UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______________________ to _____________________
Commission file number 000-51327
BlackRock Kelso Capital Corporation
-----------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 20-2725151
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 East 52nd Street, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 212-810-5800
-------------
______________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act. Yes |_| No |X|
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act. Large accelerated filer |_| Accelerated filer |_| Non-Accelerated
filer |X|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
There is no public trading market for the Registrant's common stock. As a
result, an aggregate market value of the Registrant's common stock cannot be
determined.
The number of shares of the Registrant's common stock, $.001 par value per
share, outstanding at March 28, 2006, was 35,837,489.
BLACKROCK KELSO CAPITAL CORPORATION
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
-----------------
PART I
PAGE
Item 1. Business.................................................................................... 2
Item 1A. Risk Factors................................................................................ 12
Item 1B. Unresolved Staff Comments................................................................... 18
Item 2. Properties.................................................................................. 18
Item 3. Legal Proceedings........................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......................................... 18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities........................................................................... 18
Item 6. Selected Financial Data..................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 26
Item 8. Financial Statements and Supplementary Data................................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 42
Item 9A. Controls and Procedures..................................................................... 42
Item 9B. Other Information........................................................................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 43
Item 11. Executive Compensation...................................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters..................................................................................... 46
Item 13. Certain Relationships and Related Transactions.............................................. 48
Item 14. Principal Accountant Fees and Services...................................................... 48
PART IV
Item 15. Exhibits and Financial Statement Schedules.................................................. 50
Signatures................................................................................................ 51
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to future financial or business performance, strategies or expectations.
Forward-looking statements are typically identified by words or phrases such as
"trend," "opportunity," "pipeline," "believe," "comfortable," "expect,"
"anticipate," "current," "intention," "estimate," "position," "assume,"
"potential," "outlook," "continue," "remain," "maintain," "sustain," "seek,"
"achieve" and similar expressions, or future or conditional verbs such as
"will," "would," "should," "could," "may" or similar expressions. BlackRock
Kelso Capital Corporation (the "Company") cautions that forward-looking
statements are subject to numerous assumptions, risks and uncertainties, which
change over time. Forward-looking statements speak only as of the date they are
made, and the Company assumes no duty to and does not undertake to update
forward-looking statements. Actual results could differ materially from those
anticipated in forward-looking statements and future results could differ
materially from historical performance.
In addition to factors previously disclosed in the Company's Securities and
Exchange Commission (the "SEC") reports and those identified elsewhere in this
report, the following factors, among others, could cause actual results to
differ materially from forward-looking statements or historical performance:
(1) the introduction, withdrawal, success and timing of business
initiatives and strategies;
(2) changes in political, economic or industry conditions, the
interest rate environment or financial and capital markets,
which could result in changes in the value of the Company's
assets;
(3) the relative and absolute investment performance and
operations of the Company's investment adviser, BlackRock
Kelso Capital Advisors LLC (the "Advisor");
(4) the impact of increased competition;
(5) the impact of future acquisitions and divestitures;
(6) the unfavorable resolution of legal proceedings;
(7) the extent and timing of any share repurchases;
(8) the impact, extent and timing of technological changes and the
adequacy of intellectual property protection;
(9) the impact of legislative and regulatory actions and reforms and
regulatory, supervisory or enforcement actions of government
agencies relating to the Company or the Advisor;
(10) terrorist activities, which may adversely affect the general
economy, real estate, financial and capital markets, specific
industries, and the Company and the Advisor;
(11) the ability of the Advisor to attract and retain highly
talented professionals;
(12) fluctuations in foreign currency exchange rates; and
(13) the impact of changes to tax legislation and, generally, the tax
position of the Company.
Forward-looking statements speak only as of the date they are made. The Company
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
PART I
ITEM 1. BUSINESS
GENERAL
BlackRock Kelso Capital Corporation ("BlackRock Kelso", the "Company" or the
"Registrant," which may also be referred to as "we," "us" or "our"), a Delaware
corporation organized on April 13, 2005, is a company that has filed an election
to be treated as a business development company, or BDC, under the Investment
Company Act of 1940 (the "1940 Act"). In addition, for tax purposes the Company
intends to elect to be treated as a regulated investment company, or RIC, under
the Internal Revenue Code of 1986 (the "Code").
Our investment objective is to generate both current income and capital
appreciation through debt and equity investments. We intend to invest primarily
in middle-market companies in the form of senior and junior secured and
unsecured debt securities and loans, each of which may include an equity
component, and by making direct preferred,
2
common and other equity investments in such companies. The term "middle-market"
refers to companies with annual revenues typically between $25 million and $500
million.
On July 25, 2005, we completed a private placement of 35,366,589 shares of our
common stock at a price of $15.00 per share. We commenced operations on July 25,
2005, receiving approximately $529.3 million in total net proceeds from the
placement.
For the period July 25, 2005 (inception of operations) through December 31,
2005, we invested approximately $137.7 million in 27 portfolio companies and
received proceeds from principal repayments/dispositions of approximately $1.0
million. At December 31, 2005, our net portfolio consisted of 26 portfolio
companies and was invested 25% in senior secured loans, 1% in subordinated
debt/corporate notes, 1% in publicly traded, floating rate closed-end funds,
less than 1% in common stock/warrants and 73% in short-term investments
(including cash equivalents). Our average portfolio company investment was
approximately $5 million. Our largest portfolio company investment was
approximately $26.5 million, with our five largest portfolio company investments
comprising approximately 15% of our net assets at December 31, 2005. Our
targeted investment typically ranges between $5 million and $50 million,
although the investment sizes may be more or less than the targeted range.
Our weighted average yield on invested capital other than closed-end funds,
short-term investments and cash equivalents was 10.7% at December 31, 2005. The
weighted average yield on our invested capital including closed-end funds,
short-term investments and cash equivalents was 6.0% and, net of expenses, was
4.4% at December 31, 2005. The weighted average yields on our subordinated
debt/corporate notes and senior secured loans were 10.3% and 10.8%,
respectively, at December 31, 2005.
BLACKROCK KELSO CAPITAL ADVISORS
Our investment activities are managed by our investment adviser, BlackRock Kelso
Capital Advisors LLC ("BlackRock Kelso Capital Advisors" or "Advisor"), and are
supervised by our Board of Directors, a majority of whom are independent of the
Advisor, BlackRock (as defined below), the Kelso Principals (as defined below)
and their respective affiliates. The Advisor is led by James R. Maher, our
Chairman and Chief Executive Officer, and Michael B. Lazar, our Chief Operating
Officer. They are supported by the Advisor's team of 10 dedicated investment
professionals, as well as additional investment professionals of BlackRock, Inc.
(together with its subsidiaries, "BlackRock"). BlackRock Kelso Capital Advisors'
investment committee (the "Investment Committee") has 13 members, including
Messrs. Maher and Lazar and several senior executives of BlackRock and
principals (the "Kelso Principals") of Kelso & Company, L.P. ("Kelso").
In addition to the professionals dedicated to the Advisor, we benefit from the
business and specific industry knowledge, transaction expertise and
deal-sourcing capabilities of the Investment Committee and its connection to
BlackRock and Kelso. The Advisor has access to investment opportunities through
a broad network of contacts. Professionals in Kelso's and BlackRock's businesses
are among our sources of potential long-term subordinated loans, senior secured
and unsecured loans, preferred and common equity and other investment
opportunities.
BlackRock, one of the leading investment managers in the world, manages
approximately $453 billion in assets as of December 31, 2005, including over $10
billion in non-investment grade and bank loan assets. In addition, BlackRock
provides risk management, investment system outsourcing and financial advisory
services to a growing number of institutional investors. BlackRock was founded
in 1988 on the belief that experienced investment professionals using a
disciplined investment process and highly sophisticated analytical tools will
consistently add value to client portfolios. BlackRock has assembled a team of
investment professionals with expertise in fixed income, liquidity, equity and
alternative asset classes, and continues to make extensive investments in
internal technology and analytics. BlackRock manages a set of private investment
funds, with Kelso as its advisor, with over $3.9 billion in aggregate initial
capital. These funds invest primarily in public and private debt obligations
and, to a lesser extent, in mezzanine, private equity and other special
situation investments. BlackRock is majority owned by The PNC Financial Services
Group, Inc. ("PNC").
On February 15, 2006, BlackRock entered into an agreement with Merrill Lynch &
Co., Inc. ("Merrill Lynch") pursuant to which Merrill Lynch will contribute its
investment management business, Merrill Lynch Investment Managers, to BlackRock.
The combined company would be one of the world's largest asset management firms
with nearly $1 trillion
3
in assets under management, over 4,500 employees in 18 countries and a major
presence in most key markets, including the United States, the United Kingdom,
Asia, Australia, the Middle East and Europe. Merrill Lynch would own
approximately 49% (but in any event, not more than 49.8%) of the combined
company, including a 45% voting interest, PNC would retain approximately 34%
ownership of the combined company and the remainder would be held by employees
and public shareholders. The transaction, which has been approved by the boards
of directors of BlackRock and Merrill Lynch, is subject to various regulatory
approvals, client consents, approval by BlackRock shareholders and other
customary closing conditions, and is expected to close on or around September
30, 2006.
The Kelso Principals have an average tenure of over fifteen years at Kelso.
Kelso is one of the leading private equity firms and since 1980 has invested
over $3.4 billion of private equity capital, primarily in middle-market
companies across a broad range of industries. Kelso was organized in 1971 as a
private advisory firm and initially focused its business activities on the
development and implementation of employee stock ownership plans. In 1980, Kelso
formed its first investment partnership and has made more than 80 private equity
investments through seven investment partnerships since that time. The firm
typically makes investments in companies where key managers make significant
investments and works in partnership with management teams to create value for
investors.
We have entered into a license agreement with BlackRock and the Advisor pursuant
to which BlackRock has agreed to grant to the Advisor, and the Advisor has
agreed to grant to us, a non-exclusive, royalty-free license to use the name
"BlackRock." In addition, we have entered into a license agreement with Michael
B. Lazar, our Chief Operating Officer, and the Advisor pursuant to which Mr.
Lazar has agreed to grant to the Advisor, and the Advisor has agreed to grant to
us, a non-exclusive, royalty-free license to use the name "Kelso." Mr. Lazar
obtained this limited right to license the name "Kelso" under an agreement with
Kelso.
ADMINISTRATION
BlackRock, through its subsidiary, BlackRock Financial Management, Inc. (the
"Administrator"), serves as our administrator and provides us with office
facilities, equipment and office services. BlackRock oversees our financial
records, prepares reports to our shareholders and reports filed with the SEC,
and generally monitors the payment of our expenses and the performance of
administrative and professional services rendered to us by others. Subject to
BlackRock's oversight, PFPC Inc., a subsidiary of PNC, serves as our
sub-administrator, accounting agent, investor services agent and transfer agent
and provides legal and regulatory support services. PFPC Trust Company, another
subsidiary of PNC, serves as custodian of our investment assets. Fees and
indemnification in respect of the Administrator and the PFPC entities were
approved by our Board of Directors, including the directors that are not
"interested persons."
MARKET OPPORTUNITY
We believe the environment for investing in middle market companies is
attractive for several reasons, including:
o The middle-market remains underserved by traditional financing sources.
Between December 1990 and September 2005, the broad-based consolidation in the
U.S. financial services industry reduced the number of FDIC-insured commercial
banks and savings institutions from approximately 15,000 to 9,000. Additionally,
traditional commercial banks are highly regulated and we believe their credit
spectrum and risk profile limit their ability to serve the middle-market.
o Middle-market companies face increasing difficulty in accessing capital
markets. We believe many middle-market companies have faced increasing
difficulty in accessing the public capital markets because investors are
generally seeking larger, more liquid debt offerings. As evidence of this trend,
the market for high yield issuance has seen average deal size increase from
approximately $198 million in 1995 to $278 million in 2005, while the percentage
of offerings of $100 million or less declined from approximately 14% to under
3%.
o There is currently a large pool of uninvested private equity capital. We
also believe there is a large pool of uninvested private equity capital,
estimated to be in excess of $150 billion at the end of 2005, available to
middle market companies. We expect that private equity firms will be active
investors in middle market companies and that these private equity funds will
seek to leverage their investments by combining capital with senior secured
loans, mezzanine debt and equity co-investments from other sources, such as us.
Through our extensive deal sourcing contacts and relationships, we anticipate
that we will have access to these investment opportunities.
4
COMPETITIVE ADVANTAGES
We believe we possess the following competitive advantages over many other
capital providers to middle-market companies:
Investment Expertise. The investment professionals of the Advisor and BlackRock
and the Kelso Principals, individually and collectively, have had experience
investing in nearly every industry group in small, middle and large
capitalization companies and at every level of the capital structure.
Additionally, these individuals have had extensive exposure to middle-market
companies through their investment activities in private equity securities, debt
securities (comprised of senior and junior, secured and unsecured instruments)
and bank loan investments. Although the Kelso Principals who serve on the
Investment Committee will bring the benefit of the expertise they have gained at
Kelso and elsewhere, Kelso as an organization will not participate in the
activities of the Advisor or advise us.
BlackRock manages approximately $304 billion in fixed income investments as of
December 31, 2005, and as of that date manages over $10 billion in
non-investment grade assets, including over $3.3 billion in bank loan assets.
BlackRock has over 400 investment professionals in the fixed income area,
including 27 credit research analysts and 321 quantitative research analysts
dedicated to risk management. BlackRock emphasizes rigorous credit and deal
structure analysis, relative value assessment against pertinent investment risks
and ongoing surveillance and risk management. All of the principals who founded
the firm in 1988 remain affiliated with the firm. BlackRock manages a set of
private investment funds, with Kelso as its advisor, with over $3.9 billion in
aggregate initial capital. These funds invest primarily in public and private
debt obligations and, to a lesser extent, in mezzanine, private equity and other
special situation investments.
The Kelso Principals have an average tenure of over fifteen years at Kelso. Over
the past 24 years Kelso has made more than 80 private equity investments
totaling over $3.4 billion through seven investment partnerships, spanning
multiple business cycles and widely varying conditions in the debt and equity
markets. Most of these investments have been made in middle-market companies.
The firm has consistently realized attractive returns on its portfolio of
investments. Kelso has structured and placed on behalf of its portfolio
companies nearly $400 million in privately placed junior debt securities.
Deal Sourcing Capability. We identify potential investments both through active
origination and due diligence and through dialogue with numerous management
teams, members of the financial community and potential corporate partners with
whom the Advisor's investment professionals have relationships. The Advisor's
investment professionals also have a broad network of contacts within the
investment, commercial banking, private equity and investment management
communities. We expect that these contacts will refer investment opportunities
to us. The network of contacts of BlackRock's investment professionals and the
Kelso Principals are an additional source of potential investments to us. We
also expect to generate investment opportunities from accountants, consultants
and lawyers with whom the Advisor's and BlackRock's investment professionals and
the Kelso Principals have relationships, as well as the management teams of
Kelso portfolio companies and other companies. In addition, we will have access
to investment opportunities generated through the network of BlackRock clients,
including regional banks and other financial institutions.
Operating Expertise. BlackRock has developed a dedicated professional staff,
systems, software and procedures necessary for overseeing tax reporting, trading
and other administrative, accounting and portfolio and regulatory compliance
functions on behalf of its clients. We benefit from the existing infrastructure
and administrative capabilities of BlackRock. The BlackRock organization has
over 18 years of experience managing closed-end products and, as of December 31,
2005, advised a closed-end family of 55 active funds with approximately $17.6
billion in assets, and 9 unregistered high yield funds with approximately $3.9
billion in assets.
Disciplined, Value-Oriented Investment Philosophy with a Focus on Preservation
of Capital. We focus on the risk/reward profile of each prospective portfolio
company, seeking to minimize the risk of capital loss without foregoing
potential for capital appreciation. In making investment decisions, the Advisor
employs a disciplined and selective review process that focuses on, among other
things, a thorough analysis of the underlying issuer's business and the key
drivers of that business, as well as an assessment of the legal and economic
features of each particular investment. As part
5
of its review process, the Advisor draws on the industry expertise of its
investment professionals, as well as on that of the investment professionals of
BlackRock and the Kelso Principals.
Versatile Transaction Structuring. The collective expertise and experience of
the Advisor's investment professionals enables them to identify, assess and
structure investments that are appropriate for us across all levels of a
company's capital structure and to manage potential risk and return at all
stages of the economic cycle. We are not subject to many of the regulatory
limitations that govern traditional lending institutions such as banks. As a
result, we expect to be able to be flexible in selecting and structuring our
investments. This approach should enable us to identify attractive investment
opportunities throughout the economic cycle so that we can make investments
consistent with our stated objective, even during turbulent periods in the
capital markets.
Attractive Fund Structure. Unlike typical private equity and mezzanine funds, we
are not subject to capital commitment expirations. The terms of typical private
equity or mezzanine funds usually stipulate that their capital, together with
any capital gains on such investment, can only be invested once and must be
returned to investors after a pre-agreed time period. These provisions often
force private equity and mezzanine funds to seek investments that are likely to
satisfy these timing constraints, resulting in diminished investment
opportunities and potentially lower overall return to investors. Our anticipated
flexibility to make investments with a long-term view and without the capital
return requirements of traditional private equity or mezzanine funds should
provide us with excellent investment opportunities.
OPERATING AND REGULATORY STRUCTURE
Our investment activities are managed by BlackRock Kelso Capital Advisors and
supervised by our Board of Directors, a majority of whom are independent of the
Advisor, BlackRock, the Kelso Principals and their respective affiliates.
BlackRock Kelso Capital Advisors is an investment adviser that is registered
under the Investment Advisers Act of 1940. Under our investment management
agreement, we have agreed to pay BlackRock Kelso Capital Advisors an annual base
management fee based on our total assets, as well as an incentive fee based on
our performance. The investment management agreement also provides that we will
reimburse the Advisor for costs and expenses incurred by the Advisor for office
space rental, office equipment and utilities allocable to the performance by the
Advisor of its duties under that agreement, as well as any costs and expenses
incurred by the Advisor relating to any non-investment advisory, administrative
or operating services provided by the Advisor to us.
As a BDC, we are required to comply with certain regulatory requirements. For
example, to the extent provided by the 1940 Act, we will not invest in any
private company in which BlackRock, Kelso, or any of their affiliates, or any of
the unregistered investment funds managed by them, holds an existing investment.
Also, while we are permitted to finance investments using debt, our ability to
use debt is limited in certain significant respects. We intend to elect to be
treated for federal income tax purposes as a RIC under Subchapter M of the Code.
PORTFOLIO COMPOSITION
We commenced operations on July 25, 2005, when we received approximately $529.3
million in total net proceeds from the private placement of our common stock.
During our initial period of operations, our portfolio was invested primarily in
short-term investments and cash equivalents. As we continue to invest the net
proceeds from our private placement in longer-term investments, the amounts of
our short-term investments and cash equivalents will decline, and we expect to
generate additional income at rates higher than those we received on our
investments during this initial period, although there can be no assurance that
we will achieve this objective. At December 31, 2005, our portfolio was invested
25% in senior secured loans, 1% in subordinated debt/corporate notes, 1% in
publicly traded, floating rate closed-end funds, less than 1% in common
stock/warrants and 73% in short-term investments (including cash equivalents).
At December 31, 2005, all of our senior secured loans were supported by first,
second or third priority liens in our favor on collateral consisting of assets
or stock of the portfolio company and/or its affiliates.
We will generally seek to invest in companies that generate positive cash flows
in a broad variety of industries. Although we may invest in all segments of the
capital structure, the Advisor seeks to create a portfolio consisting primarily
of various fixed-income securities and obligations of U.S. private middle-market
companies. We may also invest in other types of securities and obligations,
including common and preferred equity, options and warrants, credit derivatives,
6
high yield bonds, distressed debt and other structured securities. Up to 30% of
our assets may be invested opportunistically in investments other than those
issued by "eligible portfolio companies," as defined in the 1940 Act.
We may invest, to the extent permitted by law, in the securities and instruments
of other investment companies, including private funds.
To the extent provided by the 1940 Act, we will not invest in any private
company in which BlackRock, Kelso, or any of their affiliates, or any of the
unregistered investment funds managed by them, holds an existing investment. We
may, however, co-invest on a concurrent basis with other affiliates of BlackRock
or Kelso, subject to compliance with applicable allocation procedures.
INVESTMENT SELECTION
In managing BlackRock Kelso, the Advisor utilizes a similar value oriented
philosophy to that used by the investment professionals of BlackRock and to
those used by the Kelso Principals serving on the Investment Committee in
managing other investment accounts and commits its resources to managing
downside exposure.
PROSPECTIVE PORTFOLIO COMPANY CHARACTERISTICS
The Advisor has identified several criteria that it believes are important in
identifying and investing in prospective portfolio companies. These criteria
provide general guidelines for the Advisor's investment decisions on our behalf;
however, each prospective portfolio company may fail to meet one or more of
these criteria. Generally, the Advisor seeks to utilize its access to
information generated by its investment professionals and those of its
affiliates to identify investment candidates and to structure investments
quickly and effectively.
Value Orientation/Positive Cash Flow. The Advisor's investment philosophy places
a premium on fundamental analysis from an investor's perspective and has a
distinct value orientation. The Advisor focuses on companies in which it can
invest at relatively low multiples of operating cash flow and that are
profitable at the time of investment on an operating cash flow basis. Typically,
the Advisor does not invest in start-up companies or companies having
speculative business plans.
