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AGREEMENT
AGREEMENT, dated as of August 14, 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 February 14, 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:
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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 Senior
Loan Interest Pricing 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 Senior Loan Interest Pricing Procedures (and
the attached Senior Loan Interest Valuation Resolutions and Senior Loan
Interest Valuation Guidelines) attached hereto and made part hereof as
Exhibit A and Attachments 1 and 2 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 Senior Loan Interest Pricing
Procedures, Senior Loan Interest Valuation Resolutions, Senior Loan
Interest Guidelines and Credit Quality Review Procedures 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.
5. NO WARRANTIES AND LIMITATION OF LIABILITY.
Management Inc. will use reasonable 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
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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.
IN NO EVENT WILL MANAGEMENT INC. 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; (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;
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(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.
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).
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(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
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
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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.
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.
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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.
(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.
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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
--------------------------------
Name: Xxxxxx X. Xxxxxxxx
Title: Senior Vice President
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EXHIBIT A
SIERRA PRIME INCOME FUND
PRICING COMMITTEE PROCEDURES
A. PRICING COMMITTEE
1. Function and Responsibility
a. The Pricing Committee is generally responsible
for overseeing the valuation of assets held by
Sierra Prime Income Fund (the "Trust") to ensure
that such valuations are consistent with
valuation resolutions adopted by the Board of
Trustees (Attachment 1) and Senior Loan Interest
("SLI") Valuation Guidelines utilized by Xxx
Xxxxxx American Capital Management Inc. (the
"Sub-Adviser") (the "Guidelines") (Attachment
Z).
2. Composition
a. At least 2 voting members, including at least 1
member who does not serve on the Credit
Committee for the Trust (either currently or,
with respect to any particular SLI, the Credit
Committee at the time of the original purchase
decision by the Trust); and
b. One non-voting member and secretary. Such member
shall be, the Secretary, or Assistant Secretary
of the Trust, or their delegate.
B. MEETINGS
1. The Pricing Committee shall have special meetings:
a. If called by any member of the Pricing
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")
I. Sub-Adviser becomes aware that obligor
announces intent to file bankruptcy;
II. Sub-Adviser becomes aware that obligor
announces inability to make payments on
Senior Loan;
III. Sub-Adviser becomes aware that obligor
is negotiating for debtor-in-possession
financing;
IV. Sub-Advisor becomes aware that agent (or
other intermediary) may be insolvent.
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2. The Pricing 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);
3. The Pricing Committee shall determine, at each special
meeting, the current Credit Component value for the SLI
or SLIs that are the subject of such special meeting;
and
4. The Pricing Committee shall consider, in determining
estimated value of an SLI, the information contained in
the "Pricing Memo" (as discussed below).
C. REFERENCE FROM THE PRICING COMMITTEE TO THE CREDIT COMMITTEE
1. The Pricing 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 Pricing
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
Pricing 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;
a. Sub-Adviser becomes aware that the obligor has
filed, announced it is considering filing or is
reported to be considering filing for bankruptcy
protection;
b. Sub-Adviser 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-Adviser 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-Adviser becomes aware that the obligor has
violated any covenant with respect to the Senior
Loan Agreements;
e. Sub-Adviser becomes aware that the obligor has
requested, has indicated that it intends to
request or is reported to be considering
requesting a commitment for debtor-in-possession
financing;
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f. Sub-Adviser 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-Adviser becomes aware that the obligor has
been denied credit by its suppliers;
h. Sub-Adviser 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-Adviser 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-Adviser becomes aware of any material
adverse change in cashflow or liquidity of the
obligor;
k. Sub-Adviser becomes aware of any material
adverse change in the operating performance or
results of obligor; or
l. A member of the Pricing Committee, the Credit
Committee or the Board of Trustees of the Trust
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 pricing
Committee prior to the next regularly scheduled Pricing
Committee meeting.
3. Once an SLI has been placed on the Watch List, it may be
removed only by a vote of the Pricing Committee.
E. DOCUMENTATION
1. For each date on which the Pricing Committee considers a
change in the Credit Component Value of an 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 Pricing
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 Sub-Adviser believes there is a
risk of liquidation of the obligor;
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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
f. The factors considered in the review of the
Interest Rate Component, and any adjustments
thereto.
