Item 5: Fees and Compensation
A. Description and B. Fee Billing
Prior to its current wind-down strategy, Salus acquired on behalf of each Client
secured and unsecured loans and other debt instruments (collectively, the “Collateral
Obligations”). Salus sought out current income and return of principal for Clients by
acquiring, holding and disposing on behalf of such loans and other assets. Target
Client investments included loans originated for borrowers in the corporate middle
market and asset-based loans for purposes ranging from traditional working capital to
growth capital, acquisitions, refinancings and late-stage turnarounds.
Salus focused on providing capital solutions across a wide range of industries with a
core competency in retail and consumer products. The CLO issued senior and
subordinated notes to investors meeting suitability qualifications specified in the
CLO’s indenture.
As compensation for the performance of its obligations as collateral manager to the
CLO, pursuant to the Collateral Management Agreement between SCP II and the
CLO, SCP II is entitled to receive on each payment date, subject to available cash
flow, a fee in an amount equal to the sum of:
(a) a senior management fee (the “Senior Collateral Management Fee” ) equal to
0.20% per annum of the “fee basis amount” measured as of the beginning of the due
period preceding such payment date; and
(B) a subordinated management fee (the “Subordinated Collateral Management Fee“
and together with the Senior Collateral Management Fee, the “Base Collateral
Management Fee”) equal to 0.30% per annum of the fee basis amount measured as of
the beginning of the due period preceding such payment date.
As used herein, the term “fee basis amount” for any payment date means the sum of
the daily average aggregate Collateral Obligation commitment amount and the daily
average balance of cash on deposit in the principal collection subaccount for the
collection period related to such payment date. More information about the fee basis
amount is available in the offering circular for the CLO.
In addition to the Base Collateral Management Fee, on each payment date, SCP II is
entitled to receive an incentive collateral management fee equal to a percentage of the
interest proceeds and principal proceeds available for distribution to holders of the
CLO’s outstanding subordinated notes on and after the payment date on which the
holders of the subordinated notes issued on the closing date have realized an internal
rate of return of at least 10% on their subordinated notes investment (calculated from
the closing date to and including such payment date) (the “Incentive Collateral
Management Fee” and, together with the Base Management Fee, the “Collateral
Management Fee”).
The Collateral Management Agreement further provides that if the Collateral
Management Agreement is terminated, any Collateral Management Fee will be
prorated for any partial periods between payment dates during which the Collateral
Management Agreement was in effect and shall be due and payable on the first
payment date following the date of such termination.
If amounts distributable on any payment date in accordance with the priority of
payments set forth in the CLO’s indenture are insufficient to pay in full any of the
Collateral Management Fee then due (other than as a result of a waiver or deferral of
such Collateral Management Fee by SCP II), then the amount which remains unpaid
on such payment date will be deferred and will accrue interest at a rate of LIBOR for
the applicable period plus 3.00% per annum and will be payable on subsequent
payment dates on which funds are available therefor according to the priority of
payments set forth in the CLO’s indenture. SCP II may, in its sole discretion (but
shall not be obligated to), elect to waive all or any portion of the Collateral
Management Fee payable to SCP II on any payment date.
Salus also has entered into fee arrangements with other Clients that differ from the
fees described herein and negotiated such fees in its sole discretion. Such fees are
disclosed in the participation agreement or investment advisory agreement, as
applicable.
C. Other Fees and Expenses
The CLO generally is obligated to reimburse SCP II for all reasonable out-of-pocket
costs and expenses incurred by SCP II in connection with the performance of its
services and in connection therewith, including, without limitation, any and all rating
agency expenses, specialty and custom third-party software expenses for the
monitoring of the Collateral Obligations, due diligence costs, reasonable fees of legal
counsel and consultants, and all other reasonable costs and out-of-pocket expenses at
any time incurred, including, without limitation, in connection with acquisition,
origination, holding, monitoring, marking to market, enforcement, amendment,
default, restructuring, bankruptcy, and disposition of any collateral and investments in
connection with, and administration of, and taking of actions pursuant to, the CLO
transaction documents and relating to proposed investments that are not acquired (the
foregoing to include, without limitation, legal, tax, accounting, appraisal, and any
rating agency costs to the extent not paid directly by the CLO and any extraordinary
expenses of any nature and other unusual matters). Any expenses that are the
responsibility of Salus’s other Clients are disclosed and agreed to by such Client in
the applicable participation agreement or investment advisory agreement entered into
between Salus and such Client.
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