Experienced Management. The Advisor generally requires that portfolio companies
have an experienced management team. The Advisor also generally requires
portfolio companies to have in place proper incentives to induce management to
succeed and to act in concert with our interests as investors, which may include
having significant equity interests.
Strong Competitive Position in Industry. The Advisor seeks to invest in
companies that have strong market positions within their respective markets or
market niches and are well positioned to capitalize on growth opportunities. The
Advisor seeks companies that demonstrate significant competitive advantages
versus their competitors, which should help to protect their market position and
profitability.
Exit Strategy. The Advisor seeks to invest in companies that it believes will
provide a steady stream of cash flow to repay loans and/or build equity value.
With respect to loans and debt securities, the Advisor expects that such
internally generated cash flow, leading to the payment of interest on, and the
repayment of the principal of, our investments will be a key means by which we
exit these investments over time. In addition, the Advisor also seeks to invest
in companies whose business models and expected future cash flows offer
attractive exit possibilities. These companies include candidates for strategic
acquisition by other industry participants and companies that may repay our
investments through an initial public offering of common stock or another
capital market transaction. With respect to our equity investments, the Advisor
will look to exit such investments via repurchases by the portfolio company,
public offerings and sales pursuant to mergers and acquisitions transactions.
Liquidation Value of Assets. The prospective liquidation value of the assets, if
any, collateralizing loans in which we invest are an important factor in the
Advisor's credit analysis. The Advisor emphasizes both tangible assets, such as
accounts receivable, inventory, equipment and real estate, and intangible
assets, such as intellectual property, customer lists, networks and databases.
7
DUE DILIGENCE
The Advisor on our behalf conducts diligence on prospective portfolio companies.
The Advisor's due diligence typically includes:
o review of historical and prospective financial information;
o review of public information;
o interviews with management, employees, customers and vendors of the
potential portfolio company;
o review of financing documents and other material contracts;
o on-site visits;
o background checks; and
o research relating to the company's management, industry, markets,
products, services and competitors.
One or more of the foregoing may not be appropriate and therefore not
performed with respect to any particular prospective portfolio company. To
the extent we are not the sole investor with respect to a particular
prospective portfolio company transaction, we may rely on others investing in
the same transaction to perform one or more of the foregoing.
INVESTMENT STRUCTURE
Once the Advisor has determined that a prospective portfolio company is
suitable for investment, the Advisor works with the management of that
company and its other capital providers, including senior, junior, and equity
capital providers, to structure an investment. The Advisor negotiates among
these parties to agree on how our investment is expected to perform relative
to the other capital in the portfolio company's capital structure.
The Advisor invests a portion of our assets in senior secured loans. These
senior secured loans generally have terms of three to ten years and in some
cases provide for deferred interest in the first few years of the term of the
loan. Senior secured loans are supported by first, second or third priority
liens in our favor on all or a portion of the assets or stock of the
portfolio company or on assets or stock of affiliates of the portfolio
company. Although we may seek to dispose of such collateral in the event of
default, we may be delayed in exercising such rights or our rights may be
contested by others. In addition, the value of the collateral may deteriorate
so that the collateral is insufficient for us to recover our investment in
the event of default. In the current environment, the Advisor expects that
the interest rate on our senior secured loans generally will range between 2%
and 10% over the London Interbank Offer Rate, or LIBOR. No assurance can be
given that these or any other returns, however, can be achieved.
The Advisor may invest a portion of our assets in junior, subordinated and/or
unsecured loans, which usually rank subordinate in priority of payment to senior
debt, such as senior bank debt, and are often unsecured. However, such loans
rank senior to common and preferred equity in a borrower's capital structure.
Typically, such loans have elements of both debt and equity instruments,
offering the fixed returns in the form of interest payments associated with
senior debt, while providing lenders an opportunity to participate in the
capital appreciation of a borrower, if any, through an equity interest. This
equity interest could take the form of warrants, options or an equity
co-investment with the transaction sponsor or management of the portfolio
company. Such equity interests may include a "put" feature, which permits the
holder to sell its equity interest back to the borrower at a price determined
through an agreed formula. Due to their higher risk profile and often less
restrictive covenants as compared to senior loans, such loans generally earn a
higher return than senior secured loans. We believe that such loans offer an
attractive alternative investment opportunity.
The availability of mezzanine investments has waned in recent years as
borrowers have increasingly turned to second-lien financing as an alternative
to unsecured mezzanine financing to fund leveraged buyouts, recapitalizations
and other transactions. Borrowers have found second-lien financing to result
in a lower overall cost of funds than mezzanine
8
financing, in many cases without having to offer any equity inducement to
lenders to make the loan or any call protection to lenders other than perhaps a
nominal premium. Accordingly, if current market conditions continue, the Advisor
does not expect to invest a substantial portion of our assets in mezzanine
investments.
In the event that opportunities for mezzanine investments arise, the Advisor
will structure them primarily as unsecured, subordinated obligations that
provide for relatively high, fixed interest rates that will provide us with
significant current interest income. These loans typically will have
interest-only payments in the early years, with amortization of principal
deferred to the later years. In some cases, we may enter into loans that, by
their terms, convert into equity or additional debt securities or defer
payments of cash interest for the first few years after investment. Also, in
some cases our loans will be collateralized by a subordinated lien on some or
all of the assets of the borrower. Typically, these loans will have
maturities of five to ten years. In the current environment, the Advisor
generally targets a total return of 12% to 20%, including capital gains on
equity components, for our mezzanine investments. No assurance can be given
that these or any other returns, however, can be achieved.
The Advisor may structure equity investments as common and preferred stock,
including convertible, participating or payment-in-kind preferred stock.
Equity investments may be paired with debt investments in the form of
convertible debt or equity co-investments with the transaction sponsor or
management of the portfolio company.
The Advisor tailors the terms of our investment to the circumstances of the
transaction and the prospective portfolio company, negotiating a structure
that seeks to protect our rights and to manage our risk while creating
incentives for the portfolio company to achieve its business plan and improve
its profitability. For example, where the Advisor structures a debt
investment, it will seek to limit the downside potential of our investments
by means of one or more of the following actions:
o requiring a total return on investment (including both interest and
potential equity appreciation) that compensates us adequately for its
credit risk;
o incorporating "put" rights and call protection into the investment
structure; and
o negotiating covenants that afford the portfolio companies as much
flexibility in managing their businesses as possible, consistent with
preservation of our capital. Such restrictions may include affirmative and
negative covenants, default penalties, lien protection, change of control
provisions and board rights, including either observation or participation
rights.
We expect to hold most of our debt investments to maturity or repayment, but
will sell investments earlier if otherwise appropriate.
Our fixed-income investments may include equity features, such as warrants or
options to buy a minority interest in the common stock of the portfolio company.
Any warrants received with debt securities generally will require only a nominal
cost to exercise, and thus, if a portfolio company appreciates in value, we may
achieve additional investment return from this equity interest. The Advisor may
structure the warrants to provide provisions protecting our rights as a
minority-interest holder, as well as puts, which are rights to sell such
securities back to the company, upon the occurrence of specified events. In many
cases, we will also obtain registration rights in connection with these equity
interests. We seek to achieve additional investment return from the appreciation
and sale of these warrants.
In an effort to increase returns and the number of loans made, we may in the
future seek to securitize a portion of our loans. To securitize loans, we would
contribute a pool of loans to a wholly-owned subsidiary and sell investment
grade fixed income securities issued by such subsidiary to investors willing to
accept a lower interest rate to invest in investment-grade securities of loan
pools. Our retained interest in the subsidiary would consequently be subject to
first loss on the loans in the pool. We may use the proceeds of such sales to
pay down bank debt, to fund additional investments or for other corporate
purposes.
9
MANAGERIAL ASSISTANCE
As a business development company, we offer, and must provide upon request,
managerial assistance to our portfolio companies. This assistance could involve,
among other things, participating in board and management meetings, consulting
with and advising officers of portfolio companies and providing other
organizational and financial guidance or exercising strategic or managerial
influence over such companies. We may receive fees for these services. The
Advisor will provide managerial assistance on our behalf to those portfolio
companies that request this assistance. Employees of the Advisor have experience
providing managerial assistance to private operating companies like our
portfolio companies, and such assistance has tended to be related to board
representation and to strategic and financing transactions. The Advisor will not
receive any direct compensation from our portfolio companies for providing
managerial assistance.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
The Advisor monitors our portfolio companies on an ongoing basis. The Advisor
monitors the financial trends of each portfolio company to determine if it is
meeting its business plans and to assess the appropriate course of action for
each company.
The Advisor has several methods of evaluating and monitoring the performance and
fair value of our investments, which may include the following and other
methods:
o Assessment of success of the portfolio company in adhering to its business
plan and compliance with covenants;
o Periodic and regular contact with portfolio company management and, if
appropriate, the financial or strategic sponsor, to discuss financial
position, requirements and accomplishments;
o Comparisons to other companies in the industry;
o Attendance at and participation in board meetings;
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies; and
o Retention of third-party valuation firms to assist in determination of
fair value.
COMPETITION
Our primary competitors to provide financing to middle market companies include
public and private funds, commercial and investment banks, commercial financing
companies, business development companies, insurance companies and, to the
extent they provide an alternative form of financing, private equity funds.
Additionally, because competition for investment opportunities generally has
increased among alternative investment vehicles, such as hedge funds, those
entities have begun to invest in areas they have not traditionally invested in,
including investments in middle-market companies. As a result of these new
entrants, competition for investment opportunities at middle-market companies
has intensified. Many of our existing and potential competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than we do. For example, some competitors may have a lower
cost of funds and access to funding sources that are not available to us. In
addition, some competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety of investments
and establish more relationships than us. Furthermore, many of our competitors
are not subject to the regulatory restrictions that the 1940 Act imposes on us
as a business development company or the restrictions that the Code will impose
on us as a regulated investment company. We expect to use the industry
information of the investment professionals of the Advisor and BlackRock and of
the Kelso Principals to assess investment risks and determine appropriate
pricing for our investments in portfolio companies. In addition, we believe that
the relationships of these individuals, and of BlackRock and Kelso, enable us to
learn about, and compete effectively for, financing opportunities with
attractive middle-market companies.
10
STAFFING
We do not currently have any employees and do not expect to have any employees.
Services necessary for our business are provided by individuals who are
employees of the Advisor or the Administrator, pursuant to the terms of the
investment management agreement and the administration agreement. Each of our
executive officers is an employee of the Advisor or the Administrator. Our
executive officers are also executive officers of the Advisor. Our day-to-day
investment operations are managed by the Advisor. The Advisor has 12 investment
professionals who focus on origination and transaction development and
monitoring of our investments, and expects to hire additional professionals in
the future. We reimburse the Advisor for costs and expenses incurred by the
Advisor for office space rental, office equipment and utilities allocable to the
performance by the Advisor of its duties under the investment management
agreement, as well as any costs and expenses incurred by the Advisor relating to
any non-investment advisory, administrative or operating services provided by
the Advisor to us. In addition, we reimburse the Administrator for our allocable
portion of expenses it incurs in performing its obligations under the
administration agreement, including rent and our allocable portion of the cost
of certain of our officers and their respective staffs.
REGULATION
We are a business development company under the 1940 Act. The 1940 Act contains
prohibitions and restrictions related to transactions between business
development companies and their affiliates (including any investment advisers or
sub-advisers), principal underwriters and affiliates of those affiliates and
requires that a majority of the directors be persons other than "interested
persons," as that term is defined in the 1940 Act. In addition, the 1940 Act
provides that we may not change the nature of our business so as to cease to be,
or to withdraw our election as, a business development company unless approved
by holders of a majority of our outstanding voting securities.
Under the 1940 Act, a business development company may not acquire any assets
other than "qualifying assets," unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the company's total assets. This
results from the definition of "eligible portfolio company" in the 1940 Act,
which in part looks to whether a company has outstanding any securities against
which margin credit may be extended ("marginable securities"). Marginable
securities are any class of securities with respect to which a member of a
national securities exchange, broker or dealer may extend or maintain credit to
or for a customer pursuant to rules and regulations adopted by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under
Section 7 of the Securities Exchange Act of 1934 (the "Exchange Act").
We will invest in private companies that may have outstanding privately placed
debt securities (in addition to the securities that we acquire) and we intend to
treat such investments as qualifying assets. The Advisor believes that these
companies should not be deemed to have any outstanding marginable securities for
purposes of the 1940 Act's BDC provisions. Furthermore, extensions of commercial
credit such as bank loans, leases and receivables factoring are not securities
for purposes of the Exchange Act, which provides the authority for the Federal
Reserve Board's margin regulations, and accordingly the many private
middle-market companies that have only such obligations outstanding should not
be treated as having any outstanding marginable securities.
In 1998, the Federal Reserve Board amended Regulation T to include within the
definition of marginable securities any "non-equity security." Non-equity
securities include debt securities. If applied literally, this change would mean
that any company that has issued any debt securities would not be an eligible
portfolio company and we would be severely limited in our ability to pursue our
strategy.
The Advisor does not believe that this result was intended by the Federal
Reserve Board when it amended Regulation T in 1998 or contemplated by Congress
when it enacted the provisions of the 1940 Act relating to business development
companies, and the Advisor does not believe that these provisions should be
interpreted as causing a private company that had outstanding debt securities to
be deemed to have outstanding marginable securities, notwithstanding the literal
language of the 1940 Act and Regulation T. The SEC and the courts may have a
different interpretation of this provision and, accordingly, there can be no
assurance that we will be able to pursue our investment objective through
privately placed securities.
A decision by the SEC or a court that conflicts with the Advisor's
interpretation would have a material adverse effect on our business. For
example, such a decision would make it more difficult for the Advisor to
identify investment
11
opportunities and may require us to change our investment objective or
policies, or conceivably seek shareholder approval to cease to be regulated
as a business development company. Such a decision also may require that we
dispose of investments made based on the Advisor's interpretation. Disposing
of such investments could have a material adverse effect on us and our
shareholders. We may need to dispose of such investments quickly, which would
make it difficult to dispose of such investments on favorable terms. Because
these types of investments will generally be illiquid, we may have difficulty
in finding a buyer for these investments and, if we do, we may have to sell
them at a substantial loss.
On November 1, 2004, the SEC proposed for comment two new rules under the 1940
Act that are designed to realign the definition of eligible portfolio company
set forth in the 1940 Act, and the investment activities of BDCs, with their
original purpose by (1) defining eligible portfolio company with reference to
whether an issuer has any class of securities listed on a national securities
exchange or on an automated interdealer quotation system of a national
securities association ("NASDAQ") and (2) permitting BDCs to make certain
additional ("follow-on") investments in those issuers even after they list their
securities on a national securities exchange or on NASDAQ. The proposed rules
are intended to expand the definition of eligible portfolio company in a manner
that would promote the flow of capital to small, developing and financially
troubled companies. We cannot assure you that these rules, or related rules
arising out of the comment process, will be approved by the SEC.
Until the SEC or its staff has issued final rules with respect to the issue
discussed above, we will continue to monitor this issue closely, and may be
required to adjust our investment focus to comply with and/or take advantage of
any future administrative position, judicial decision or legislative action.
The 1940 Act limits our ability to borrow money or issue debt securities or
preferred stock so that the resulting leverage does not exceed our net assets
attributable to common shares. Compliance with these requirements may
unfavorably limit our investment opportunities and reduce our ability in
comparison to other companies to profit from favorable spreads between the rates
at which we can borrow and the rates at which we can lend.
Under the 1940 Act, we cannot, with minor exceptions, sell securities to, buy
securities from, or lend money to, certain controlling or closely affiliated
persons or companies; e.g., our directors, officers and employees or the
directors, officers and employees of the Advisor, or members of the Investment
Committee, or any company that any of these people control. Any such
transactions would be subject to prior SEC approval, and we have no plans to
invest in these affiliates. If we choose to invest in companies that the Advisor
has other associations with, such as a company in which BlackRock or Kelso has a
noncontrolling minority equity investment, or a company to which a BlackRock or
Kelso affiliate has made a loan or loans, such decision would be subject to
approval by our Board of Directors, including a majority of the directors that
are not "interested persons."
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in privately
negotiated transactions, we rarely use brokers in the normal course of business.
In those cases where the Advisor does use a broker on our behalf, the Advisor
does not execute transactions through any particular broker or dealer, but will
seek to obtain the best net results for us, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution, and operational facilities of the firm and the
firm's risk and skill in positioning blocks of securities. While the Advisor
generally seeks reasonably competitive execution costs, it may not necessarily
pay the lowest spread or commission available. Subject to applicable legal
requirements, the Advisor may select a broker based partly upon brokerage or
research services provided to it. In return for such services, we may pay a
higher commission than other brokers would charge if the Advisor determines in
good faith that such commission is reasonable in relation to the services
provided. For the period July 25, 2005 (inception of operations) through
December 31, 2005, we paid $13,182 in brokerage commissions related to purchases
of closed-end funds.
ITEM 1A. RISK FACTORS
WE ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY.
We commenced operations on July 25, 2005 and therefore have a limited operating
history. We are subject to the business risks and uncertainties associated with
any new business, including the risk that we will not achieve our investment
objective and that our net asset value could decline substantially.
12
WE OPERATE IN A HIGHLY COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES.
A number of entities compete with us to make the types of investments that we
plan to make in middle market companies. We compete with other business
development companies, public and private funds, commercial and investment
banks, commercial financing companies, insurance companies, high yield
investors, hedge funds, and, to the extent they provide an alternative form of
financing, private equity funds. Many of our competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than we do. Some competitors may have a lower cost of funds and access
to funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships than us. Furthermore, many of our competitors are not subject to
the regulatory restrictions that the 1940 Act will impose on us as a BDC. We
cannot assure you that the competitive pressures we face will not have a
material adverse effect on our business, financial condition and results of
operations. Also, as a result of this competition, we may not be able to take
advantage of attractive investment opportunities from time to time, and we
cannot assure you that we will be able to identify and make investments that
meet our investment objectives.
We will not seek to compete primarily based on the interest rates we will offer
and we believe that some of our competitors may make loans with interest rates
that will be comparable to or lower than the rates we offer.
We may lose investment opportunities if we do not match our competitors'
pricing, terms and structure. If we match our competitors' pricing, terms and
structure, we may experience decreased net interest income and increased risk of
credit loss. As a result of operating in such a competitive environment, we may
make investments that are on better terms to our portfolio companies than what
we may have originally anticipated, which may impact our return on these
investments.
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL DEPEND ON OUR ABILITY TO
MANAGE FUTURE GROWTH EFFECTIVELY.
Our ability to achieve our investment objective will depend on our ability to
manage our business, which will depend, in turn, on the ability of the Advisor
to identify, invest in and monitor companies that meet our investment criteria.
Accomplishing this result largely will be a function of the Advisor's investment
process and, in conjunction with the Administrator, its ability to provide
competent, attentive and efficient services to us.
The members of the Investment Committee will have substantial responsibilities
to other clients of the Advisor's affiliates in addition to their activities on
our behalf. The members of the Investment Committee and the investment
professionals dedicated primarily to us may also be required to provide
managerial assistance to our portfolio companies. These demands on their time
may distract them or slow our rate of investment. Any failure to manage our
business effectively could have a material adverse effect on our business,
financial condition and results of operations.
REGULATIONS GOVERNING OUR OPERATION AS A BDC MAY REDUCE OUR OPERATING
FLEXIBILITY.
Please refer to the section on "Regulation" on pages 11 and 12 for a discussion
of business development company limitations.
WE MAY NOT REPLICATE THE SUCCESS OF BLACKROCK'S OR KELSO'S INVESTMENT FUNDS.
We are a different vehicle from any investment fund managed by either BlackRock
or the Kelso Principals. Our investment strategies differ from those of private
funds that are or have been managed by BlackRock, the Kelso Principals or their
respective affiliates. To the extent provided by the 1940 Act, we will not
invest in any private company in which BlackRock, Kelso, or any of their
affiliates, or any of the unregistered investment funds managed by them, holds
an existing investment. This may adversely affect the pace at which we make
investments. We can provide no assurance that we will replicate the historical
or future performance of BlackRock's or Kelso's private investment funds and our
investment returns may be substantially lower than the returns achieved by those
private funds. As a business development company, we are subject to certain
investment restrictions that do not apply to BlackRock's or Kelso's private
investment funds.
13
MANY OF OUR PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS DETERMINED IN
GOOD FAITH BY OUR BOARD OF DIRECTORS. AS A RESULT, THERE WILL BE UNCERTAINTY AS
TO THE VALUE OF OUR PORTFOLIO INVESTMENTS.
Many of our portfolio investments are in the form of securities that are not
publicly traded. The fair value of securities and other investments that are not
publicly traded may not be readily determinable. We value these securities at
least quarterly at fair value as determined in good faith by our Board of
Directors with the assistance of the Advisor and, to the extent determined by
the Audit Committee of our Board of Directors, one or more independent valuation
firms. However, because fair valuations, and particularly fair valuations of
private securities and private companies, are inherently uncertain, may
fluctuate over short periods of time and are often based to a large extent on
estimates, comparisons and qualitative evaluations of private information, our
determinations of fair value may differ materially from the values that would
have been determined if a ready market for these securities existed. This could
make it more difficult for investors to accurately value our portfolio
investments and could lead to under-valuation or over-valuation of our common
shares.
