Advisor") recommends the
valuation for the Trust's portfolio pursuant to guidelines established and
reviewed by the Board of Trustees of the Trust. The Board of Trustees
ultimately determines the proper value of the Senior Loan Interests by
either accepting or rejecting the recommendations of Xxx Xxxxxx.
The value of a Senior Loan Interest in the Trust's portfolio is determined
with references to changes in market interest rates (the "Interest
Component") and to the creditworthiness of the obligor with respect to the
Senior Loan underlying the Senior Loan Interest (the "Credit Component").
In valuing Senior Loan Interests in the Trust's portfolio the Sub-Advisor
considers market quotations and transactions in instruments that the
Sub-Advisor believes may be comparable to such Senior Loan Interests. In
determining the relationship between such instruments and the Senior Loan
Interests in the Trust's portfolio, the Sub-Advisor considers such factors
as the creditworthiness of the obligor, the current interest rate, the
period until next interest rate redetermination and maturity of such Senior
Loan Interests. To the extent that the Sub-Advisor believes such
information to be reliable, the Sub-Advisor considers prices, quotations
and market indications provided by the banks, dealers or pricing services
with respect to transactions in Senior Loan Interests.
II. The Interest Component
Interest payments with respect to Senior Loan Interests generally are
determined with reference to a base interest rate, such as the prime rate,
the London interbank offer rate or the certificate of deposit ("CD") rate,
plus a premium or spread. Additionally, the effective rate of return on a
Senior Loan Interest may be adjusted through receipt or payment of a fee,
if any, at the time of purchase or sale of the Senior Loan Interest.
Pursuant to the loan documents with respect to the Senior Loan, the
applicable interest rate on the Senior Loan will be redetermined on a
periodic basis, e.g., daily, monthly, quarterly, semi-annually or annually.
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A. Fluctuations in the Base Rate
The following guidelines should be utilized to take into account
changes in value of the Senior Loan Interests in the Trust's
portfolio as a result of fluctuations in the market rates of
interest.
1. Compare the base interest rate in effect with respect to a Senior
Loan Interest (the "effective base rate") to publicly reported
current market rates of interest on instruments with a comparable
base rate of interest (the "current base rate").
2. Calculate the amount of discount or premium between the amount of
interest scheduled to be received until the next interest rate
redetermination date, calculated with reference to the effective
base rate, and the amount of interest that would be received if
the current base rate were in effect.
3. Calculate the present value of such amount of discount or premium,
if any, using a discount factor based on short-term market rates
of interest derived from market quotations in comparable
securities, e.g., the 90-day retail CD rate.
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B. Fluctuations in Spreads
The following guidelines should be utilized to take into account
changes in the value of the Senior Loan Interests in the Trust's
portfolio as a result of fluctuations in market spreads.
1. Consider primary and secondary market information with respect to
spreads applicable to current transactions in Senior Loan
Interests in order to determine the spread which the Sub-Advisor
believes would be applicable to a current transaction in such
Senior Loan Interest (the "current spread"). Compare the actual
spread with respect to the Senior Loan Interest (the "actual
spread") to the current spread.
2. Calculate the amount of discount or premium between the amount of
interest which would be received during the life of the Senior
Loan, calculated with reference to the actual spread, and the
amount of interest that would be received if the current spread
were applicable to the Senior Loan Interest.
3. Calculate the present value of such amount of discount or premium,
if any, using a discount factor based on short-term market rates
of interest derived from market quotations in comparable
securities.
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C. Fluctuations in Facility Fees
The following guidelines should be utilized to take into account
changes in the value of the Senior Loan Interests in the Trust's
portfolio as a result of fluctuations in market facility fees.
1. Consider Primary and Secondary market information with respect to
facility fees applicable to current transactions in Senior Loan
Interests in order to determine the facility fee which the
Sub-Advisor believes would be applicable to a current transaction
in such Senior Loan Interest (the "current fee").
2. Calculate the premium or discount between the unamortized portion
of any facility fee received by the Trust with respect to a Senior
Loan Interest and the current fee.
III. The Credit Component
The following guidelines should be utilized to take into account changes in
the value of the Senior Loan Interests in the Trust's portfolio as a result
of changes in the credit quality of the obligor with respect to a Senior
Loan.
1. Creditworthiness. Analyze the creditworthiness of the obligor with
respect to the Senior Loan underlying the Senior Loan Interest to
determine whether such creditworthiness necessitates any adjustment to
the stated principal value of the Senior Loan Interest.
(a) Delayed Payment. Attempt to determine whether there is a material
risk of a lapse in the scheduled repayment of principal and/or in
payment of interest on the Senior Loan, the likely duration of any
such lapse and whether all or a portion of any default in the
repayment of principal and/or the payment of interest will
ultimately be recovered by the Trust.
(b) Collateral Valuation
(i) If upon best information and belief it appears to the
Sub-Advisor that the obligor with respect to the Senior Loan
will continue to be operated as a going concern, estimate the
value of the obligor as a going concern and compare such
valuation to the principal amount of the Senior Loan and any
other senior securities of such obligor with an equal capital
structure ranking to that of the Senior Loan. In making such
estimations, utilize, to the extent appropriate, traditional
valuation methods, e.g., by making reference to earnings
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multiples for purchases and sales of companies in the same or
similar industries as that of the obligor.