2. The Pricing 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 Pricing 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 Pricing Committee, including the Pricing Memos,
shall be made available to the Board of Trustees upon
their request.
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Attachment 1
SIERRA PRIME INCOME FUND
SENIOR LOAN INTEREST VALUATION RESOLUTIONS
[Resolutions adopted by the Board of Trustees on , 199 ]
----------------- -
RESOLVED, that Senior Loan interests shall be valued by Xxx Xxxxxx American
Capital Management Inc. (the "Investment Sub-Adviser") on behalf of the Fund on
the basis of market quotations and transactions in instruments which the
investment Sub-Advisor believes are comparable to senior loan interests in one
or more of the following characteristics: credit quality, interest rate,
interest rate redetermination period and maturity. Such instruments include
commercial paper, negotiable certificates of deposit, treasury bills and
short-term variable rate securities which have adjustment periods comparable to
the senior loan interest in the Fund's portfolio. These instruments fluctuate in
value as a function of interest rate and credit factors and it is expected that
the Fund's net asset value will fluctuate accordingly. Because of the
short-term nature of such instruments, however, the Fund's net asset value is
expected to fluctuate less than the net asset values of investment companies
with portfolios consisting primarily of fixed-income or longer term securities;
and
FURTHER RESOLVED, that in determining the relationship between such instruments
and the senior loan interests in the Fund's portfolio, the Investment Sub-
Advisor will consider, among other factors (i) the creditworthiness of the
borrower and (ii) the current interest rate, the period until the next interest
rate redetermination and maturity of such senior loan interests. The Investment
Sub-Advisor believes that lenders selling senior loan interests or otherwise
involved in senior loan transactions may tend, in valuing senior loan interests
for their own account, to be less sensitive to interest rate and credit quality
changes and, accordingly, the Investment Sub-Advisor does not intend to rely on
such valuations in valuing the senior loan interests for the Fund's account.
However, a secondary trading market in senior loan interests is developing,
although such market has not, in the view of the Board of Trustees and the
Investment Sub-Advisor, developed to the extent to enable undo reliance, in
valuing such interests, on prices or quotations provided by banks, dealers or
pricing services with respect to secondary market transactions in senior loan
interests. To the extent that an active secondary market in senior loan
interests develops, the Investment Sub-Advisor may rely to an increasing extent
on such market prices and quotations in valuing loan interests in the Fund's
portfolio.
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ATTACHMENT 2
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., (the "Sub-Adviser"),
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-Adviser determines the value of the Trust's portfolio
pursuant to guidelines established and periodically reviewed by the
Board of Trustees of the Trust.
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-Adviser considers market quotations and transactions
in instruments that the Sub-Adviser 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-Adviser 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-Adviser believes such information to be reliable,
the Sub-Adviser 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.
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 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.
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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.
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-Adviser 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.
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 Adviser 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 portion
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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 adviser 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 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-Adviser 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 Advisor, reflects the estimated fair value of
such Senior Loan Interest.
IV. Secondary Market Data
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-Adviser 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 at least semi-annually the
credit quality of every Senior Loan Interest (SLI) in
the Fund's portfolio; (ii) approving and periodically
reviewing the credit quality of agents and selling
lenders associated with SLIs which the Fund acquires;
and (iii) approving and periodically reviewing issuers
with respect to short-term investments made by the Fund;
and
b) The Credit Committee shall have particular
responsibility for (i) pre-authorizing all purchases of
SLIs by the Fund and (ii) determining whether to
recommend the sale of any SLI referred to the Credit
Committee by the Pricing Committee.
2. Composition
a) Consist of at least 2 voting members,
b) Not complete overlap with the Pricing Committee, and
c) Include, as a non-voting member and secretary for any
meetings, the Secretary, any Assistant Secretary of the
Fund or their delegate (the "Secretary").
3. Operation
a) The Credit Committee shall meet as necessary to (i)
pre-authorize 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
c) The Secretary shall keep minutes of all meetings of the
Credit Committee.
B. Portfolio Manager
1. The Portfolio Manager shall not acquire any SLI without
obtaining pre-authorization of 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;
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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 Pricing Committee
1. The Pricing 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 Pricing 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
Pricing 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.
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 Pricing 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.