THE LACK OF LIQUIDITY IN OUR INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.
We will generally make investments in private companies. Many of these
securities will be subject to legal and other restrictions on resale or will
otherwise be less liquid than publicly traded securities. The illiquidity of
these investments may make it difficult for us to sell such investments if the
need arises. In addition, if we are required to liquidate all or a portion of
our portfolio quickly, we may realize significantly less than the value at which
we had previously recorded such investments. In addition, we may face other
restrictions on our ability to liquidate an investment in a portfolio company to
the extent that we have material non-public information regarding such portfolio
company.
IF WE DO NOT ACHIEVE THE PUBLIC MARKET EVENT ON OR PRIOR TO THE FIFTH
ANNIVERSARY OF OUR INCEPTION, WE COULD BE SUBJECT TO TERMINATION ON THE TENTH
ANNIVERSARY OF OUR INCEPTION, WHICH COULD CAUSE SHAREHOLDERS TO INCUR A LOSS OR
A LOWER RETURN ON THEIR INVESTMENT.
We expect to seek to complete an initial public offering of our common shares
registered under the Securities Act of 1933 (the "Securities Act") and list such
common shares on a national securities exchange (collectively, the "Public
Market Event") on or prior to the fifth anniversary of our inception. There can
be no assurance that we will achieve this objective. In the event we fail to
effect the Public Market Event, our Articles of Incorporation provide that we
could be subject to termination on the tenth anniversary of our inception and
accordingly would be required to liquidate our portfolio of investments, wind up
our business and affairs, and be dissolved. The proceeds from the liquidation of
our portfolio, net of costs and expenses of winding up our business and affairs,
would be distributed to our shareholders, which could result in shareholders
receiving less than their original investment or less than the most recent net
asset value of our common shares at the time. As a result, shareholders could
incur a loss or a lower return on their investment.
WE MAY BORROW MONEY, WHICH MAY MAGNIFY THE POTENTIAL FOR GAIN OR LOSS ON AMOUNTS
INVESTED AND MAY INCREASE THE RISK OF INVESTING WITH US.
We may borrow money or issue debt securities or preferred stock to leverage our
capital structure. If we do so:
o Our common shares will be exposed to incremental risk of loss. In these
circumstances, a decrease in the value of our investments would have a greater
negative impact on the value of our common shares than if we did not use
leverage.
o Adverse changes in interest rates could reduce or eliminate the
incremental income we expect to make with the proceeds of any leverage.
o Our ability to pay dividends on our common shares will be restricted if
our asset coverage ratio is not at least 200% and any amounts used to service
indebtedness or preferred stock would not be available for such dividends.
o It is likely that such securities will be governed by an indenture or
other instrument containing covenants restricting our operating flexibility.
o We, and indirectly our shareholders, will bear the cost of issuing and
paying interest or dividends on such securities.
14
o Any convertible or exchangeable securities that we issue may have rights,
preferences and privileges more favorable than those of our common shares.
WE MAKE LOANS TO AND INVEST IN PRIVATE MIDDLE-MARKET COMPANIES, WHICH MAY
DEFAULT ON THEIR LOANS, THEREBY REDUCING OR ELIMINATING THE RETURN ON OUR
INVESTMENTS.
Investment in private middle-market companies involves a number of significant
risks, including:
o These companies may have limited financial resources and may be unable to
meet their obligations under their debt securities that we hold, which may be
accompanied by a deterioration in the value of any collateral.
o They typically have shorter operating histories, narrower product lines
and smaller market shares than larger businesses, which tend to render them more
vulnerable to competitors' actions and market conditions, as well as general
economic downturns.
o They are more likely to depend on the management talents and efforts of a
small group of persons; therefore, the death, disability, resignation or
termination of one or more of these persons could have a material adverse impact
on the portfolio company and, in turn, on us.
o They generally have less predictable operating results, may from time to
time be parties to litigation, may be engaged in rapidly changing businesses
with products subject to a substantial risk of obsolescence, and may require
substantial additional capital to support their operations, finance expansion or
maintain their competitive position.
o They may cease to be treated as private companies for purposes of the
regulatory restrictions applicable to us, in which case we may not be able to
invest additional amounts in them.
o Little public information exists about these companies. The greater
difficulty in making a fully informed investment decision raises the risk of
misjudging the credit quality of the company, and we may lose money on our
investments.
ECONOMIC DOWNTURNS OR RECESSIONS COULD IMPAIR OUR PORTFOLIO COMPANIES' ABILITY
TO REPAY OUR LOANS, HARM OUR OPERATING RESULTS AND REDUCE OUR VOLUME OF NEW
LOANS.
Many of our portfolio companies may be susceptible to economic slowdowns or
recessions and may be unable to repay loans during these periods. Therefore, our
non-performing assets are likely to increase and the value of our portfolio is
likely to decrease during these periods. Adverse economic conditions also may
decrease the value of collateral securing some of our loans and the value of our
equity investments. Economic slowdowns or recessions could lead to financial
losses in our portfolio and a decrease in revenues, net income and assets.
Unfavorable economic conditions also could increase funding costs, limit access
to the capital markets or result in a decision by lenders not to extend credit
to us. These events could prevent us from increasing investments and harm our
operating results.
A portfolio company's failure to satisfy financial or operating covenants could
lead to defaults and, potentially, termination of its loans and foreclosure on
its secured assets, which could trigger cross-defaults under other agreements
and jeopardize the portfolio company's ability to meet its obligations under the
debt securities that we hold. We may need to incur additional expenses to seek
recovery upon default or to negotiate new terms with a defaulting portfolio
company. In addition, if one of our portfolio companies were to go bankrupt,
even though we may have structured our interest as senior debt, depending on the
facts and circumstances, including the extent to which we actually provided
significant managerial assistance to that portfolio company, a bankruptcy court
might recharacterize our debt holding and subordinate all or a portion of our
claim to that of other creditors.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH CHANGES IN INTEREST RATES.
Because a substantial portion of our assets will consist of loans and debt
securities, the net asset value of our common shares will fluctuate with changes
in interest rates, as well as with changes in the prices of the securities we
own caused by other factors. These fluctuations are likely to be greater when we
are using financial leverage.
15
IF WE FAIL TO QUALIFY AS A REGULATED INVESTMENT COMPANY, WE WILL HAVE TO PAY
CORPORATE-LEVEL TAXES ON OUR INCOME AND OUR INCOME AVAILABLE FOR DISTRIBUTION
WOULD BE REDUCED.
To maintain our qualification as a regulated investment company under the Code,
which is required in order for us to distribute our income without tax at the
corporate level, we must meet certain income source, asset diversification and
annual distribution requirements. Satisfying these requirements may require us
to take actions we would not otherwise take, such as selling investments at
unattractive prices to satisfy diversification, distribution or source of income
requirements. In addition, while we are authorized to borrow funds in order to
make distributions, under the 1940 Act we are not permitted to make
distributions to shareholders while our debt obligations and other senior
securities are outstanding unless certain "asset coverage" tests are met. If we
fail to qualify as a regulated investment company for any reason and become or
remain subject to corporate income tax, the resulting corporate taxes could
substantially reduce our net assets, the amount of income available for
distribution and the amount of our distributions. Such a failure would have a
material adverse effect on us and our shareholders.
WE MAY HAVE DIFFICULTY PAYING OUR REQUIRED DISTRIBUTIONS IF WE RECOGNIZE INCOME
BEFORE OR WITHOUT RECEIVING CASH REPRESENTING SUCH INCOME.
For U.S. federal income tax purposes, we will include in income certain amounts
that we have not yet received in cash, such as original issue discount, which
may arise if we invest in zero coupon securities, deferred interest securities
or certain other securities, or if we receive warrants in connection with the
making of a loan or possibly in other circumstances. Such original issue
discount, which could but is not expected to be significant relative to our
overall investment activities, generally will be included in income before we
receive any corresponding cash payments. We also may be required to include in
income certain other amounts that we will not receive in cash.
Since in certain cases we may recognize income before or without receiving cash
representing such income, we may have difficulty making distributions in the
amounts necessary to satisfy the requirements for maintaining regulated
investment company status and for avoiding income and excise taxes. Accordingly,
we may have to sell some of our investments at times the Advisor would not
consider advantageous, raise additional debt or equity capital or reduce new
investment originations to meet these distribution requirements. If we are not
able to obtain cash from other sources, we may fail to qualify as a regulated
investment company and thus be subject to corporate-level income tax. Such a
failure would have a material adverse effect on us and our shareholders.
THERE ARE SIGNIFICANT POTENTIAL CONFLICTS OF INTEREST THAT COULD IMPACT OUR
INVESTMENT RETURNS.
The Advisor, its affiliates or their officers and employees serve or may serve
as officers, directors or principals of entities that operate in the same or a
related line of business or of investment funds managed by affiliates of the
Advisor. Accordingly, these individuals may have obligations to investors in
those entities or funds, the fulfillment of which might not be in our best
interests or the best interests of our shareholders.
The Advisor and its affiliates have procedures and policies in place designed to
manage potential conflicts of interest that may arise from time to time between
the Advisor's fiduciary obligations to us and their similar fiduciary
obligations to other clients so that, for example, investment opportunities are
allocated in a fair and equitable manner among us and such other clients. An
investment opportunity that is suitable for multiple clients of the Advisor's
affiliates may not be capable of being shared among some or all of such clients
due to the limited scale of the opportunity or other factors, including
regulatory restrictions imposed by the 1940 Act. There can be no assurance that
the Advisor's or its affiliates' efforts to allocate any particular investment
opportunity fairly among all clients for whom such opportunity is appropriate
will result in an allocation of all or part of such opportunity to us. Not all
conflicts of interest can be expected to be resolved in our favor.
Some individuals may be employed both by the Advisor and by another entity that
has other clients for whom a particular investment opportunity may be
appropriate. When the Advisor can determine the capacity in which a dual
employee obtained an investment opportunity, the opportunity will be offered
first to the clients of the entity through which the opportunity arose. Where
the capacity cannot readily be determined, the Advisor will seek to allocate the
opportunity in accordance with the principles articulated above.
16
RESTRICTIONS ON THE ABILITY OF INVESTMENT PROFESSIONALS OF BLACKROCK AND THE
KELSO PRINCIPALS TO REFER POTENTIAL INVESTMENTS TO US COULD REDUCE THE VOLUME OF
OUR INVESTMENT OPPORTUNITIES.
We expect that the Kelso Principals, certain of whom are affiliated with the
Advisor but have no individual contractual duty to the Advisor or to us, will be
a source of investment opportunities. However, investors should be aware that
the Kelso Principals are subject to the terms and conditions of the agreements
governing the private investment partnerships managed by Kelso, which include
restrictions on the non-Kelso fund activities of Kelso and the Kelso Principals.
The primary obligation of the Kelso Principals is to manage Kelso's investment
partnerships. For example, these agreements generally require that certain of
the Kelso Principals who serve on the Investment Committee in their individual
capacities as members of the Advisor devote substantially all of their business
time and efforts to the private investment partnerships managed by Kelso, and
each of them intends to do so. The Advisor is not subject to these restrictions.
In addition, these agreements require that any investment opportunities
presented to Kelso or the Kelso Principals that are appropriate to such
partnerships be offered to the partnerships. Therefore, although the investment
opportunities appropriate for us will generally not be of the type that would be
appropriate for the private investment partnerships managed by Kelso, if the
Kelso Principals are presented with any opportunities that are appropriate for
both us and such partnerships, the Kelso Principals would be obligated to offer
the opportunities first to such partnerships and not to us, regardless of the
capacity in which they received such opportunity. This may limit the extent to
which the Kelso Principals (but not the Advisor, to the extent it is able to
identify investment opportunities independently) will be a source of investment
transactions for us. BlackRock is not subject to any similar arrangements in
favor of its clients other than with respect to mezzanine real estate debt, as
to which it is required to bring certain opportunities first to certain private
real estate debt funds managed by BlackRock.
THE CARRIED INTEREST MAY CREATE AN INCENTIVE FOR THE ADVISOR TO TAKE ACTIONS
DETRIMENTAL TO US.
The Carried Interest, which is an incentive fee that may be owing to the Advisor
or its affiliates from time to time under the investment management agreement,
may create an incentive for the Advisor to make investments that are riskier or
more speculative than would otherwise be the case. The way in which the amount
of the Carried Interest is determined, which is calculated as a percentage of
distributions on our common shares, may encourage the Advisor to use leverage in
an effort to increase the return on our investments. If the Advisor acquires
poorly performing assets with such leverage, the loss to holders of our common
shares could be substantial. Finally, because a portion of the Carried Interest
is likely to reflect interest and dividend income and is calculated on an
accrual basis regardless of whether we have received a cash payment of such
interest or dividends, the Advisor might have an incentive to invest in zero
coupon or deferred interest securities in circumstances where it would not have
done so but for the opportunity to continue to earn Carried Interest even when
the issuers thereof would not be able to make cash payments on such securities.
The foregoing risks could be increased because the Advisor is not obligated to
reimburse us for any Carried Interest received even if we subsequently incur
losses or never receive in cash income that was previously accrued.
We do not believe the Advisor is susceptible to engaging in these practices,
both because excessive risk taking will reduce the likelihood of earning
incentive fees over the long term and because of the high standards of fiduciary
conduct exhibited by BlackRock and the Kelso Principals in the past. However,
our Board of Directors will monitor the investment activities of the Advisor and
will be prepared to terminate its services and seek restitution of any harm to
us if it believes the Advisor has breached its fiduciary duties in this regard.
DUE TO THE LACK OF LIQUIDITY OF OUR COMMON SHARES, YOU MAY NOT BE ABLE TO SELL
YOUR INVESTMENT IN US IF THE NEED ARISES OR YOU MAY REALIZE SIGNIFICANTLY LESS
FROM A SALE THAN OUR NET ASSET VALUE PER SHARE.
There is currently no public trading market for our common shares. Our common
shares are not freely transferable and shareholders do not have the right to
redeem their common shares. The lack of liquidity of our common shares may make
it difficult for you to sell your shares if the need arises. In addition, if you
need to dispose of your shares, you may realize significantly less than our net
asset value per share. Our common shares should be regarded as a long-term
investment.
17
IF THE INDUSTRY SECTORS IN WHICH OUR PORTFOLIO IS CURRENTLY CONCENTRATED
EXPERIENCE ADVERSE ECONOMIC CONDITIONS, OUR OPERATING RESULTS MAY BE NEGATIVELY
AFFECTED.
We may, from time to time, invest a substantial portion of our assets in the
securities of issuers in any single industry or sector of the economy or in only
a few issuers. We cannot predict the industries or sectors in which our
investment strategy may cause us to concentrate and cannot predict the level of
our diversification among issuers, although over time we anticipate investing in
a minimum of 15 to 20 issuers to ensure we satisfy diversification requirements
for qualification as a RIC for U.S. federal income tax purposes. Concentration
of our assets in an industry or sector may present more risks than if we were
broadly diversified over numerous industries and sectors of the economy. A
downturn in an industry or sector in which we are concentrated would have a
larger impact on us than on a company that does not concentrate in industry or
sector. As a result of investing a greater portion of our assets in the
securities of a smaller number of issuers, we are classified as a
non-diversified company under the 1940 Act. We may be more vulnerable to events
affecting a single issuer or industry and therefore subject to greater
volatility than a company whose investments are more broadly diversified.
Accordingly, an investment in us may present greater risk than an investment in
a diversified company. Furthermore, the Advisor has not made and does not intend
to make any determination as to the allocation of assets among different classes
of securities. At any point in time we may be highly concentrated in a single
type of asset, such as junior unsecured loans or distressed debt. Consequently,
events which affect a particular asset class disproportionately could have an
equally disproportionate effect on us.
CHANGES IN LAWS OR REGULATIONS GOVERNING OUR OPERATIONS, OR CHANGES IN THE
INTERPRETATION THEREOF, AND ANY FAILURE BY US TO COMPLY WITH LAWS OR REGULATIONS
GOVERNING OUR OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
We and our portfolio companies are subject to laws and regulations at the local,
state and federal level. These laws and regulations, as well as their
interpretation, may be changed from time to time. Any change in these laws or
regulations, or any failure to comply with them by us or our portfolio
companies, could have a material adverse affect on our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We do not own any real estate or other physical properties materially important
to our operation. Our administrative and principal executive offices are located
at 40 East 52nd Street, New York, NY 10022. We believe that our office
facilities are suitable and adequate for our business as it is contemplated to
be conducted.
ITEM 3. LEGAL PROCEEDINGS
We and the Advisor are not currently subject to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during our fourth fiscal
quarter ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
There is no established public trading market for our common stock.
18
HOLDERS
At March 28, 2006, we had approximately 395 shareholders of record. Such number
of shareholders includes institutional or omnibus accounts that hold common
stock for multiple underlying investors.
DIVIDENDS
We intend to distribute quarterly dividends to our shareholders. Our quarterly
dividends, if any, will be determined by our Board of Directors. On December 22,
2005, we declared an initial dividend of $0.20 per share. On March 8, 2006, we
declared a dividend of $0.20 per share for the first quarter of 2006. Because of
our limited operating history, these are the only dividends to date that we have
declared on our common stock.
We intend to elect to be taxed as a regulated investment company, or RIC, under
Subchapter M of the Code. To maintain our RIC status, we must distribute
annually at least 90% of our ordinary income and realized net short-term capital
gains in excess of realized net long-term capital losses, if any, out of the
assets legally available for distribution. In order to avoid certain excise
taxes imposed on RICs, we currently intend to distribute during each calendar
year an amount at least equal to the sum of (1) 98% of our ordinary income for
the calendar year, (2) 98% of our capital gains in excess of capital losses for
the one-year period ending on October 31st and (3) any ordinary income and net
capital gains for preceding years that were not distributed during such years.
In addition, although we currently intend to distribute realized net capital
gains (i.e., net long-term capital gains in excess of short-term capital
losses), if any, at least annually, out of the assets legally available for such
distributions, we may in the future decide to retain such capital gains for
investment.
We maintain an "opt out" dividend reinvestment plan for our common shareholders.
As a result, if we declare a dividend, shareholders' cash dividends will be
automatically reinvested in additional shares of our common stock, unless they
specifically "opt out" of the dividend reinvestment plan so as to receive cash
dividends.
We may not be able to achieve operating results that will allow us to make
dividends and distributions at a specific level or to increase the amount of
these dividends and distributions from time to time. In addition, we may be
limited in our ability to make dividends and distributions due to the asset
coverage test for borrowings when applicable to us as a business development
company under the 1940 Act and due to provisions in future credit facilities. If
we do not distribute a certain percentage of our income annually, we will suffer
adverse tax consequences, including possible loss of our status as a regulated
investment company. We cannot assure shareholders that they will receive any
dividends and distributions or dividends and distributions at a particular
level.
With respect to the dividends paid to shareholders, income from origination,
structuring, closing, commitment and other upfront fees associated with
investments in portfolio companies is treated as taxable income and accordingly,
distributed to shareholders. For the period from July 25, 2005 (inception of
operations) through December 31, 2005, these fees totaled $906,250.
RECENT SALES OF UNREGISTERED SECURITIES
On July 25, 2005, we completed a private placement of 35,366,589 shares of our
common stock, par value $.001 per share, for aggregate gross proceeds of
$530,498,845, consisting of cash of $110,780,905 and a contribution of
short-term investments and cash equivalents of $419,717,940. The contribution
of short-term investments and cash equivalents represented a portion of the
consideration for shares of our common stock purchased by BlackRock Kelso
Capital Holding LLC, an entity for which the Advisor serves as manager. The
transaction was effected in accordance with our valuation procedures governing
securities transactions with affiliates and was ratified by our Board of
Directors, including the directors that are not "interested persons."
The placement of our common stock was exempt from the registration requirements
of the Securities Act, pursuant to Section 4(2) of the Securities Act and
Regulation D, Rule 506 promulgated thereunder for transactions not involving a
public offering and based on the fact that the common stock was issued primarily
to institutional or accredited investors.
Wachovia Capital Markets, LLC, a broker-dealer registered with the SEC and
the National Association of Securities Dealers, acted as our placement agent
in connection with a portion (approximately 3% of gross proceeds) of the
private placement referenced above and we paid them a placement fee of
$507,407. We incurred legal fees and other offering
19
costs of $657,639 relating to the private placement. The net proceeds from
the private placement of $529,333,799 were used for general corporate purposes.
Our common stock became a registered class of securities under the Exchange Act
pursuant to our Registration Statement on Form 10 (SEC file no. 000-51327),
which became effective on July 25, 2005.
ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any shares of our common stock during the three months
ended December 31, 2005.