(ii) If upon best information and belief the Sub-Advisor believes
it unlikely that the obligor with respect to the Senior Loan
will continue to be operated as a going concern, attempt to
estimate the liquidation value of the obligor focusing on the
value of specific collateral securing the Senior Loan and
compare such valuation to the principal amount of the Senior
Loan and any other senior securities of such obligor with an
equal capital structure ranking to that of the Senior Loan.
2. Affect on Principal. If warranted by the foregoing credit
analysis, reduce the principal value of the Senior Loan Interest
to an amount which, in consideration of any other circumstances
deemed relevant by the Sub-Advisor, reflects the estimated fair
value of such Senior Loan Interest.
IV. In addition to the Interest Component and Credit Component, consider, to
the extent deemed to be reliable, any available secondary market prices or
quotations for trades in the Senior Loan Interests in the Trust's
portfolio, any available bid and ask quotations regarding such Senior Loan
Interests and other market information. Determine the reliability of the
market data by considering such factors as:
1. the parties to any trades in Senior Loan Interest and whether such
transaction was a transfer of the Senior Loan Interest to a new lender
or was a repositioning of interests among the existing lenders;
2. the recency of any trade in a Senior Loan interest;
3. the size of any trade in relation to the size of the Trust's portfolio
position in such Senior Loan Interest;
4. whether the seller with respect to any trade as know to be a distressed
company in need of cash;
5. the reliability of the source of market information; and
6. whether the Sub-Advisor has access to financial information regarding
the obligor with respect to the Senior Loan that such source may not.
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EXHIBIT B
SIERRA PRIME INCOME FUND
CREDIT QUALITY REVIEW PROCEDURES
A. Credit Committee
1. Function and Responsibility
a) The Credit Committee shall be responsible generally for
reviewing the overall credit quality of the portfolio of Sierra
Prime Income Fund (the "Fund") including, but not limited to, (i)
reviewing the credit quality of every Senior Loan Interest ("SLI")
that is placed on the "Watch List" (i.e., "troubled credits") held
----
in the Fund's portfolio; (ii) periodically reviewing the credit
quality of agents and selling lenders associated with SLIs which
the Fund acquires; and (iii) periodically reviewing issuers with
respect to short-term investments made by the Fund.
b) The Credit Committee shall have particular responsibility for
determining whether to recommend the sale of any SLI referred to
the Credit Committee by the Valuation Committee.
2. Composition
The Credit Committee of the Trust will consist of the members of the
Investment Policy Committee of Sierra Advisors. A majority of the
members of the Credit Committee must be present in order for such
Committee to achieve a quorum to transact business.
3. Operation
a) The Credit Committee shall meet as necessary to (i) review SLI
purchases (excluding subsequent additional purchases of previously
approved SLIs with total commitments up to $50,000,000), (ii)
determine whether to recommend SLI sales, and (iii) consider such
other issues with respect to the overall credit quality of the
Fund as may be appropriate.
b) The Credit Committee shall request of the Portfolio Manager such
reports, research, summaries, memoranda or other materials as
deemed appropriate by the Credit Committee in connection with the
discharge of its responsibilities pursuant hereto; and
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c) Minutes of all meetings of the Credit Committee shall be kept.
B. Portfolio Manager
1. All SLIs must be reviewed and ratified by the Credit Committee (except
with regard to subsequent additional purchases of previously approved
SLIs with total commitments up to $50,000,000).
2. The Portfolio Manager shall have the authority to sell any SLI on
behalf of the Fund without obtaining the prior authorization of the
Credit Committee;
3. The Portfolio Manager shall use its best efforts to effect the sale of
any SLI recommended by the Credit Committee and shall report promptly
to the Credit Committee, as the case may be, in the events that a sale
of the terms so recommended is not readily achievable.
4. The Portfolio Manager shall have the authority to acquire (i) short-
term SLIs with respect to issuers approved by the Credit Committee
and, to the extent required by applicable law, the Fund's prospectus
or the policies of the Fund, by the board of Trustees and (ii) other
high quality, short-term securities described in the Fund's
prospectus; and
5. The Portfolio Manager shall prepare or oversee the preparation of such
reports, research, summaries, memoranda or other material as the
Credit Committee may request in connection with the discharge of its
responsibilities.
C. Reference from Valuation Committee
1. The Valuation Committee promptly shall reference to the Credit
Committee for the Credit Committee's determination as to a sale
recommendation:
a) Any SLI with respect to which a Special Situation (as defined in
the Valuation Committee Procedures) shall have occurred;
b) Any SLI that has been designated by the Pricing Committee as a
Watch List SLI (as provided in the Valuation Committee
Procedures); and
c) Any other SLI with respect to which the Pricing Committee
determines it to be appropriate to refer such SLI to the Credit
Committee for such determination.
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D. Reporting to Board of Trustees
1. The Credit Committee shall present a credit report, for each SLI
referred to the Credit Committee from the Valuation Committee, as of
the close of each quarter, to the Board of Trustees of the Fund at
each regularly scheduled quarterly meeting of the Board. In addition,
the minutes of the Credit Committee meetings shall be made available
to the Board of Trustees upon their request.
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