ITEM 6. SELECTED FINANCIAL DATA
The Statement of Operations, Per Share and Balance Sheet data for the period
ended December 31, 2005 are derived from our financial statements which have
been audited by Deloitte & Touche LLP, our independent registered public
accounting firm. This selected financial data should be read in conjunction with
our financial statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report.
for the Period
July 25, 2005* Through
December 31, 2005
(Dollar Amounts in Thousands, Except
Statement of Operations Data: Per Share Data)
---------------------------- ---------------
Total Investment Income $ 10,005
Net Expenses:
Before Management Fee Waiver $ 6,137
After Management Fee Waiver $ 3,802
Net Investment Income $ 6,203
Net Realized and Unrealized Gain $ 241
Net Increase in Net Assets Resulting from Operations $ 6,444
Per Share Data:
---------------
Net Asset Value at Period End $ 14.95
Net Investment Income $ 0.17
Net Realized and Unrealized Gain $ 0.01
Net Increase in Net Assets Resulting from Operations $ 0.18
Dividends Declared $ 0.20
Balance Sheet Data at Period End:
---------------------------------
Total Assets $ 542,226
Total Net Assets $ 528,705
Other Data:
-----------
Total Return (1) 1.0 %
Number of Portfolio Companies at Period End 26
Amount of Investments in Loans, Bonds and Equities $ 137,664
Amount of Loans Sold and Repayments $ 1,022
Weighted Average Yield on Invested Capital, other than 10.7 %
Closed-End Funds, Short-Term Investments and Cash
Equivalents, at Period End (2)
Weighted Average Yield on Invested Capital, including 6.0 %
Closed-End Funds, Short-Term Investments and Cash
Equivalents, at Period End (2)
Weighted Average Yield on Invested Capital, including 4.4 %
Closed-End Funds, Short-Term Investments and Cash
Equivalents, at Period End, Net of Expenses (2)
20
______________
* Inception of operations
(1) Total return is based on the change in net asset value per share assuming
an investment at the initial offering price of $15.00 per share. Total
return also takes into account dividends and distributions, if any,
reinvested in accordance with our dividend reinvestment plan. Total return
is not annualized.
(2) Yields are computed using interest rates and dividend yields as of the
purchase date and include amortization of loan origination and commitment
fees, original issue discount and market premium or discount, weighted by
the value of the respective investment when averaged.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction with the
Selected Financial Data and our financial statements and notes thereto appearing
elsewhere in this Annual Report.
OVERVIEW
We were incorporated in Delaware on April 13, 2005 and were initially funded on
July 25, 2005. Our investment objective is to provide a combination of current
income and capital appreciation. We intend to invest primarily in debt and
equity securities of private U.S. middle-market companies.
We are externally managed and have elected to be treated as a BDC under the 1940
Act. As a BDC, we are required to comply with certain regulatory requirements.
For instance, we generally have to invest at least 70% of our total assets in
"qualifying assets," including securities of private U.S. companies, cash, cash
equivalents, U.S. government securities and high-quality debt investments that
mature in one year or less.
On July 25, 2005, we completed a private placement (the "Offering") of
35,366,589 shares of our common stock at a price of $15.00 per share, less a
placement fee of $507,407 and legal fees and other offering costs of $657,639.
We received approximately $529.3 million in net proceeds from the Offering.
We intend to elect to be treated as a regulated investment company, or a RIC,
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). To qualify
as a RIC, we must, among other things, meet certain source-of-income and asset
diversification requirements. Pursuant to these elections, we generally will not
have to pay corporate-level taxes on any income that we distribute to our
shareholders.
Investments. Our level of investment activity can and does vary substantially
from period to period depending on many factors, including the amount of debt
and equity capital available to middle market companies, the level of merger
and acquisition activity for such companies, the general economic environment
and the competitive environment for the types of investments we make.
Although conditions during the period from July 25, 2005 (our inception of
operations) to December 31, 2005 were challenging, because of our broad
relationship network and flexibility and creativity in responding to the
needs of prospective portfolio companies we were able to accumulate a diverse
portfolio of companies with solid fundamentals at attractive spreads. In the
year ahead, we expect the environment for investments in middle-market
companies to remain very competitive. We intend to maintain our disciplined
investment process, selectively participating in transactions when our
assessment of risk and reward indicates a favorable opportunity.
Revenues. We generate revenue primarily in the form of interest on the debt
we hold, dividends on our equity interests and capital gains on warrants and
other debt or equity interests that we acquire in portfolio companies. Our
fixed income instruments generally have an expected maturity of three to ten
years, although we have no lower or upper constraint on maturity, and
typically bear interest at a fixed or floating rate. Interest on our debt
securities is generally payable
21
quarterly or semi-annually. Payments of principal on our debt investments may
be amortized over the stated term of the investment, deferred for several years
or due entirely at maturity. In some cases, our debt instruments and preferred
stock investments may defer payments of cash interest or pay interest in-kind.
Any outstanding principal amount of our debt securities and any accrued but
unpaid interest will generally become due at the maturity date. In addition, we
may generate revenue in the form of commitment, origination, structuring or
diligence fees, fees for providing significant managerial assistance and
consulting fees.
Expenses. Our primary operating expenses include the payment of a management
fee (the "Management Fee"), expenses reimbursable under the investment
management agreement, administration fees and the allocable portion of overhead
under the administration agreement. The Management Fee compensates the Advisor
for work in identifying, evaluating, negotiating, closing and monitoring our
investments. The investment management agreement provides that we will
reimburse the Advisor for costs and expenses incurred by the Advisor for office
space rental, office equipment and utilities allocable to the performance by
the Advisor of its duties under the investment management agreement, as well as
any costs and expenses incurred by the Advisor relating to any non-investment
advisory, administrative or operating services provided by the Advisor to us.
We bear all other costs and expenses of our operations and transactions,
including those relating to: our organization; calculating our net asset value
(including the cost and expenses of any independent valuation firms); expenses
incurred by the Advisor payable to third parties in monitoring our investments
and performing due diligence on prospective portfolio companies; interest
payable on debt, if any, incurred to finance our investments; the costs of
future offerings of common shares and other securities, if any; the Management
Fee; distributions on our common shares; administration fees payable under the
administration agreement; fees payable to third parties relating to, or
associated with, making investments; transfer agent and custodial fees;
registration fees; listing fees; taxes; independent director fees and expenses;
costs of preparing and filing reports or other documents with the SEC; the
costs of any reports, proxy statements or other notices to our shareholders,
including printing costs; our fidelity bond, directors and officers/errors and
omissions liability insurance, and any other insurance premiums;
indemnification payments; direct costs and expenses of administration,
including audit and legal costs; and all other expenses reasonably incurred by
us or the Administrator in connection with administering our business, such as
its allocable portion of overhead under the administration agreement, including
rent and other allocable portions of the cost of certain of our officers and
their respective staffs.
The Advisor has agreed to waive its rights to receive one-half of the amount of
the Management Fee the Advisor would otherwise be entitled to receive from us
until the first date on which 90% of our assets are invested in portfolio
companies in accordance with our investment objective, excluding investments in
cash, cash equivalents, U.S. government securities and other high-quality debt
investments that mature in one year or less from the date of investment, or the
first anniversary of our inception of operations, whichever is sooner (the
"Ramp-Up Date"). Thereafter, the Advisor has agreed to waive, until such time
as we have completed an initial public offering of our common stock and listed
our common stock on a national securities exchange (collectively, the "Public
Market Event"), one-quarter of the amount of the Management Fee the Advisor
would otherwise be entitled to receive from us. In addition, the Advisor has
agreed to (a) waive Management Fees for any calendar year in excess of
approximately $11.9 million until the earlier of (i) such time as the we have
completed the Public Market Event or (ii) the fourth anniversary of our
inception of operations and (b) waive Management Fees in excess of
approximately $5.6 million during the fifth year of our operations unless we
have completed the Public Market Event.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America,
or GAAP. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Changes in the economic environment,
financial markets and any other parameters used in determining such estimates
could cause actual results to differ. In addition to the discussion below, our
critical accounting policies are further described in the notes to the financial
statements.
Valuation of Portfolio Investments. Under procedures established by our Board
of Directors, we value investments for which market quotations are readily
available at such market quotations, which are generally obtained from an
independent pricing service or one or more broker-dealers or market makers.
However, we value debt investments with remaining maturities within 60 days
at cost plus accreted discount, or minus amortized premium, which
approximates fair value. As a BDC, we generally invest in securities of
middle-market companies for which market quotations are not
22
readily available. We value such securities at fair value as determined in
good faith by or under the direction of our Board of Directors. Such
determinations of fair values may involve subjective judgments and estimates.
With respect to investments for which market quotations are not readily
available, our Board of Directors, together with independent valuation
advisers to the extent the Board of Directors determines in its discretion to
utilize them, values each investment considering, among other measures,
discounted cash flow models, comparisons of financial ratios of peer
companies that are public, valuations of like securities and other factors.
As noted, we expect to value many of our portfolio investments at fair value as
determined in good faith by or under the direction of our Board of Directors
using a consistently applied valuation process in accordance with a documented
valuation policy that has been reviewed and approved by the Board of Directors.
Due to the inherent uncertainty of determining the fair value of investments
that do not have a readily available market value, the fair value of our
investments may differ significantly from the values that would have been used
had a readily available market value existed for such investments, and the
differences could be material.
With respect to investments for which market quotations are not readily
available, our Board of Directors undertakes a multi-step valuation process each
quarter, as described below:
o Our quarterly valuation process begins with each portfolio company or
investment being initially valued by the investment professionals
responsible for the portfolio investment;
o Preliminary valuation conclusions are then documented and discussed with
senior management;
o To the extent determined by the Audit Committee of our Board of
Directors, independent valuation firms engaged by our Board of
Directors conduct independent appraisals and review management's
preliminary valuations and their own independent assessment;
o The Audit Committee of our Board of Directors reviews the preliminary
valuations of the investment professionals, senior management and
independent valuation firms; and
o The Board of Directors discusses valuations and determines the fair
value of each investment in our portfolio in good faith based on the
input of our investment adviser, the respective independent valuation
firms and the Audit Committee.
Revenue Recognition. We record interest income, adjusted for amortization of
premium and accretion of discount, on an accrual basis. We do not accrue
interest income if collection is deemed doubtful or the related investment is in
default. For loans and debt securities with contractual payment-in-kind, or PIK,
interest, which represents contractual interest accrued and added to the loan
balance that generally becomes due at maturity, we do not accrue PIK interest if
the portfolio company valuation indicates that the PIK interest is not
collectible. Origination, structuring, closing, commitment and other upfront
fees and discounts and premiums on investments purchased are accreted/amortized
over the life of the respective investment. Unamortized origination,
structuring, closing, commitment and other upfront fees are recorded as unearned
income. Upon the prepayment of a loan or debt security, we record any prepayment
penalties and unamortized loan origination, structuring, closing, commitment and
other upfront fees as interest income.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or
Depreciation. We measure realized gains or losses by the difference between the
net proceeds from the repayment or sale and the amortized cost basis of the
investment, without regard to unrealized appreciation or depreciation previously
recognized, but considering unamortized upfront fees and prepayment penalties.
Realized gains and losses are computed using the specific identification method.
Net change in unrealized appreciation or depreciation reflects the change in
portfolio investment values during the reporting period, including the reversal
of previously recorded unrealized appreciation or depreciation, when gains or
losses are realized.
Federal Income Taxes. We intend to qualify for the tax treatment applicable to
regulated investment companies under Subchapter M of the Code, and, among other
things, intend to make the requisite distributions to our shareholders to
relieve us from federal income and excise taxes. In order to qualify as a RIC,
we are required to distribute annually at least 90% of investment company
taxable income, as defined by the Code, to our shareholders. To avoid federal
excise taxes, we must distribute annually at least 98% of our income (both
ordinary income and net capital gains).
23
Within the context of these critical accounting policies, we are not currently
aware of any reasonably likely events or circumstances that would result in
materially different amounts being reported.
PORTFOLIO AND INVESTMENT ACTIVITY
During the period July 25, 2005 (inception of operations) through December 31,
2005, we invested approximately $137.7 million in 27 portfolio companies and
received proceeds from principal repayments/dispositions of approximately $1.0
million. At December 31, 2005, our net portfolio consisted of 26 portfolio
companies and was invested 25% in senior secured loans, 1% in subordinated
debt/corporate notes, 1% in publicly traded, floating rate closed-end funds,
less than 1% in common stock/warrants and 73% in short-term investments
(including cash equivalents). Our average portfolio company investment was
approximately $5 million. Our largest portfolio company investment was
approximately $26.5 million, with our five largest portfolio company investments
comprising approximately 15% of our net assets at December 31, 2005.
Our weighted average yield on invested capital other than closed-end funds,
short-term investments and cash equivalents was 10.7% at December 31, 2005. The
weighted average yield on our invested capital including closed-end funds,
short-term investments and cash equivalents was 6.0% and, net of expenses, was
4.4% at December 31, 2005. The weighted average yields on our subordinated
debt/corporate notes and senior secured loans were 10.3% and 10.8%,
respectively, at December 31, 2005. Yields are computed using interest rates and
dividend yields as of the purchase date and include amortization of loan
origination and commitment fees, original issue discount and market premium or
discount, weighted by the value of the respective investment when averaged.
RESULTS OF OPERATIONS
As this is our first fiscal year of operations, there is no previous period with
which to compare financial results. Our financial results for the period July
25, 2005 (inception of operations) to December 31, 2005 are not necessarily
indicative of a full year's results.
Operating Income
Investment income totaled $10,004,626 for the period July 25, 2005 (inception of
operations) through December 31, 2005, of which $8,501,049 was attributable to
interest earned on short-term investments and cash equivalents, $1,253,427 to
interest earned on senior secured loans, $215,359 to interest earned on
subordinated debt/corporate notes and $34,791 to dividends received from
closed-end funds. As we continue to invest the net proceeds from the Offering in
longer-term investments, we expect that we will generate additional income at
rates higher than those we received on our investments during our initial period
of operations, although there can be no assurance that we will achieve this
objective.
Operating Expenses
Operating expenses for the period July 25, 2005 (inception of operations)
through December 31, 2005 were $3,801,635, consisting of $2,334,922 in
management fees (net of management fee waivers of $2,334,922), $435,483 in
administrative services expenses, $333,969 in professional fees, $233,508 in
director fees, $138,405 in Advisor expenses, $108,374 in insurance expenses,
$57,056 in organizational expenses and $159,918 in other expenses. For the
period July 25, 2005 (inception of operations) through December 31, 2005, no
incentive fee, or Carried Interest, amounts were paid or owed to the Advisor.
Net Investment Income
Net investment income was $6,202,991 for the period July 25, 2005 (inception of
operations) through December 31, 2005.
Net Realized Gain
Net realized gain on investments of $1,141 for the period July 25, 2005
(inception of operations) through December 31, 2005 resulted from the
disposition of a senior secured loan.
24
Net Unrealized Appreciation
For the period July 25, 2005 (inception of operations) through December 31,
2005, net unrealized appreciation was $240,236, which was comprised of net
unrealized appreciation on investments of $252,276 and net unrealized
depreciation on cash equivalents of $12,040.
Net Increase in Net Assets Resulting From Operations
The net increase in net assets resulting from operations for the period July 25,
2005 (inception of operations) through December 31, 2005 was $6,444,368.
Financial Condition, Liquidity and Capital Resources
During the period July 25, 2005 (inception of operations) to December 31, 2005,
we completed a private placement of 35,366,589 shares of our common stock at a
price of $15.00 per share. The net proceeds from the Offering of $529,333,799
consisted of cash of $109,615,859 and a contribution of short-term investments
and cash equivalents of $419,717,940.
We generated cash primarily from the net proceeds of the Offering as well as
cash flows from operations, including interest earned on senior secured loans
and subordinated debt/corporate notes, as well as from temporary investments in
cash equivalents and other high-quality debt investments that mature in one year
or less. In the future, we may also fund a portion of our investments through
borrowings from banks and issuances of senior securities. As a business
development company, we are subject to regulations governing our operations that
affect our ability to raise additional capital. In the future, we may also
securitize a portion of our investments in senior secured loans or other assets.
At December 31, 2005, we had approximately $289.0 million in cash and cash
equivalents and $106.3 million in other short-term investments that we intend to
use in our operations. We do not expect to incur indebtedness until such amounts
have been substantially invested in longer-term investments.
Our primary uses of funds are expected to be investments in portfolio companies,
payment of fees and other operating expenses and cash distributions to
shareholders.
Our operating activities resulted in a net use of cash of $240,361,452 for the
period July 25, 2005 (inception of operations) through December 31, 2005,
primarily due to the purchase of investments and the payment of management fees
and other expenses.
Our financing activities provided cash of $529,333,799 for the period July 25,
2005 (inception of operations) through December 31, 2005, comprised of net
proceeds from the Offering. In addition, our non-cash financing activities
consisted of $7,073,318 of dividend distributions declared.
Off-Balance Sheet Financing
At December 31, 2005, we had a $10 million commitment outstanding to fund a
senior secured loan. We have no other off-balance sheet contractual
obligations or arrangements.
DIVIDENDS
We intend to distribute quarterly dividends to our shareholders. Our
quarterly dividends, if any, will be determined by our Board of Directors. On
December 22, 2005, we declared an initial dividend of $0.20 per share. On
March 8, 2006, we declared a dividend of $0.20 per share for the first
quarter of 2006. Because of our limited operating history, these are the only
dividends to date that we have declared on our common stock.
We intend to elect to be taxed as a regulated investment company, or RIC, under
Subchapter M of the Code. To maintain our RIC status, we must distribute
annually at least 90% of our ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any, out
of the assets legally available for distribution. In order to avoid certain
excise taxes imposed on RICs, we currently intend to distribute during each
calendar year an amount at least
25
equal to the sum of (1) 98% of our ordinary income for the calendar year, (2)
98% of our capital gains in excess of capital losses for the one-year period
ending on October 31st and (3) any ordinary income and net capital gains for
preceding years that were not distributed during such years. In addition,
although we currently intend to distribute realized net capital gains (i.e.,
net long-term capital gains in excess of short-term capital losses), if any,
at least annually, out of the assets legally available for such
distributions, we may in the future decide to retain such capital gains for
investment.
We maintain an "opt out" dividend reinvestment plan for our common shareholders.
As a result, if we declare a dividend, shareholders' cash dividends will be
automatically reinvested in additional shares of our common stock, unless they
specifically "opt out" of the dividend reinvestment plan so as to receive cash
dividends.
We may not be able to achieve operating results that will allow us to make
dividends and distributions at a specific level or to increase the amount of
these dividends and distributions from time to time. In addition, we may be
limited in our ability to make dividends and distributions due to the asset
coverage test for borrowings when applicable to us as a business development
company under the 1940 Act and due to provisions in future credit facilities. If
we do not distribute a certain percentage of our income annually, we will suffer
adverse tax consequences, including possible loss of our status as a regulated
investment company. We cannot assure shareholders that they will receive any
dividends and distributions or dividends and distributions at a particular
level.
With respect to the dividends paid to shareholders, income from origination,
structuring, closing, commitment and other upfront fees associated with
investments in portfolio companies is treated as taxable income and accordingly,
distributed to shareholders. For the period from July 25, 2005 (inception of
operations) through December 31, 2005, these fees totaled $906,250.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to financial market risks, including changes in interest rates.
During the period July 25, 2005 (inception of operations) to December 31, 2005,
all of the loans in our portfolio had floating rates determined by reference to
an index such as LIBOR, the Federal Funds Rate or the Prime Rate. The interest
rates on such loans generally reset by reference to the current market index
after one to six months. At December 31, 2005, over 99% of our investment assets
consisted of floating rate investments and high quality short-term investments
and cash equivalents.
To illustrate the potential impact of changes in interest rates, we have
performed the following analysis based on our December 31, 2005 balance sheet
and assuming no changes in our investment structure. Net asset value is analyzed
using the assumptions that interest rates, as defined by the LIBOR and U.S.
Treasury yield curves, increase or decrease and that the yield curves of the
rate shocks will be parallel to each other. Under this analysis, an
instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would
cause a decline of approximately $634,000 in the value of our net assets at
December 31, 2005.
While hedging activities may insulate us against adverse changes in interest
rates, they may also limit our ability to participate in the benefits of lower
interest rates with respect to our portfolio of investments. During the period
July 25, 2005 (inception of operations) through December 31, 2005, we did not
engage in any hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Statement of Assets and Liabilities as of December 31, 2005
Statement of Operations for the period July 25, 2005 (inception of operations)
through December 31, 2005
Statement of Changes in Net Assets for the period July 25, 2005 (inception of
operations) through December 31, 2005
Statement of Cash Flows for the period July 25, 2005 (inception of operations)
through December 31, 2005
26
Schedule of Investments as of December 31, 2005
Notes to Financial Statements
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
BlackRock Kelso Capital Corporation:
We have audited the accompanying statement of assets and liabilities of
BlackRock Kelso Capital Corporation (the "Company"), including the schedule of
investments, as of December 31, 2005, and the related statements of operations,
changes in net assets, and cash flows for the period July 25, 2005 (inception of
operations) through December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned at December 31, 2005 by correspondence with the custodian, the
management of the investment funds and the brokers; where replies were not
received from the brokers, alternative procedures were performed. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005, and the results of its operations, changes in its net assets, and cash
flows for the period July 25, 2005 (inception of operations) through December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
New York, New York
March 28, 2006
28
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
ASSETS:
Cash and cash equivalents (amortized cost of $288,984,387) $ 288,972,347
Investments, at value (amortized cost of $250,184,074) 250,436,350
Receivable for investments sold 996,250
Interest receivable 1,656,131
Other assets 165,363
-----------------
TOTAL ASSETS $ 542,226,441
=================
LIABILITIES:
Payable for investments purchased 4,198,296
Dividend distribution payable 7,073,318
Legal fees (offering costs) payable 587,080
Management fees payable 455,329
Accrued administrative services expenses 508,950
Other accrued expenses and payables 698,619
-----------------
TOTAL LIABILITIES 13,521,592
-----------------
NET ASSETS:
Common stock, par value $.001 per share, 40,000,000 common 35,367
shares authorized, 35,366,589 issued and outstanding
Paid-in capital in excess of par 529,298,432
Distributions in excess of net investment income (870,327)
Undistributed net realized gain 1,141
Net unrealized appreciation 240,236
-----------------
TOTAL NET ASSETS 528,704,849
-----------------
TOTAL LIABILITIES AND NET ASSETS $ 542,226,441
=================
NET ASSET VALUE PER SHARE $ 14.95
=================
The accompanying notes are an integral part of these financial statements.
29
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 25, 2005 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 2005
INVESTMENT INCOME:
Interest income $ 9,969,835
Dividend income 34,791
-------------------
Total investment income 10,004,626
-------------------
EXPENSES:
Management fees 4,669,844
Administrative services 435,483
Professional fees 333,969
Director fees 233,508
Advisor expenses 138,405
Insurance 108,374
Organizational 57,056
Other 159,918
-------------------
Expenses Before Management Fee Waiver 6,136,557
Management fee waiver (2,334,922)
------------------
Net Expenses 3,801,635
-------------------
NET INVESTMENT INCOME 6,202,991
-------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments 1,141
------------------
Net unrealized appreciation (depreciation):
Investments 252,276
Cash equivalents (12,040)
-------------------
Net unrealized appreciation 240,236
-------------------
Net Realized and Unrealized Gain 241,377
-------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,444,368
===================
Earnings Per Share $ 0.18
====================
Basic and Diluted Shares Outstanding 35,366,589
The accompanying notes are an integral part of these financial statements.
30
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JULY 25, 2005 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 2005
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income $ 6,202,991
Net unrealized appreciation 240,236
Net realized gain on investments 1,141
---------------------
Net increase in net assets resulting from operations 6,444,368
---------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME (7,073,318)
---------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 530,498,845
Less offering costs charged against capital (1,165,046)
---------------------
Net increase in net assets resulting from capital share transactions 529,333,799
---------------------
TOTAL INCREASE IN NET ASSETS 528,704,849
Net assets at beginning of period -
---------------------
Net assets at end of period $ 528,704,849
=====================
Distributions in excess of net investment income $ (870,327)
=====================
The accompanying notes are an integral part of these financial statements.
31
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD JULY 25, 2005 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 2005
OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 6,444,368
Adjustments to reconcile net increase in net assets resulting from operations to
net cash used in operating activities:
Purchases of short-term investments - net (106,043,189)
Purchases of long-term investments (144,808,218)
Proceeds from disposition of long-term investments 1,021,610
Net unrealized appreciation on investments (252,276)
Net realized gain on investments (1,141)
Amortization of premium/discount - net (353,136)
Increase in receivable for investment sold (996,250)
Increase in interest receivable (1,656,131)
Increase in other assets (165,363)
Increase in payable for investments purchased 4,198,296
Increase in legal fees (offering costs) payable 587,080
Increase in management fees payable 455,329
Increase in accrued administrative services payable 508,950
Increase in other accrued expenses and payables 698,619
--------------------
Net cash used in operating activities (240,361,452)
--------------------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock:
Cash 109,615,859
Contribution of short-term investments and cash equivalents 419,717,940
--------------------
Net cash provided by financing activities 529,333,799
--------------------
Net increase in cash and cash equivalents 288,972,347
Cash and cash equivalents, beginning of period -
--------------------
Cash and cash equivalents, end of period $ 288,972,347
====================
Supplemental disclosure of non-cash financing activities:
Dividend distribution declared $ 7,073,318
====================
The accompanying notes are an integral part of these financial statements.
32
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005
PRINCIPAL
AMOUNT OR
NUMBER OF FAIR
PORTFOLIO COMPANY (a) INDUSTRY (b) SHARES/UNITS COST (c) VALUE
- ----------------- -------- ------------ ---- -----
SHORT-TERM INVESTMENTS - 20.1%
- ------------------------------
ASSET-BACKED SECURITY - 2.8%
RACERS Trust, Series 2005-17-O, 4.39%
(LIBOR + 0.02%/Q), 8/21/06, acquired
8/29/05 (d) Asset-Backed Security $ 15,000,000 $ 15,000,000 $ 15,006,300
----------------------------------------------
COMMERCIAL PAPER - 11.6%
Barclays US Funding Corp., 4.24%, 2/3/06 Banking 26,000,000 25,900,019 25,900,019
BNP Paribas (Canada), 3.83%, 1/24/06 Banking 1,500,000 1,496,397 1,496,397
Credit Suisse First Boston USA, Inc., 3.83%, Security Broker and
1/27/06 Dealer 8,000,000 7,978,626 7,978,626
Morgan Stanley & Co. Incorporated, 4.08%, Security Broker and
8/4/06 Dealer 26,000,000 26,000,000 26,003,120
----------------------------------------------
TOTAL COMMERCIAL PAPER 61,500,000 61,375,042 61,378,162
----------------------------------------------
CERTIFICATES OF DEPOSIT - 5.7%
DEFPA BANK plc, New York, 4.53%, 10/16/06 Banking 15,000,000 15,000,000 14,961,713
Washington Mutual Bank N.A., 4.46%, 3/28/06 Banking 15,000,000 15,000,000 14,999,820
----------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT 30,000,000 30,000,000 29,961,533
----------------------------------------------
TOTAL SHORT-TERM INVESTMENTS $ 106,500,000 106,375,042 106,345,995
===============-------------------------------
LONG-TERM INVESTMENTS - 27.3%
- -----------------------------
SUBORDINATED DEBT / CORPORATE NOTES - 1.3%
First Mercury Holdings, Inc., 12.33%
(LIBOR + 8.00%/Q), 8/15/12, acquired
8/12/05 (d) Insurance $ 1,800,000 1,782,965 1,831,500
InSight Health Services Corp., 9.17%
(LIBOR + 5.25%/Q), 11/1/11, acquired
9/16/05 (d) Diagnostic Imaging 2,500,000 2,488,066 2,375,000
Select Medical Holdings Corporation, 9.93%
(LIBOR + 5.75%/S), 9/15/15, acquired
9/15/05 (d) Specialty Hospitals 2,500,000 2,500,000 2,512,500
--------------- -------------- ---------------
TOTAL SUBORDINATED DEBT / CORPORATE NOTES $ 6,800,000 6,771,031 6,719,000
=============== -------------- ---------------
SENIOR SECURED LOANS (E) - 24.8%
Applied Tech Products Corp. et al., Tranche A,
First Lien, 8.91% (LIBOR + 4.50%),
10/24/10 Plastic Packaging $ 4,251,515 4,219,701 4,219,629 (f)
Applied Tech Products Corp. et al., Tranche B,
Second Lien, 13.41% (LIBOR + 9.00%),
4/24/11 Plastic Packaging 1,951,515 1,932,040 1,932,000 (f)
Applied Tech Products Corp. et al., Tranche C,
Third Lien, 16.91% (LIBOR + 6.30% cash,
6.20% PIK), 10/24/11 Plastic Packaging 696,970 598,331 598,145 (f)
Benchmark Medical Holdings Inc., First Lien,
9.00% (Base Rate + 1.75%), 12/27/12 Rehabilitation Centers 2,000,000 2,000,000 2,015,000
Benchmark Medical Holdings Inc., Second Lien,
13.00% (Base Rate + 5.75%), 6/27/13 Rehabilitation Centers 9,000,000 9,000,000 9,000,000
Bushnell Performance Optics, First Lien, 7.53%
(LIBOR + 3.00%), 8/19/11 Leisure Products 1,000,000 1,000,000 1,012,469
The accompanying notes are an integral part of these financial statements.
33
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
PRINCIPAL
AMOUNT OR
NUMBER OF FAIR
PORTFOLIO COMPANY (a) INDUSTRY (b) SHARES/UNITS COST (c) VALUE
- ----------------- -------- ------------ ---- -----
Cannondale Bicycle Corporation, Second Lien,
11.53% (LIBOR + 7.00%), 6/5/10 Bicycles/Apparel $ 10,000,000 $ 10,000,000 $ 10,000,000 (f)
Champion Energy Corporation et al., First Lien,
13.38% (LIBOR + 9.00%), 6/30/09 Heating and Oil Services 18,000,000 18,000,000 18,000,000 (f)
Clean Earth Inc., Tranche B, First Lien,
7.39% (LIBOR + 3.00%), 10/17/11 Environmental Services 1,500,000 1,500,000 1,515,000
Delta Air Lines, Inc., Term Loan B, First
Lien, 11.01% (LIBOR + 6.50%), 3/16/08 Airlines 1,000,000 1,000,000 1,036,750
Eight O'Clock Coffee Company, First Lien,
7.44% (LIBOR + 3.00%), 11/14/11 Coffee Distributor 3,000,000 3,000,000 3,022,500
Eight O'Clock Coffee Company, Second Lien,
11.44% (LIBOR + 7.00%), 11/14/12 Coffee Distributor 12,000,000 12,000,000 12,000,000
Event Rentals, Inc., First Lien, 9.94%
(LIBOR + 5.25%), 11/17/11 Party Rentals 14,454,545 14,454,545 14,454,545 (f)
Event Rentals, Inc., Acquisition Loan (Funded),
First Lien, 9.92% (LIBOR + 5.25%), 11/17/11 Party Rentals 9,847,159 9,847,159 9,847,159 (f)
Event Rentals, Inc., Acquisition Loan
(Unfunded), First Lien, 0.50%, 11/18/07 Party Rentals 2,198,295 2,198,295 2,198,295 (f)
Haggar Clothing Co., Second Lien, 11.51%
(LIBOR + 7.00%), 11/1/11 Apparel 2,500,000 2,500,000 2,500,000
The Hertz Corporation, Tranche B, First Lien, Automobile and
8.50% (Base Rate + 1.25%), 12/21/12 Equipment Rental 2,000,000 2,000,000 2,022,500
HIT Entertainment, Inc., Second Lien, 9.71%
(LIBOR + 5.50%), 2/26/13 Entertainment 1,000,000 1,000,000 990,000
Houghton International Inc., First Lien, 9.25%
(Base Rate + 2.00%), 12/15/11 Specialty Chemicals 5,000,000 5,000,000 5,043,750
MD Beauty, Inc., Second Lien, 11.25%
(LIBOR + 7.00%), 2/18/13 Cosmetics 3,000,000 3,000,000 3,022,500
Metaldyne Corporation et al., First Lien, 8.58%
(LIBOR + 4.50%), 12/31/09 Automotive Parts 998,741 988,476 1,001,237
NTELOS Inc., Second Lien, 9.39%
(LIBOR + 5.00%), 2/24/12 Telecommunications 2,000,000 1,984,276 2,020,000
PBI Media, Inc., Second Lien, 10.24%
(LIBOR + 6.00%), 9/30/13 Information Services 6,000,000 5,990,032 5,940,000
Precision Parts International Services Corp.
et al., First Lien, 7.98% (LIBOR + 3.75%),
9/30/11 Automotive Parts 3,000,000 3,000,000 3,022,501
QTC Acquisition Inc., Second Lien, 10.84%
(LIBOR + 6.50%), 5/10/13 Disability Evaluations 10,000,000 10,000,000 10,075,000
US Investigations Services, Inc., Tranche B,
First Lien, 7.00% (LIBOR + 2.50%),
10/14/12 Commercial Services 1,995,000 1,995,000 1,999,988
U.S. Security Holdings, Inc., First Lien, 7.27%
(LIBOR + 3.25%), 2/29/12 Security Services 983,400 983,400 990,776
Wastequip, Inc., Second Lien, 10.53%
(LIBOR + 6.00%), 7/15/12 Waste Treatment 500,000 500,000 506,250
Wembley, Inc., Second Lien, 7.83%
(LIBOR + 3.75%), 8/23/12 Gaming 1,000,000 1,000,000 1,006,250
-----------------------------------------------
TOTAL SENIOR SECURED LOANS $ 130,877,140 130,691,255 130,992,244
================-------------------------------
The accompanying notes are an integral part of these financial statements.
34
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
PRINCIPAL
AMOUNT OR
NUMBER OF FAIR
PORTFOLIO COMPANY (a) INDUSTRY (b) SHARES/UNITS COST (c) VALUE
- ----------------- -------- ------------ ---- -----
CLOSED-END FUNDS - 1.4%
Eaton Vance Floating-Rate Income Trust Closed-End Fund 175,000 $ 2,988,408 $ 2,952,250
Nuveen Floating Rate Income Fund Closed-End Fund 94,400 1,159,147 1,188,496
PIMCO Floating Rate Strategy Fund Closed-End Fund 170,000 2,997,026 3,036,200
-------------------------------
TOTAL CLOSED-END FUNDS 7,144,581 7,176,946
-------------------------------
EQUITY WARRANTS - 0.0%
ATEP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
ATH Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
ATPP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 90,114 90,114 (f)
ATPR Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
-------------------------------
TOTAL EQUITY WARRANTS 90,114 90,114
-------------------------------
TOTAL LONG-TERM INVESTMENTS
INCLUDING UNEARNED INCOME 144,696,981 144,978,304
UNEARNED INCOME - (0.2)% (887,949) (887,949)
-------------------------------
TOTAL LONG-TERM INVESTMENTS 143,809,032 144,090,355
-------------------------------
TOTAL INVESTMENTS - 47.4% $ 250,184,074 250,436,350
===============----------------
OTHER ASSETS & LIABILITIES (NET) - 52.6% 278,268,499
---------------
NET ASSETS - 100.0% $ 528,704,849
===============
_________________
(a) None of our portfolio companies are "controlled" or "affiliated" as defined
by the Investment Company Act of 1940.
(b) Unaudited.
(c) Represents amortized cost for fixed income securities and unearned income,
and cost for closed-end funds and equity warrants.
(d) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions that are
exempt from registration, normally to qualified institutional buyers. In the
aggregate, these securities represent 4.1% of net assets at December 31, 2005.
(e) All of the senior secured loans to our portfolio companies bear interest at
a floating rate that may be determined by reference to the London Interbank
Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the
Prime Rate), at the borrower's option. Additionally, the borrower under a senior
secured loan generally has the option to select from interest rate reset periods
of one, two, three or six months and may alter that selection at the end of any
reset period. Current reset frequencies for floating rate instruments other than
senior secured loans are indicated by Q (quarterly) or S (semiannually).
(f) Fair value of this investment determined by or under the direction of our
Board of Directors (see Note 2).
The accompanying notes are an integral part of these financial statements.
35
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
BlackRock Kelso Capital Corporation (the "Company"), was organized as a Delaware
corporation on April 13, 2005 and was initially funded on July 25, 2005. The
Company has filed an election to be treated as a business development company
("BDC") under the Investment Company Act of 1940 (the "1940 Act"). In addition,
for tax purposes the Company intends to elect to be treated as a regulated
investment company, or RIC, under the Internal Revenue Code of 1986 (the
"Code"). The Company's investment objective is to generate both current income
and capital appreciation through debt and equity investments. The Company
intends to invest primarily in middle-market companies in the form of senior and
junior secured and unsecured debt securities and loans, each of which may
include an equity component, and by making direct preferred, common and other
equity investments in such companies.
On July 25, 2005, the Company completed a private placement (the "Offering") of
35,366,589 shares of its common stock, par value $.001 per share (the "Common
Stock"), at a price of $15.00 per share. Net proceeds from the Offering of
$529,333,799 reflect the payment of a placement fee of $507,407 and legal fees
and other offering costs of $657,639.
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP").
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reported period. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ and such
differences could be material.
The significant accounting policies consistently followed by the Company are:
(a) Investments for which market quotations are readily available are valued at
such market quotations, which are generally obtained from an independent
pricing service or one or more broker-dealers or market makers. However,
debt investments with remaining maturities within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
fair value. Debt and equity securities for which market quotations are not
readily available are valued at fair value as determined in good faith by
or under the direction of the Company's Board of Directors. Because the
Company expects that there will not be a readily available market value for
many of the investments in its portfolio, the Company expects to value many
of its portfolio investments at fair value as determined in good faith by
or under the direction of the Board of Directors using a consistently
applied valuation process in accordance with a documented valuation policy
that has been reviewed and approved by the Board of Directors. Due to the
inherent uncertainty of determining the fair value of investments that do
not have a readily available market value, the fair value of the Company's
investments may differ significantly from the values that would have been
used had a readily available market value existed for such investments, and
the differences could be material.
With respect to the Company's investments for which market quotations are not
readily available, the Board of Directors undertakes a multi-step valuation
process each quarter, as described below:
(1) The quarterly valuation process begins with each portfolio
company or investment being initially valued by the investment
professionals responsible for the portfolio investment;
(2) Preliminary valuation conclusions are then documented and
discussed with senior management;
(3) To the extent determined by the Audit Committee of the Board of
Directors, independent valuation firms engaged by the Board of
Directors conduct independent appraisals and review management's
preliminary valuations and their own independent assessment;
36
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(4) The Audit Committee of the Board of Directors reviews the
preliminary valuations of the investment professionals, senior
management and independent valuation firms; and
(5) The Board of Directors discusses valuations and determines the
fair value of each investment in the portfolio in good faith
based on the input of the Company's investment adviser, the
respective independent valuation firms and the Audit Committee.
The types of factors that the Company may take into account in fair value
pricing its investments include, as relevant, the nature and realizable value of
any collateral, the portfolio company's ability to make payments and its
earnings and discounted cash flow, the markets in which the portfolio company
does business, comparison to publicly traded securities and other relevant
factors.
Determination of fair values involves subjective judgments and estimates.
Accordingly, these notes to the financial statements express the uncertainty
with respect to the possible effect of such valuations, and any change in such
valuations, on the financial statements.
The carrying value of the Company's financial instruments approximate fair
value. The carrying value of receivables, other assets, accounts payable and
accrued expenses approximate fair value due to their short maturity.
None of the Company's portfolio companies are controlled by or affiliated with
the Company as defined in the 1940 Act.
(b) Cash equivalents include short-term investments in money market instruments
with remaining maturities when purchased of three months or less.
(c) Security transactions are accounted for on the trade date unless there are
substantial conditions to the purchase.
(d) Gains or losses on the sale of investments are calculated using the
specific identification method.
(e) Interest income, adjusted for amortization of premium and accretion of
discount, is recorded on an accrual basis. Interest income is not accrued
if collection is deemed doubtful or the related investment is in default.
For loans and debt securities with contractual payment-in-kind ("PIK")
interest, which represents contractual interest accrued and added to the
loan balance that generally becomes due at maturity, PIK interest is not
accrued if the portfolio company valuation indicates that the PIK interest
is not collectible. Origination, structuring, closing, commitment and
other upfront fees and discounts and premiums on investments purchased are
accreted/amortized over the life of the respective investment. Unamortized
origination, structuring, closing, commitment and other upfront fees are
recorded as unearned income. Upon the prepayment of a loan or debt
security, any prepayment penalties and unamortized loan origination,
structuring, closing, commitment and other upfront fees are recorded as
interest income. Dividend income is recorded on the ex-dividend date.
Expenses are recorded on an accrual basis.
(f) Organizational costs of the Company are expensed as incurred. Offering
costs are charged against paid-in capital.
(g) The Company intends to qualify for the tax treatment applicable to
regulated investment companies under Subchapter M of the Code, and, among
other things, intends to make the requisite distributions to its
shareholders which will relieve the Company from federal income and excise
taxes. Therefore, no provision has been recorded for federal income or
excise taxes.
In order to qualify as a RIC, the Company is required to distribute
annually to its shareholders at least 90% of investment company taxable
income, as defined by the Code. To avoid federal excise taxes, the Company
must distribute annually at least 98% of its income (both ordinary income
and net capital gains).
In accordance with GAAP, book and tax basis differences relating to
distributions to shareholders and other
37
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
permanent book and tax differences are reclassified to capital in excess of par.
In addition, the character of income and gains to be distributed is determined
in accordance with income tax regulations that may differ from GAAP.
(h) Dividends and distributions to common shareholders are recorded on the
ex-date. The amount to be paid out as a dividend is determined by the Board
of Directors. On December 22, 2005, the Company declared a dividend of
$0.20 per share, payable on January 31, 2006 to shareholders of record at
the close of business on December 31, 2005. The ex-date of this dividend
was December 29, 2005. On March 8, 2006, the Company declared a dividend of
$0.20 per share, payable on March 31, 2006 to shareholders of record at the
close of business on March 15, 2006. The ex-date of this dividend is
March 29, 2006.
The Company has adopted a dividend reinvestment plan that provides for
reinvestment of distributions on behalf of shareholders, unless a
shareholder elects to receive cash. As a result, if the Board of Directors
authorizes, and the Company declares, a cash dividend, then shareholders
who have not "opted out" of the dividend reinvestment plan will have their
cash dividends automatically reinvested in additional shares of Common
Stock, rather than receiving the cash dividends.
3. AGREEMENTS AND RELATED PARTY TRANSACTION
The Company has entered into an Investment Management Agreement (the "Management
Agreement") with BlackRock Kelso Capital Advisors LLC (the "Investment
Advisor"), under which the Investment Advisor, subject to the overall
supervision of the Company's Board of Directors, manages the day-to-day
operations of, and provides investment advisory services to, the Company. For
providing these services, the Investment Advisor receives a fee (the "Management
Fee") from the Company at an annual rate of 2.0% of the Company's total assets,
including any assets acquired with the proceeds of leverage. For services
rendered under the Management Agreement during the period commencing from the
closing of the Offering (the "Closing") through and including the first twelve
months of operations, the Management Fee will be payable monthly in arrears. For
services rendered under the Management Agreement after that time, the Management
Fee will be paid quarterly in arrears. The Investment Advisor has contractually
agreed to waive its rights to receive one-half of the amount of the Management
Fee the Investment Advisor would otherwise be entitled to receive from the
Company until the first date on which 90% of the assets of the Company are
invested in portfolio companies in accordance with the Company's investment
objective, excluding investments in cash, cash equivalents, U.S. government
securities and other high-quality debt investments that mature in one year or
less from the date of investment, or the first anniversary of the Closing,
whichever is sooner (the "Ramp-Up Date"). Thereafter, the Investment Advisor has
agreed to waive, until such time as the Company has completed an initial public
offering of its Common Stock and listed its Common Stock on a national
securities exchange (collectively, the "Public Market Event"), one-quarter of
the amount of the Management Fee the Investment Advisor would otherwise be
entitled to receive from the Company. In addition, the Investment Advisor has
agreed to (a) waive Management Fees for any calendar year in excess of
approximately $11.9 million until the earlier of (i) such time as the Company
has completed the Public Market Event or (ii) the fourth anniversary of the
Company's inception of operations and (b) waive Management Fees in excess of
approximately $5.6 million during the fifth year of the Company's operations
unless the Company has completed the Public Market Event.
For the period July 25, 2005 (inception of operations) through December 31,
2005, the Investment Advisor earned $2,334,922 in fees, net of the waiver
provision, from the Company.
The Management Agreement provides that the Investment Advisor or its affiliates
may be entitled to an incentive fee (the "Carried Interest") under certain
circumstances. The determination of the Carried Interest, as described in more
detail below, will result in the Investment Advisor or its affiliates receiving
no Carried Interest payments if returns to Company shareholders, as described in
more detail below, do not meet an 8.0% annualized rate of return and will result
in the Investment Advisor or its affiliates receiving less than the full amount
of the Carried Interest percentage until returns to shareholders exceed an
approximate 13.3% annualized rate of return.
38
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
Commencing on the Ramp-Up Date, the Company will pay to the Investment Advisor
or its affiliates at the same time as, and not in advance of, any distributions
in respect of the Company's Common Stock, (i) 50% of the amount by which the
cumulative distributions and amounts distributable to the holders of the Common
Stock of the Company exceed an 8% annualized rate of return on net asset value
until the Investment Advisor or its affiliates have received from the Company an
amount equal to 20% of the sum of the cumulative amounts distributed pursuant to
this paragraph and the cumulative amounts of net income (including realized
capital gains in excess of realized capital losses) in excess of net unrealized
capital depreciation distributed to the holders of the Company's Common Stock,
and (ii) thereafter an amount equal to 20% of the sum of the amount distributed
pursuant to this paragraph and the cumulative amounts of net income (including
realized capital gains in excess of realized capital losses) in excess of net
unrealized capital depreciation distributed to the holders of the Company's
Common Stock. After the Public Market Event, if any, the amounts above will be
measured and paid quarterly on a rolling four-quarter basis and will take into
account any decrease in net unrealized depreciation during the measurement
period to the extent such decrease did not exceed the net amount of capital
depreciation at the beginning of such period and does not exceed the excess of
cumulative realized capital gains over cumulative realized capital losses.
For the period July 25, 2005 (inception of operations) through December 31,
2005, no Carried Interest amounts were earned by the Investment Advisor.
The Management Agreement provides that the Company will reimburse the Investment
Advisor for costs and expenses incurred by the Investment Advisor for office
space rental, office equipment and utilities allocable to the performance by the
Investment Advisor of its duties under the Management Agreement, as well as any
costs and expenses incurred by the Investment Advisor relating to any
non-investment advisory, administrative or operating services provided by the
Investment Advisor to the Company. For the period July 25, 2005 (inception of
operations) through December 31, 2005, the Company accrued $138,405 for costs
and expenses reimbursable to the Investment Advisor under the Management
Agreement.
No person who is an officer, director or employee of the Investment Advisor and
who serves as a director of the Company receives any compensation from the
Company for such services. Directors who are not affiliated with the Investment
Advisor receive compensation for their services and reimbursement of expenses
incurred to attend meetings.
The Company has also entered into an Administration Agreement with BlackRock
Financial Management, Inc. (the "Administrator"), a majority-owned subsidiary of
The PNC Financial Services Group, Inc., under which the Administrator provides
administrative services to the Company. For providing these services, facilities
and personnel, the Company reimburses the Administrator for the Company's
allocable portion of overhead and other expenses incurred by the Administrator
in performing its obligations under the Administration Agreement, including rent
and the Company's allocable portion of the cost of certain of the Company's
officers and their respective staffs.
For the period July 25, 2005 (inception of operations) through December 31,
2005, the Company accrued $435,483 for administrative services expenses payable
to the Administrator under the Administration Agreement.
From time to time, the Administrator may pay amounts owed by the Company to
third party providers of goods or services. The Company will subsequently
reimburse the Administrator for such amounts paid on its behalf. For the period
July 25, 2005 (inception of operations) through December 31, 2005, the Company
reimbursed the Administrator $198,875 of payments made on behalf of the Company
to third party providers of goods and services. At December 31, 2005, an
additional $10,935 has been accrued for and is owing to the Administrator for
such payments.
PFPC Inc. ("PFPC"), a subsidiary of The PNC Financial Services Group, Inc.
("PNC"), provides administrative and accounting services to the Company pursuant
to a Sub-Administration and Accounting Services Agreement. PFPC Trust Company,
another subsidiary of PNC, provides custodian services to the Company pursuant
to a Custodian Services Agreement. Also, PFPC provides transfer agency and
compliance support services to the Company pursuant to a Transfer Agency
Agreement and a Compliance Support Services Agreement, respectively. For the
services provided to the Company by PFPC and its affiliates, PFPC is entitled to
an annual fee of 0.02% of the Company's average net assets plus reimbursement of
reasonable expenses, and a base fee, payable monthly.
39
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
For the period July 25, 2005 (inception of operations) through December 31,
2005, the Company accrued $83,919 for administrative, accounting, custodian and
transfer agency services fees payable to PFPC and its affiliates under the
related agreements.
On July 25, 2005, in connection with the closing of the Offering, the Company
issued approximately 33,333,333 shares of its common stock to BlackRock Kelso
Capital Holding LLC, an entity for which the Investment Advisor serves as
manager, in exchange for total consideration of $500,000,000 ($15.00 per share),
consisting of $80,282,060 in cash and a portfolio of short-term investments and
cash equivalents valued at $419,717,940. The transaction was effected in
accordance with the Company's valuation procedures governing securities
transactions with affiliates and was ratified by the Board of Directors.
At December 31, 2005, the Investment Advisor beneficially owned indirectly
733,333 shares of the Company's Common Stock, representing approximately 2.1% of
the total shares outstanding. At December 31, 2005, other entities affiliated
with the Administrator and PFPC beneficially owned indirectly 2,309,150 shares
of the Company's Common Stock, representing approximately 6.5% of the total
shares outstanding. At December 31, 2005, an entity affiliated with the
Administrator and PFPC owned 36.5% of the members' interests of the Investment
Advisor.
4. ORGANIZATIONAL EXPENSES AND OFFERING COSTS
A portion of the proceeds of the Offering was used for organizational expenses
and offering costs of $57,056 and $1,165,046, respectively. Organizational
expenses were charged to expense as incurred. Offering costs have been charged
against paid-in capital in excess of par.
5. EARNINGS PER SHARE
The following information sets forth the computation of basic and diluted net
increase in net assets per share resulting from operations for the period July
25, 2005 (inception of operations) through December 31, 2005.
Numerator for basic and diluted net
increase in net assets per share: $6,444,368
Denominator for basic and diluted weighted average shares: 35,366,589
Basic/diluted net increase in net assets per share
resulting from operations: $0.18
Diluted net increase in net assets per share resulting from operations equals
basic net increase in net assets per share resulting from operations for the
period because there were no common stock equivalents outstanding during the
period.
6. PURCHASES AND SALES OF INVESTMENTS
Excluding short-term investments, the Company's purchases and sales of
investments for the period July 25, 2005 (inception of operations) to December
31, 2005 totaled $144,808,218 and $996,250, respectively.
7. COMMITMENTS AND CONTINGENCIES
At December 31, 2005, the Company had a $10 million commitment outstanding to
fund a senior secured loan.
In the normal course of business, the Company enters into contractual agreements
that provide general indemnifications against losses, costs, claims and
liabilities arising from the performance of individual obligations under such
agreements. The Company has had no prior claims or payments pursuant to such
agreements. The Company's individual maximum exposure under these arrangements
is unknown, as this would involve future claims that may be made against the
Company that have not yet occurred. However, based on management's experience,
the Company expects the risk of loss to be remote.
40
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
8. FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from information
provided in the financial statements. The following is a schedule of financial
highlights for a common share outstanding during the period July 25, 2005
(inception of operations) through December 31, 2005.
Per Share Data:
Net asset value, beginning of period $ -
----------------
Gross proceeds from Offering 15.00
----------------
Offering costs (0.03)
----------------
Net proceeds from Offering 14.97
----------------
Net investment income 0.17
Net realized and unrealized gain 0.01
----------------
Total from investment operations 0.18
----------------
Less: Dividends to shareholders from net (0.20)
investment income
----------------
Net decrease in net assets (0.02)
----------------
Net asset value, end of period $ 14.95
================
Total return (1)(2) 1.00%
Ratios / Supplemental Data:
Ratio of expenses to average net assets (3)
Before management fee waiver 2.64%
After management fee waiver 1.63%
Ratio of net investment income
to average net assets (3) 2.67%
Net assets, end of period $528,704,849
Portfolio turnover (2) 2%
(1) Total return is based on the change in net asset value per
share assuming an investment at the initial offering price of
$15.00 per share. Total return also takes into account dividends
and distributions, if any, reinvested in accordance with the
Company's dividend reinvestment plan.
(2) Not annualized.
(3) Annualized.
9. FEDERAL TAX INFORMATION
Dividends from net investment income and distributions from net realized capital
gains are determined in accordance with U.S. federal income tax regulations,
which may differ from those amounts determined in accordance with GAAP. These
book/tax differences are either temporary or permanent in nature. To the extent
these differences are permanent, they are charged or credited to paid-in-capital
or accumulated net realized gain, as appropriate, in the period that the
differences arise. The following permanent difference as of December 31, 2005,
attributable to the reclassification of dividends to shareholders, was
reclassified for tax purposes as follows:
41
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
Decrease accumulated net realized gain ($1,141)
Increase distributions in excess of net investment income $1,141
The following reconciles net increase in net assets resulting from operations to
taxable income for the period from July 25, 2005 (inception of operations)
through December 31, 2005:
Net increase in net assets resulting from operations $ 6,444,368
Net unrealized appreciation not taxable (240,236)
Origination, structuring, closing, commitment and other
upfront fees currently taxable, deferred for book purposes 887,949
Expenses not currently deductible 55,467
-------------
Taxable income before deductions for distributions $ 7,147,548
=============
At December 31, 2005, the cost of investments for tax purposes was $251,072,023,
resulting in net unrealized depreciation on investments of $635,673.
At December 31, 2005, the components of accumulated losses on a tax basis and a
reconciliation to accumulated losses on a book basis were as follows:
Undistributed ordinary income - net $ 74,230
Unrealized losses - net (647,713)
-------------
Total accumulated losses - net, tax basis (573,483)
Expenses not currently deductible (55,467)
-------------
Total accumulated losses - net, book basis $ (628,950)
=============
The difference between book-basis unrealized gains and tax-basis unrealized
losses is attributable to the book deferral of origination, structuring,
closing, commitment and other upfront fees. Expenses not currently deductible
are a book/tax temporary difference attributable to certain organizational
expenses.
For income tax purposes, distributions paid to shareholders are reported as
ordinary income, non-taxable, capital gains, or a combination thereof. Dividends
declared of $7,073,318 for the period from July 25, 2005 (inception of
operations) through December 31, 2005 were taxable entirely as ordinary income.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15 under the Securities Exchange Act of
1934). Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our current disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company that is required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting that
occurred during our most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
42
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Our business and affairs are managed under the direction of our Board of
Directors. The Board of Directors currently consists of five members, four of
whom are not "interested persons" of the Company or of BlackRock Kelso Capital
Advisors LLC as defined in Section 2(a)(19) of the 1940 Act. We refer to these
individuals as our independent directors. Our Board of Directors elects our
officers, who serve at the discretion of the Board of Directors. Each director
holds office until his successor is elected and qualified, or until his term as
a director is terminated as provided in the Company's by-laws. The directors of
the Company are as follows:
Name Age Position
- ---- --- --------
James R. Maher* 56 Chairman of the Board of Directors and
Chief Executive Officer, since 2005
Jerrold B. Harris (1)(2) 63 Director, since 2005
William E. Mayer (1) 65 Director, since 2005
Francois de Saint Phalle (1)(2) 60 Director, since 2005
Maureen K. Usifer (1)(2) 46 Director, since 2005
_____________________
*Interested person of the Company and of BlackRock Kelso Capital Advisors
LLC within the meaning of the 1940 Act.
(1) Member of the Governance Committee.
(2) Member of the Audit Committee.
The address for each director is c/o BlackRock Kelso Capital Corporation, 40
East 52nd Street, New York, New York 10022.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Our executive officers who are not directors are as follows:
Name Age Position
- ---- --- --------
Michael B. Lazar 36 Chief Operating Officer, since 2005
Frank D. Gordon 45 Chief Financial Officer and Treasurer, since 2005
Vincent B. Tritto 44 Chief Compliance Officer and Secretary, since 2005
The address for each executive officer is c/o BlackRock Kelso Capital
Corporation, 40 East 52nd Street, New York, New York 10022.
The following is information concerning the business experience of our Board of
Directors and executive officers:
JAMES R. MAHER, Chairman of the Board and Chief Executive Officer of the Company
and Chairman of the Board and Chief Executive Officer of the Advisor. Since June
2004 Mr. Maher has been engaged in establishing the Company. Mr. Maher was, from
2001 until June 2004, a partner at Park Avenue Equity Partners, L.P. ("Park
Avenue"). Park Avenue is a private equity fund specializing in middle-market
management buyouts and growth capital investments. Prior to joining Park Avenue,
Mr. Maher was President of MacAndrews & Forbes Holdings Inc., a diversified
holding company with interests primarily in consumer products and financial
services companies. Mr. Maher served as Chairman of Laboratory
43
Corporation of America Holdings ("LabCorp"), a large clinical laboratory
company, after serving as President and Chief Executive Officer of National
Health Laboratories, LabCorp's predecessor, from 1992 to 1995. Prior to
joining National Health Laboratories, Mr. Maher was Vice Chairman and a
member of the Operating Committee of The First Boston Corporation, an
international investment-banking firm. He served on the Group Executive
Committee of Credit Suisse First Boston, Inc., where he was responsible for
the global oversight and coordination of merger and acquisition activities,
as well as being a member of its investment committee. He was also Head of
the Investment Banking Group for more than four years. He joined The First
Boston Corporation in 1976 and was named a Managing Director in 1982. Mr.
Maher serves as a Director of Panavision, Inc. and HCI Direct, Inc. He is
also a Director of Prep for Prep, an organization based in New York City that
assists intellectually gifted public school students from minority group
backgrounds, and prepares them for placement in independent schools. He has
served as a Director of the Brearley School in New York City and on the
boards of a number of public companies. Mr. Maher received a Master's in
Business Administration from Columbia University in 1976 and an undergraduate
degree from Boston College in 1971.
JERROLD B. HARRIS, Director of the Company. Mr. Harris has been retired since
1999. From 1990 to 1999, Mr. Harris was President and Chief Executive Officer of
VWR Scientific Products Corporation (which was acquired by Merck KGaA in 1999).
Mr. Harris is currently a director of BlackRock Liquidity Funds and Henry
Troemner LLC. Mr. Harris is a trustee of Ursinus College. Mr. Harris earned a
B.S. degree from the University of California at Berkeley in 1964.
WILLIAM E. MAYER, Director of the Company. Since 1999, Mr. Mayer has been a
partner at Park Avenue, which he co-founded. From 1996 until the formation of
Park Avenue, Mr. Mayer was a founding Partner of Development Capital, which
invested in private and public companies. From the fall of 1992 until
December 1996, Mr. Mayer was a professor and Dean of the College of Business
and Management at the University of Maryland. From 1991 to 1992, Mr. Mayer
served as a professor and Dean of the Simon Graduate School of Business at
the University of Rochester. Mr. Mayer worked for The First Boston
Corporation (now Credit Suisse), a major investment bank, from 1967 to 1990.
During his career at The First Boston Corporation, Mr. Mayer held numerous
management positions including President and Chief Executive Officer. Mr.
Mayer is currently a board member of Lee Enterprises (a newspaper company
owning or having stakes in approximately 45 daily newspapers) and Reader's
Digest, and is a trustee of the Columbia Group of Mutual Funds. Over the past
25 years, he has been a board member of numerous other public and private
companies. Mr. Mayer is also Chairman of the Aspen Institute and a trustee of
The University of Maryland. Mr. Mayer was a First Lieutenant and Navigator in
the U.S. Air Force. He holds a B.S. degree and an M.B.A. degree from the
University of Maryland.
FRANCOIS DE SAINT PHALLE, Director of the Company. Mr. de Sainte Phalle has
been retired since 2001. From 1990 to 2001, Mr. de Saint Phalle was
Vice-Chairman and Chief Operating Officer of Dillon, Read & Co., Inc., an
investment bank which was acquired by Swiss Bank Corporation in 1997. From
1968 to 1990, Mr. de Saint Phalle was a Managing Director at Lehman Brothers,
Inc. and, from 1985 to 1990, Chairman of Lehman Brothers International
(Europe). Mr. de Saint Phalle is currently a director of Cornerstone
Management Solutions. Mr. de Saint Phalle earned a B.A. degree from Columbia
College in 1968.
MAUREEN K. USIFER, Director of the Company. Maureen K. Usifer has been a
senior finance director with Church & Dwight Co., Inc., a major producer of
baking soda and consumer products, from May 2004 until present. From October
2001 until May 2004, Ms. Usifer was the Chief Financial Officer for Armkel,
LLC a joint venture with Church & Dwight and Kelso which encompassed over
$400 million in personal care sales. Ms. Usifer was Division Controller of
Church & Dwight's Armus joint venture, which encompassed $500 million in
laundry sales, from May 2000 through October 2001. From 1996 through 2000,
Ms. Usifer was a Senior Finance Manager of Church & Dwight responsible for
all of the Arm & Hammer's personal care businesses. Ms. Usifer received an
undergraduate degree in business from St. Michael's College and an M.B.A. in
Finance from Clarkson University.
MICHAEL B. LAZAR, Chief Operating Officer of the Company and Chief Operating
Officer of the Advisor. Prior to joining the Company and the Advisor, Mr.
Lazar was a Managing Director and Principal at Kelso, one of the oldest and
most established firms specializing in private equity investing. Having
originally joined Kelso in 1993, Mr. Lazar has been involved in Kelso's
private equity transactions since that time. Prior to joining Kelso, Mr.
Lazar worked in the Acquisition Finance Group at Chemical Securities, Inc.
(predecessor to J.P. Morgan Securities Inc.) where his responsibilities
included working with financial sponsors on the analysis, evaluation and
financing of leveraged buyouts. Mr. Lazar began his career in the Corporate
Finance and Structured Finance Groups at Chemical Bank, where he focused on
financings for leveraged companies. He received a B.A. degree, cum laude,
from Dartmouth College. Mr. Lazar is a director of Endurance Business Media,
Inc. and Waste Services, Inc.
44
FRANK D. GORDON, Chief Financial Officer and Treasurer of the Company, Chief
Financial Officer and Treasurer of the Advisor and a Director of the
Administrator. Mr. Gordon has worked at BlackRock since 1998, where his primary
responsibility was until recently the administration of structured finance
entities managed by the high yield and bank loan teams, including compliance
monitoring, legal affairs and financial and shareholder reporting. Mr. Gordon
has been involved in BlackRock's high yield and mezzanine efforts since their
inception. Prior to joining BlackRock's high yield effort, Mr. Gordon was the
Controller of Anthracite Capital, Inc., a publicly traded (NYSE: AHR) real
estate investment trust managed by BlackRock. From 1994 to 1998, Mr. Gordon was
an attorney in the Structured Finance department of Skadden, Arps, Slate,
Meagher & Flom LLP. From 1987 to 1990, Mr. Gordon was a Vice President in the
Fixed Income Research department of The First Boston Corporation. From 1983 to
1986, Mr. Gordon was a senior auditor at Deloitte Haskins & Sells. Mr. Gordon
earned a B.S. degree in economics from the Wharton School of the University of
Pennsylvania in 1983 and an M.B.A. degree with honors and a J.D. degree from The
University of Chicago in 1992 and 1994, respectively. Mr. Gordon is a Certified
Public Accountant and a Chartered Financial Analyst.
VINCENT B. TRITTO, Chief Compliance Officer and Secretary of the Company, Chief
Compliance Officer of the Advisor and a Managing Director and Senior Counsel of
the Administrator. Mr. Tritto has worked at BlackRock since 2002. He also serves
as the Secretary of the 56 active funds comprising the BlackRock Closed-end
Funds. Prior to joining BlackRock, Mr. Tritto was Executive Director and Counsel
at Morgan Stanley Investment Management Inc. for four years. Previously, he was
Counsel (1998), and an associate (1988 through 1997), at the New York law firm
of Rogers & Wells. During this time he also served as a foreign associate at the
Tokyo law firm of Masuda & Ejiri, from 1992 to 1994. Mr. Tritto earned B.A.
degrees, cum laude, from the University of Rochester in 1983 and a J.D. degree,
cum laude, from St. John's University School of Law in 1988 where he was
managing editor of the St. John's Law Review.
THE AUDIT COMMITTEE
The Audit Committee operates pursuant to a charter approved by our Board of
Directors. The charter sets forth the responsibilities of the Audit Committee.
The primary function of the Audit Committee is to serve as an independent and
objective party to assist the Board of Directors in fulfilling its
responsibilities for overseeing and monitoring the quality and integrity of the
Company's financial statements, the adequacy of the Company's system of internal
controls, the review of the independence, qualifications and performance of the
Company's independent registered public accounting firm, and the performance of
the Company's internal audit function. The Audit Committee is presently composed
of three persons, including Ms. Usifer (Chairperson) and Messrs. Harris and de
Saint Phalle, all of whom are considered independent. The Company's Board of
Directors has determined that Ms. Usifer is an "audit committee financial
expert" as defined under Item 401 of Regulation S-K of the Exchange Act. Ms.
Usifer meets the current independence and experience requirements of Rule 10A-3
of the Exchange Act and, in addition, is not an "interested person" of the
Company or of BlackRock Kelso Capital Advisors LLC as defined in Section
2(a)(19) of the 1940 Act.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Exchange Act, the Company's directors and
executive officers, and any persons holding more than 10% of its common stock,
are required to report their beneficial ownership and any changes therein to the
Securities and Exchange Commission and the Company. Specific due dates for those
reports have been established, and the Company is required to report herein any
failure to file such reports by those due dates. Based on the Company's review
of Forms 3, 4 and 5 filed by such persons, the Company believes that during the
fiscal year ended December 31, 2005, all Section 16(a) filing requirements
applicable to such persons were met in a timely manner.
CODE OF ETHICS
We have adopted a code of ethics that applies to our Chief Executive Officer,
President, Chief Financial Officer and Treasurer, or persons performing similar
functions, as required under Item 406 of Regulation S-K under the Exchange Act.
The code of ethics is filed as an exhibit to this annual report on Form 10-K and
is available at our corporate website at www.blackrockkelso.com under the
heading "Investor Relations/Corporate Governance." Further, we will provide a
copy of the code of ethics without charge to each shareholder upon written
request. Requests for copies should be addressed to the Corporate Secretary,
BlackRock Kelso Capital Corporation, 40 East 52nd Street, New York, New York
10022. We intend to satisfy any disclosure requirements regarding any amendment
to, or waiver from, a provision of this code of ethics by posting such
information on our corporate website at www.blackrockkelso.com under the heading
"Investor Relations/Corporate Governance."
45
ITEM 11. EXECUTIVE COMPENSATION
The following table shows information regarding the compensation received by the
directors and executive officers of the Company for the calendar year ended
December 31, 2005. No compensation is paid to directors who are "interested
persons."
Pension or Retirement Total Compensation from
Name and Aggregate Compensation Benefits Accrued as Part the Company Paid to
Principal Position from the Company of Our Expenses (1) Director/Officer
- ------------------ ---------------- -------------------- ----------------
DIRECTORS:
James R. Maher,* None None None
Chairman of the Board of Directors
and Chief Executive Officer (2)
Jerrold B. Harris, $62,000 None $62,000
Director
William E. Mayer, $62,500 None $62,500
Director
Francois de Saint Phalle, $62,000 None $62,000
Director
Maureen K. Usifer, $69,500 None $69,500
Director
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS:
Michael B. Lazar, None None None
Chief Operating Officer (2)
Frank D. Gordon, None None None
Chief Financial Officer and
Treasurer (3)
Vincent B. Tritto, None None None
Chief Compliance Officer
and Secretary (3)
____________________
*Interested person of the Company and of BlackRock Kelso Capital Advisors LLC within the meaning of the 1940 Act.
(1) We do not have a profit sharing or retirement plan, and directors do not receive any pension or retirement benefits.
(2) James R. Maher and Michael B. Lazar are officers and members of BlackRock Kelso Capital Advisors LLC, the Advisor.
(3) Frank D. Gordon and Vincent B. Tritto are officers of BlackRock Kelso Capital Advisors LLC, the Advisor,
and are employees of BlackRock Financial Management, Inc., the Administrator.
The independent directors receive an annual fee of $50,000. They also receive
$2,500 ($1,250 for telephonic attendance) plus reimbursement of reasonable
out-of-pocket expenses incurred in connection with attending each board meeting
and receive $1,000 ($500 for telephonic attendance) plus reimbursement of
reasonable out-of-pocket expenses incurred in connection with attending each
committee meeting. In addition, the Chairman of the Audit Committee receives an
annual fee of $7,500 and each chairman of any other committee receives an annual
fee of $2,500 for their additional services in these capacities. In addition, we
purchase directors' and officers' liability insurance on behalf of our directors
and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
At December 31, 2005, Virginia Retirement System beneficially owned 25% or more
of our outstanding voting securities, and therefore would be deemed to control
us, as such term is defined in the 1940 Act.
46
The following table sets forth, at December 31, 2005, information with respect
to the ownership of our common stock by each shareholder who owned more than 5%
of our outstanding shares of common stock, each director, our chief executive
officer, each of our other executive officers and our directors and executive
officers as a group. Unless otherwise indicated, we believe that each beneficial
owner set forth in the table has sole voting and investment power.
Percentage of
Type of Shares Common Stock
Name and Address Ownership Owned Outstanding
- ---------------- --------- ----- -----------
Virginia Retirement System (1) Beneficial 13,333,333 37.70%
1200 East Main Street
Richmond, VA 23219
Performance Equity Management, LLC (2)(3) Beneficial 6,666,667 18.85%
2 Pickwick Plaza, Suite 310
Greenwich, CT 06830
First Plaza Group Trust (2)(3) Beneficial 5,000,000 14.13%
c/o JP Morgan Chase Bank, N.A.
3 Chase Metro Center - Fifth Floor
Brooklyn, NY 11245
Officers and Directors:
James R. Maher (4) Beneficial 666,666 1.89%
Jerrold B. Harris Beneficial 40,000 *%
William E. Mayer Beneficial 16,667 *%
Francois de Saint Phalle Direct 333,333 *%
Maureen K. Usifer Direct 6,667 *%
Michael B. Lazar Beneficial 66,667 *%
Frank D. Gordon Direct 3,333 *%
Vincent B. Tritto Direct 67 *%
All officers and directors as a group (8 persons)(5) Direct/ 1,133,400 3.2%
Beneficial
_________________
* Represents less than 1%.
(1) This information is obtained from a Schedule 13G filed on August 9,
2005, by Virginia Retirement System.
(2) This information is obtained from a Schedule 13G filed on August 9,
2005, by First Plaza Group Trust and General Motors Investment
Management Corporation (predecessor in interest to Performance Equity
Management, LLC).
(3) Performance Equity Management, LLC and First Plaza Group Trust retain
shared power to vote or to direct the vote and to dispose or to direct
the disposition of the same 5,000,000 shares.
(4) Includes 97,333 shares owned indirectly by the individual's children and
102,667 shares owned indirectly by a family trust for which the
individual serves as a trustee, as to each of which the individual
disclaims beneficial ownership.
(5) The address for all our officers and directors is c/o BlackRock Kelso
Capital Corporation, 40 East 52nd Street, New York, NY 10022.
The following table sets forth the dollar range of our equity securities
beneficially owned by each of our directors at December 31, 2005. We are not
part of a "family of investment companies," as that term is defined in the 1940
Act.
Dollar Range of Equity
Name of Director Securities in the Company (1)
- ---------------- ----------------------------
INDEPENDENT DIRECTORS:
Jerrold B. Harris $500,001 - $1,000,000
William E. Mayer $100,001 - $500,000
Francois de Saint Phalle Over $1,000,000
Maureen K. Usifer $50,001 - $100,000
INTERESTED DIRECTOR AND EXECUTIVE OFFICER:
James R. Maher Over $1,000,000
47
_____________
(1) Dollar ranges are as follows: None, $1 - $10,000, $10,001 - $50,000,
$50,001 - $100,000, $100,001 - $500,000, $500,001 - $1,000,000 or over
$1,000,000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into an investment management agreement with BlackRock Kelso
Capital Advisors LLC (the "Advisor"). Our senior management and our Chairman of
the Board of Directors have ownership and financial interests in the Advisor. In
addition, our executive officers and directors and the employees of the Advisor,
serve or may serve as officers, directors or principals of entities that operate
in the same or related line of business as we do or of investment funds managed
by our affiliates. Accordingly, we may not be given the opportunity to
participate in certain investments made by investment funds managed by advisers
affiliated with the Advisor. However, the Advisor and BlackRock intend to
allocate investment opportunities in a fair and equitable manner consistent with
our investment objectives and strategies.
We have entered into a license agreement with BlackRock and the Advisor pursuant
to which BlackRock has agreed to grant to the Advisor, and the Advisor has
agreed to grant to us, a non-exclusive, royalty-free license to use the name
"BlackRock." In addition, we have entered into a license agreement with Michael
B. Lazar, our Chief Operating Officer, and the Advisor pursuant to which Mr.
Lazar has agreed to grant to the Advisor, and the Advisor has agreed to grant to
us, a non-exclusive, royalty-free license to use the name "Kelso." Mr. Lazar
obtained this limited right to license the name "Kelso" under an agreement with
Kelso.
Pursuant to the terms of the administration agreement, BlackRock, through its
wholly owned subsidiary, BlackRock Financial Management, Inc., provides us with
the office facilities and administrative services necessary to conduct our
day-to-day operations. Subject to BlackRock's oversight, PFPC Inc., a
subsidiary of PNC, serves as our sub-administrator, accounting agent, investor
services agent and transfer agent and provides legal and regulatory support
services. PFPC Trust Company, another subsidiary of PNC, serves as custodian of
our investment assets. Fees and indemnification in respect of BlackRock and the
PFPC entities as providers of such services were approved by our Board of
Directors, including the directors that are not "interested persons."
To the extent provided by the 1940 Act, we will not invest in any private
company in which BlackRock, Kelso, or any of their affiliates, or any of the
unregistered investment funds managed by them, holds an existing investment. We
may, however, co-invest on a concurrent basis with other affiliates of BlackRock
or Kelso, subject to compliance with applicable allocation procedures.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of our Board of Directors selected Deloitte & Touche LLP as
independent auditors for the Company for the fiscal year ended December 31,
2005. Deloitte & Touche LLP has advised the Company that neither the firm nor
any present member or associate of it has any material financial interest,
direct or indirect, in the Company or its subsidiaries.
AUDIT FEES: Audit fees consist of fees billed for professional services rendered
for the audit of our year-end financial statements and services that are
normally provided by Deloitte & Touche LLP in connection with statutory and
regulatory filings. Fees incurred were $165,000 for the quarterly review
associated with our Form 10-Q filing and for the annual audit of the Company's
financial statements included as part of our Form 10-K filing.
AUDIT-RELATED FEES: Audit-related services consist of fees billed for assurance
and related services that are reasonably related to the performance of the audit
or review of our financial statements and are not reported under "Audit Fees."
These services include attest services that are not required by statute or
regulation and consultations concerning financial accounting and reporting
standards. There were no audit-related fees charged to the Company for the
period ended December 31, 2005.
TAX SERVICES FEES: Tax fees consist of fees billed for professional services for
tax compliance. These services include assistance regarding federal, state, and
local tax compliance. Tax fees incurred by the Company were $4,000 during the
48
fiscal period ended December 31, 2005 and represented work related to our excise
tax distribution requirements and their respective form extensions.
ALL OTHER FEES: Other fees would include fees for products and services other
than the services reported above. There were no such fees charged to the Company
for the period ended December 31, 2005.
The Audit Committee of the Board of Directors of BlackRock Kelso Capital
Corporation operates under a written charter adopted by the Board of Directors.
Management is responsible for the Company's internal controls and the financial
reporting process. The Company's Independent Registered Public Accounting Firm
("Independent Auditors") are responsible for performing an independent audit of
the Company's financial statements in accordance with standards of the Public
Company Accounting Oversight Board (United States) and expressing an opinion on
the conformity of those audited financial statements in accordance with
accounting principles generally accepted in the United States. The Audit
Committee's responsibility is to monitor and oversee these processes. The Audit
Committee is also directly responsible for the appointment, compensation and
oversight of the Company's Independent Auditors.
The Audit Committee has established a pre-approval policy that describes the
permitted audit, audit-related, tax and other services to be provided by
Deloitte & Touche LLP, the Company's Independent Auditors. The policy requires
that the Audit Committee pre-approve the audit and non-audit services performed
by the Independent Auditors in order to assure that the provision of such
service does not impair the Independent Auditors' independence.
Any requests for audit, audit-related, tax and other services that have not
received general pre-approval must be submitted to the Audit Committee for
specific pre-approval, and cannot commence until such approval has been granted.
Normally, pre-approval is provided at regularly scheduled meetings of the Audit
Committee. However, the Audit Committee may delegate pre-approval authority to
one or more of its members. The member or members to whom such authority is
delegated shall report any pre-approval decisions to the Audit Committee at its
next scheduled meeting. The Audit Committee does not delegate its
responsibilities to pre-approve services performed by the Independent Auditors
to management.
The Audit Committee has reviewed the audited financial statements and met and
held discussions with management regarding the audited financial statements.
Management has represented to the Audit Committee that the Company's financial
statements were prepared in accordance with accounting principles generally
accepted in the United States.
The Audit Committee has discussed with Deloitte & Touche LLP, the Company's
Independent Auditors, matters required to be discussed by Statement of Auditing
Standards No. 61 (Communication with Audit Committees). The Audit Committee
received and reviewed the written disclosures and the letter from the
Independent Auditors required by Independence Standard No. 1, Independence
Discussions with Audit Committees, as amended by the Independence Standards
Board, and has discussed with the Independent Auditors their independence.
Based on the Audit Committee's discussion with management and the Independent
Auditors, the Audit Committee's review of the audited financial statements, the
representations of management and the report of the Independent Auditors to the
Audit Committee, the Audit Committee recommends that the Board of Directors
include the audited financial statements in the Company's Annual Report on Form
10-K for the fiscal period ended December 31, 2005 for filing with the
Securities and Exchange Commission. The Audit Committee has also appointed
Deloitte & Touche LLP to serve as independent auditors for the year ending
December 31, 2006.
49
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements.
Refer to Item 8 above.
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
3.1 Certificate of Incorporation of the Registrant (1)
3.2 Certificate of Amendment to the Certificate of Incorporation
of the Registrant (1)
3.3 By-laws of the Registrant (1)
4.1* Form of Stock Certificate of the Registrant
10.1* Investment Management Agreement between the Registrant and
BlackRock Kelso Capital Advisors LLC
10.2* Administration Agreement between the Registrant and BlackRock
Financial Management, Inc.
10.3* Dividend Reinvestment Plan
10.4* Custodian Services Agreement between PFPC Trust Company and
the Registrant
10.5* Transfer Agency Services Agreement between PFPC Inc. and the
Registrant
10.6* Sub-Administration and Accounting Services Agreement by and
among the Registrant, PFPC Inc. and BlackRock Financial
Management, Inc.
10.7* Waiver Reliance Letter between the Registrant and BlackRock
Kelso Capital Advisors LLC
11.1* Statement regarding computation of per share earnings
14.1* Code of Ethics of the Registrant
31.1* Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2* Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1* Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U. S. C. 1350)
________________
* Filed herewith.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10 (Commission File No. 000-51327), as amended, originally filed with
the Securities and Exchange Commission on May 24, 2005.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BLACKROCK KELSO CAPITAL CORPORATION
By: /s/ James R. Maher
--------------------------------
James R. Maher
Chairman of the Board and Chief Executive Officer
March 29, 2006
Each of the officers and directors of BlackRock Kelso Capital Corporation whose
signature appears below, in so signing, also makes, constitutes and appoints
each of James R. Maher and Frank D. Gordon, or either of them, each acting
alone, his true and lawful attorneys-in-fact, with full power and substitution,
for him in any and all capacities, to execute and cause to be filed with the
Securities and Exchange Commission any and all amendments to the Annual Report
on Form 10-K, with exhibits thereto and other documents connected therewith and
to perform any acts necessary to be done in order to file such documents, and
hereby ratifies and confirms all that said attorneys-in-fact or their substitute
or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James R. Maher Chairman of the Board March 29, 2006
- ----------------------------------------- and Chief Executive Officer
JAMES R. MAHER (principal executive officer)
/s/ Frank D. Gordon Chief Financial Officer and March 29, 2006
- ----------------------------------------- Treasurer
FRANK D. GORDON (principal financial and accounting
officer)
/s/ Jerrold B. Harris Director March 29, 2006
- -----------------------------------------
JERROLD B. HARRIS
/s/ William E. Mayer Director March 29, 2006
- -----------------------------------------
WILLIAM E. MAYER
/s/ Francois de Saint Phalle Director March 29, 2006
- -----------------------------------------
FRANCOIS DE SAINT PHALLE
/s/ Maureen K. Usifer Director March 29, 2006
- -----------------------------------------
MAUREEN K. USIFER
51
Exhibit 4.1
NUMBER Incorporated Under the laws of the State of Delaware SHARES
______ ______
BlackRock Kelso Capital Corporation
Par Value $0.001 Common Stock
This is to certify that ________________________________________ is the owner of
________________________________________________________________________________
Fully Paid and Non-Assessable Shares of Par Vale $0.001 Common Stock of
BlackRock Kelso Captial Corporation
transferable only on the books of the Corporation by the holder thereof in
person or by a duly authorized Attorney upon surrender of this Certificate
properly endorsed.
Witness, the seal of the Corporation and the signatures of its dulyu authorized
officers.
Dated
________________________________ ____________________________________
Treasurer Chairman and Chief Executive Officer
For value received _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
________________________ _____________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
_________________________________________________________________________ Shares
represented by the within Certificate and do hereby irrevocably constitute and appoint
________________________________________________ Attorney to transfer the said Shares
on the books of the within named Corporation with full power of substitution in the premises.
Dated ___________________________
In presence of___________________________________
___________________________________
THIS SECURITY HAS NOT BEEN RECOMMENDED, APPROVED OR DISAPPROVED BY ANY FEDERAL
OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. THIS SECURITY HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT"), AND ACCORDINGLY,
MAY NOT BE OFFERED, PLEDGED OR SOLD EXCEPT AS SET FORTH N THE FOLLOWING
SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS AN
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 OF REGULATION D UNDER THE
SECURITIES ACT) (AN "ACCREDITED INVESTOR") AND (2) AGREES THAT IT WILL NOT
REOFFER, PLEDGE, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE
COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO AN ACCREDITED INVESTOR, PROVIDED THAT
PRIOR TO SUCH TRANSFER THE HOLDER FURNISHES TO THE COMPANY A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS
ON TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE
COMPANY), OR (C) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES. PRIOR TO ANY TRANSFER, THE HOLDER OF
THIS SECURITY AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY
IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THE HOLDER
MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS THE COMPANY MAY REASONABLY REQUIRE TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
AS USED HEREIN, THE TERMS "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS
GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
Exhibit 10.1
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT, dated July 25, 2005, between BlackRock Kelso Capital
Corporation, a Delaware corporation, (the "BDC") and BlackRock Kelso Capital
Advisors LLC (the "Advisor"), a Delaware limited liability company.
WHEREAS, Advisor has agreed to furnish investment advisory services to
the BDC, a business development company registered under the Investment Company
Act of 1940, as amended (the "1940 Act");
WHEREAS, this Agreement has been approved in accordance with the
provisions of the 1940 Act, and the Advisor is willing to furnish such services
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein contained and other good and valuable consideration, the receipt of
which is hereby acknowledged, it is agreed by and between the parties hereto as
follows:
1. In General. The Advisor agrees, all as more fully set forth herein,
to act as investment advisor to the BDC with respect to the investment of the
BDC's assets and to supervise and arrange for the day-to-day operations of the
BDC and the purchase of securities for and the sale of securities held in the
investment portfolio of the BDC.
2. Duties and Obligations of the Advisor with Respect to Investment of
Assets of the BDC.
(a) Subject to the succeeding provisions of this paragraph
and subject to the direction and control of the BDC's Board of Directors, the
Advisor shall (i) act as investment advisor for and supervise and manage the
investment and reinvestment of the BDC's assets and in connection therewith
have complete discretion in purchasing and selling securities and other assets
for the BDC and in voting, exercising consents and exercising all other rights
appertaining to such securities and other assets on behalf of the BDC; (ii)
supervise continuously the investment program of the BDC and the composition of
its investment portfolio; (iii) arrange, subject to the provisions of Section
3(b) hereof, for the purchase and sale of securities and other assets held in
the investment portfolio of the BDC; and (iv) oversee the administration of all
aspects of the BDC's business and affairs and provide, or arrange for others
whom it believes to be competent to provide, certain services as specified in
paragraph (b) below. Nothing contained herein shall be construed to restrict
the BDC's right to hire its own employees or to contract for administrative
services to be performed by third parties, including but not limited to, the
calculation of the net asset value of the BDC's shares.
(b) Except to the extent provided for directly by the BDC,
the specific services to be provided or arranged for by the Advisor for the BDC
pursuant to paragraph (a)(iv) above are (i) maintaining the BDC's books and
records, to the extent not maintained by the BDC's custodian, transfer agent
and dividend disbursing agent in accordance with applicable laws and
regulations; (ii) initiating all money transfers to the BDC's custodian and
from the BDC's custodian for the payment of the BDC's expenses, investments and
dividends; (iii) reconciling account information and balances among the BDC's
custodian, transfer agent and dividend disbursing agent; (iv) preparing all
governmental filings by the BDC and all reports by the BDC to its shareholders;
(v) supervising the calculation of the net asset value of the BDC's shares; and
(vi) preparing notices and agendas for meetings of the BDC's shareholders and
the BDC's Board of Directors as well as minutes of such meetings in all matters
required by applicable law to be acted upon by the Board of Directors.
(c) In the performance of its duties under this Agreement,
the Advisor shall at all times use all reasonable efforts to conform to, and
act in accordance with, any requirements imposed by (i) the provisions of the
Investment Company Act of 1940 (the "Act"), and of any rules or regulations in
force thereunder; (ii) any other applicable provision of law; (iii) the
provisions of the Certificate of Incorporation and the By-Laws of the BDC, as
such documents are amended from time to time; (iv) the investment objectives,
policies and restrictions applicable to the BDC as set forth in the BDC's
Private Placement Memorandum; and (v) any policies and determinations of the
Board of Directors of the BDC.
(d) The Advisor will seek to provide qualified personnel to
fulfill its duties hereunder and, except as set forth in the following
sentence, will bear all costs and expenses incurred in connection with its
investment advisory duties thereunder. The BDC shall reimburse the Advisor for
all direct and indirect cost and expenses incurred by the Advisor (i) for
office space rental, office equipment and utilities allocable to performance of
investment advisory and non investment advisory administrative or operating
services hereunder by the Advisor and (ii) allocable to any non-investment
advisory administrative or operating services provided by the Advisor
hereunder, including salaries, bonuses, health insurance, retirement benefits
and all similar employment costs, such as office equipment and other overhead
items. All allocations made pursuant to this paragraph (d) shall be made
pursuant to allocation guidelines approved from time to time by the Board of
Directors. The BDC shall also be responsible for the payment of all the BDC's
other expenses, including (i) payment of the fees payable to the Advisor under
Section 8 hereof; (ii) organizational expenses; (iii) brokerage fees and
commissions; (iv) taxes; (v) interest charges on borrowings; (vi) the cost of
liability insurance or fidelity bond coverage for the BDC's officers and
employees, and directors' and officers' errors and omissions insurance
coverage; (vii) legal, auditing and accounting fees and expenses; (viii)
charges of the BDC's administrator (if any), custodian, transfer agent and
dividend disbursing agent and any other service providers; (ix) the BDC's dues,
fees and charges of any trade association of which the BDC is a member; (x) the
expenses of printing, preparing and mailing proxies, stock certificates,
reports, prospectuses, registration statements and other documents used by the
BDC; (xi) expenses of registering and offering securities of the BDC under
applicable law; (xii) the expenses of holding shareholder meetings; (xiii) the
compensation, including fees, of any of the BDC's directors, officers or
employees who are not affiliated persons of the Advisor; (xiv) all expenses of
computing the BDC's net asset value per share; (xv) litigation and
indemnification and other extraordinary or non recurring expenses; and (xvi)
all other non investment advisory expenses of the BDC.
(e) The Advisor shall give the BDC the benefit of its
professional judgment and effort in rendering services hereunder, but neither
the Advisor nor any of its officers, directors, employees, agents or
controlling persons shall be liable for any act or omission or for any loss
sustained by the BDC in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement; provided,
however, that the foregoing shall not constitute a waiver of any rights which
the BDC may have which may not be waived under applicable law.
3. Covenants. (a) In the performance of its duties under this
Agreement, the Advisor shall at all times conform to, and act in accordance
with, any requirements imposed by: (i) the provisions of the 1940 Act and the
Investment Advisers Act of 1940, as amended, and all applicable Rules and
Regulations of the Securities and Exchange Commission; (ii) any other
applicable provision of law; (iii) the provisions of the Certificate of
Incorporation and By-Laws of the BDC, as such documents are amended from time
to time; (iv) the investment objectives and policies of the BDC as set forth in
its Private Placement Memorandum; and (v) any policies and determinations of
the Board of Directors of the BDC.
(b) In addition, the Advisor will:
(i) place orders either directly with the issuer or
with any broker or dealer. Subject to the other provisions of this
paragraph, in placing orders with brokers and dealers, the Advisor
will attempt to obtain the best price and the most favorable execution
of its orders. In placing orders, the Advisor will consider the
experience and skill of the firm's securities traders as well as the
firm's financial responsibility and administrative efficiency.
Consistent with this obligation, the Advisor may select brokers on the
basis of the research, statistical and pricing services they provide
to the BDC and other clients of the Advisor. Information and research
received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by the Advisor hereunder. A
commission paid to such brokers may be higher than that which another
qualified broker would have charged for effecting the same
transaction, provided that the Advisor determines in good faith that
such commission is reasonable in terms either of the transaction or
the overall responsibility of the Advisor to the BDC and its other
clients and that the total commissions paid by the BDC will be
reasonable in relation to the benefits to the BDC over the long term.
In addition, the Advisor is authorized to take into account the sale
of shares of the BDC in allocating purchase and sale orders for
portfolio securities to brokers or dealers (including brokers and
dealers that are affiliated with the Advisor), provided that the
Advisor believes that the quality of the transaction and the
commission are comparable to what they would be with other qualified
firms. In no instance, however, will the BDC's securities be purchased
from or sold to the Advisor, or any affiliated person thereof, except
to the extent permitted by the SEC or by applicable law;
(ii) maintain a policy and practice of conducting
its investment advisory services hereunder independently of the
commercial banking operations of its affiliates. When the Advisor
makes investment recommendations for the BDC, its investment advisory
personnel will not inquire or take into consideration whether the
issuer of securities proposed for purchase or sale for the BDC's
account are customers of the commercial department of its affiliates;
and
(iii) treat confidentially and as proprietary
information of the BDC all records and other information relative to
the BDC, and the BDC's prior, current or potential shareholders, and
will not use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the BDC, which
approval shall not be unreasonably withheld and may not be withheld
where the Advisor may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by
the BDC.
4. Services Not Exclusive. Nothing in this Agreement shall prevent the
Advisor or any officer, employee or other affiliate thereof from acting as
investment advisor for any other person, firm or corporation, or from engaging
in any other lawful activity, and shall not in any way limit or restrict the
Advisor or any of its officers, employees or agents from buying, selling or
trading any securities for its or their own accounts or for the accounts of
others for whom it or they may be acting; provided, however, that the Advisor
will undertake, and will cause its employees to undertake, no activities which,
in its judgment, will adversely affect the performance of the Advisor's
obligations under this Agreement.
5. Books and Records. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Advisor hereby agrees that all records which it
maintains for the BDC are the property of the BDC and further agrees to
surrender promptly to the BDC any such records upon the BDC's request. The
Advisor further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under
the 1940 Act.
6. Agency Cross Transactions. From time to time, the Advisor or
brokers or dealers affiliated with it may find themselves in a position to buy
for certain of their brokerage clients (each an "Account") securities which the
Advisor's investment advisory clients wish to sell, and to sell for certain of
their brokerage clients securities which advisory clients wish to buy. Where
one of the parties is an advisory client, the Advisor or the affiliated broker
or dealer cannot participate in this type of transaction (known as a cross
transaction) on behalf of an advisory client and retain commissions from one or
both parties to the transaction without the advisory client's consent. This is
because in a situation where the Advisor is making the investment decision (as
opposed to a brokerage client who makes his own investment decisions), and the
Advisor or an affiliate is receiving commissions from both sides of the
transaction, there is a potential conflicting division of loyalties and
responsibilities on the Advisor's part regarding the advisory client. The SEC
has adopted a rule under the Investment Advisers Act of 1940, as amended, which
permits the Advisor or its affiliates to participate on behalf of an Account in
agency cross transactions if the advisory client has given written consent in
advance. By execution of this Agreement, the BDC authorizes the Advisor or its
affiliates to participate in agency cross transactions involving an Account.
The BDC may revoke its consent at any time by written notice to the Advisor.
7. Expenses. During the term of this Agreement, the Advisor will bear
all costs and expenses of its employees and any overhead incurred in connection
with its duties hereunder and shall bear the costs of any salaries or
Directors' fees of any officers or Directors of the BDC who are affiliated
persons (as defined in the 1940 Act) of the Advisor; provided that the Board of
Directors of the BDC may approve reimbursement to the Advisor of the pro rata
portion of the salaries, bonuses, health insurance, retirement benefits and all
similar employment costs for the time spent on BDC operations (other than the
provision of investment advice and administrative services required to be
provided hereunder) of all personnel employed by the Advisor who devote
substantial time to BDC operations or the operations of other investment
companies advised by the Advisor.
8. Compensation of the Advisor.
(a) The Advisor, for its services to the BDC, will be
entitled to receive a management fee (the "Management Fee") from the BDC. The
Management Fee will be calculated at an annual rate of 2.00% of total assets.
For services rendered under this Agreement during the period commencing from
the Closing through and including the first twelve months of operations, the
Management Fee will be payable monthly in arrears based on the asset valuation
for the prior month or, prior to the BDC's first valuation, its assets upon the
commencement of its business. For services rendered under this Agreement after
that time, the Management Fee will be paid quarterly in arrears based on the
asset valuation for the prior quarter.
(b) For purposes of this Agreement, the net assets of the BDC
shall be calculated pursuant to the procedures adopted by resolutions of the
Directors of the BDC for calculating the value of the BDC's assets or
delegating such calculations to third parties.
(c) The Advisor will be entitled to receive a fee (the
"Carried Interest") in an amount equal to, (i) commencing on the Ramp-Up Date
and prior to the first day of the calendar quarter during which the Public
Market Event occurs, (A) 50% (payable at the same time as, and not in advance
of, any distributions in respect of the BDC's common shares) of the amount by
which the Cumulative Adjusted Common Distributions exceed the Hurdle until the
cumulative payments that have been made in respect of the Carried Interest
pursuant to this clause (i) since the Ramp-Up Date equal 20% of the sum of the
amount paid pursuant to this clause (i) plus the amount of the Cumulative
Adjusted Common Distributions since the Ramp-Up Date, and thereafter (B) an
amount (payable at the same time as, and not in advance of, any distributions
in respect of the BDC's common shares) such that, after payment thereof, the
cumulative payments that have been made in respect of the Carried Interest
pursuant to this clause (i) since the Ramp-Up Date equal 20% of the sum of the
amount paid pursuant to this clause (i) plus the amount of the Cumulative
Adjusted Common Distributions since the Ramp-Up Date and (ii) commencing on and
after the first day of the calendar quarter during which the Public Market
Event occurs, (A) 50% (payable at the same time as, and not in advance of, any
distributions in respect of the BDC's common shares) of the amount by which the
cumulative distributions and amounts distributable out of net income (including
realized capital gains in excess of realized capital losses) in respect of the
BDC's common shares (1) since the Public Market Event or (2) during the four
calendar quarters most recently completed prior to or within 15 days after the
date of declaration, whichever is most recent, exceed the Hurdle until the
cumulative payments that have been made in respect of the Carried Interest
pursuant to this clause (ii) equal 20% of the sum of the amount distributed
pursuant to this clause (ii) plus the amount of the Cumulative Adjusted Common
Distributions (1) since the Public Market Event or (2) during the four calendar
quarters most recently completed prior to or within 15 days after the date of
declaration, whichever is most recent, and thereafter (B) an amount (payable at
the same time as, and not in advance of, any distributions in respect of the
Common Shares) equal to the excess of (1) 20% of the sum of the amount
distributed pursuant to this clause (ii) plus the amount of the Measurement
Period Adjusted Common Distributions (as defined below) over (2) the portion of
the amount in item (1) above previously distributed during such four preceding
quarters.
(d) For purposes of Section 8(c), (i) "Public Market Event"
means the completion by the BDC of an initial public offering of its common
shares registered under the Securities Act of 1933 and the commencement of
trading of such common shares on a national securities exchange; (ii) "Hurdle"
means the product of 2% times the quarterly net asset value of the BDC
attributable to its common shares as of the beginning of such quarter (or such
measurement period) calculated after giving effect to any distributions in
respect of such quarter (or such measurement period) times the number of
quarters in the measurement period (which, after the Public Market Event, will
be four quarters); (iii) "Cumulative Adjusted Common Distributions" means the
excess of the cumulative distributions and amounts distributable out of net
income (including realized capital gain in excess of realized capital losses)
in respect of the common shares over the net amount of capital depreciation, if
any, at the time of determination; (iv) "Measurement Period Adjusted Common
Distributions" means the aggregate distributions and amounts distributable out
of net income (including realized capital gains in excess of realized capital
losses) in respect of the common shares during the four calendar quarters most
recently completed prior to or within 15 days after the date of declaration of
any distribution under Section 8(c), less any increases in net capital
depreciation attributable to the common shares during such four quarter period
or plus any decrease in such net capital depreciation but only to the extent
that both (A) such decrease did not exceed the net amount of capital
depreciation at the beginning of such period and (B) such decrease did not
exceed the excess of cumulative realized capital gains over cumulative realized
capital losses since commencement of operations; and (v) "Ramp-up Date" means
such time that 90% of the assets of the BDC are invested in portfolio companies
in accordance with the BDC's investment objective, excluding investments in
cash, cash equivalents, U.S. government securities and other high-quality debt
investments that mature in one year or less from the date of investment, or the
first anniversary of the date on which the BDC first draws funds under accepted
subscriptions for its common shares, whichever is sooner.
(e) The Advisor shall only be entitled to the Carried
Interest if such fees are not, have not, or will not be paid to the Advisor or
an affiliate through another mechanism.
(f) Alternatively, the Carried Interest may be paid pursuant
to a dividend on a preferred share (the "Special S Share") to be issued by the
BDC. For avoidance of doubt, if the Special S Share is issued by the BDC the
Carried Interest will not be paid pursuant to this agreement.
9. Indemnity. (a) The BDC may, in the discretion of the Board of
Directors of the BDC, indemnify the Advisor, and each of the Advisor's
directors, officers, employees, agents, associates and controlling persons and
the directors, partners, members, officers, employees and agents thereof
(including any individual who serves at the Advisor's request as director,
officer, partner, member or the like of another entity) (each such person being
an "Indemnitee") against any liabilities and expenses, including amounts paid
in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees (all as provided in accordance with applicable state law)
reasonably incurred by such Indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or investigative body in which such
Indemnitee may be or may have been involved as a party or otherwise or with
which such Indemnitee may be or may have been threatened, while acting in any
capacity set forth herein or thereafter by reason of such Indemnitee having
acted in any such capacity, except with respect to any matter as to which such
Indemnitee shall have been adjudicated not to have acted in good faith in the
reasonable belief that such Indemnitee's action was in the best interest of the
BDC and furthermore, in the case of any criminal proceeding, so long as such
Indemnitee had no reasonable cause to believe that the conduct was unlawful;
provided, however, that (1) no Indemnitee shall be indemnified hereunder
against any liability to the BDC or its shareholders or any expense of such
Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties involved in the
conduct of such Indemnitee's position (the conduct referred to in such clauses
(i) through (iv) being sometimes referred to herein as "disabling conduct"),
(2) as to any matter disposed of by settlement or a compromise payment by such
Indemnitee, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless
there has been a determination that such settlement or compromise is in the
best interests of the BDC and that such Indemnitee appears to have acted in
good faith in the reasonable belief that such Indemnitee's action was in the
best interest of the BDC and did not involve disabling conduct by such
Indemnitee and (3) with respect to any action, suit or other proceeding
voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be
mandatory only if the prosecution of such action, suit or other proceeding by
such Indemnitee was authorized by a majority of the full Board of Directors of
the BDC.
(b) The BDC may make advance payments in connection with the
expenses of defending any action with respect to which indemnification might be
sought hereunder if the BDC receives a written affirmation of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification
has been met and a written undertaking to reimburse the BDC unless it is
subsequently determined that such Indemnitee is entitled to such
indemnification and if the Directors of the BDC determine that the facts then
known to them would not preclude indemnification. In addition, at least one of
the following conditions must be met: (A) the Indemnitee shall provide security
for such Indemnitee-undertaking, (B) the BDC shall be insured against losses
arising by reason of any unlawful advance, or (C) a majority of a quorum
consisting of Directors of the BDC who are neither "interested persons" of the
BDC (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the
proceeding ("Disinterested Non-Party Directors") or an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the Indemnitee ultimately will be found entitled to
indemnification.
(c) All determinations with respect to the standards for
indemnification hereunder shall be made (1) by a final decision on the merits
by a court or other body before whom the proceeding was brought that such
Indemnitee is not liable or is not liable by reason of disabling conduct, or
(2) in the absence of such a decision, by (i) a majority vote of a quorum of
the Disinterested Non-Party Directors of the BDC, or (ii) if such a quorum is
not obtainable or, even if obtainable, if a majority vote of such quorum so
directs, independent legal counsel in a written opinion. All determinations
that advance payments in connection with the expense of defending any
proceeding shall be authorized and shall be made in accordance with the
immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall not
exclude any other right to which such Indemnitee may be lawfully entitled.
10. Limitation on Liability. (a) The Advisor will not be liable for
any error of judgment or mistake of law or for any loss suffered by Advisor or
by the BDC in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its duties under this Agreement.
(b) Notwithstanding anything to the contrary contained in
this Agreement, the parties hereto acknowledge and agree that, as provided in
the Certificate of Incorporation, this Agreement is executed by the Directors
and/or officers of the BDC, not individually but as such Directors and/or
officers of the BDC, and the obligations hereunder are not binding upon any of
the Directors or Shareholders individually but bind only the estate of the BDC.
11. Duration and Termination. This Agreement shall become effective as
of the date hereof and, unless sooner terminated with respect to the BDC as
provided herein, shall continue in effect for a period of two years.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to the BDC for successive periods of 12 months, provided such
continuance is specifically approved at least annually by both (a) the vote of
a majority of the BDC's Board of Directors or the vote of a majority of the
outstanding voting securities of the BDC at the time outstanding and entitled
to vote, and (b) by the vote of a majority of the Directors who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated by the BDC at
any time, without the payment of any penalty, upon giving the Advisor 60 days'
notice (which notice may be waived by the Advisor), provided that such
termination by the BDC shall be directed or approved by the vote of a majority
of the Directors of the BDC in office at the time or by the vote of the holders
of a majority of the voting securities of the BDC at the time outstanding and
entitled to vote, or by the Advisor on 60 days' written notice (which notice
may be waived by the BDC). This Agreement will also immediately terminate in
the event of its assignment. (As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested person" and "assignment" shall
have the same meanings of such terms in the 1940 Act.) If this Agreement is
terminated pursuant to this Section, the BDC shall pay the Advisor a pro rated
portion of the Management Fee and the Carried Interest. The Management Fee and
the Carried Interest due to the Adviser in the event of termination pursuant to
this Section will be determined according to the method set forth in the
following paragraph.
The BDC will engage at its own expense a firm acceptable to the BDC
and the Advisor to determine the maximum reasonable fair value as of the
termination date of the BDC's consolidated assets (assuming each asset is
readily marketable among institutional investors without minority discount and
with an appropriate control premium for any control positions and ascribing an
appropriate net present value to unamortized organizational and offering costs
and going concern value). After review of such firm's work papers by the
Advisor and the BDC and resolution of any comments therefrom, such firm will
render its report as to valuation, and the BDC will pay to the Advisor or its
affiliates any Management Fees or Carried Interest, as the case may be, payable
pursuant to the paragraphs above as if all of the consolidated assets of the
BDC had been sold at the values indicated in such report and any net income and
gain distributed. Such report will be completed within 90 days after notice of
termination is delivered hereto.
12. Notices. Any notice under this Agreement shall be in writing to
the other party at such address as the other party may designate from time to
time for the receipt of such notice and shall be deemed to be received on the
earlier of the date actually received or on the fourth day after the postmark
if such notice is mailed first class postage prepaid.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
14. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York for contracts to be
performed entirely therein without reference to choice of law principles
thereof and in accordance with the applicable provisions of the 1940 Act.
15. Use of the Name BlackRock Kelso Capital. The Advisor has consented
to the use by the BDC of the name or identifying words "BlackRock Kelso
Capital" in the name of the BDC. Such consent is conditioned upon the
employment of the Advisor as the investment advisor to the BDC. The name or
identifying words "BlackRock Kelso Capital" may be used from time to time in
other connections and for other purposes by the Advisor and any of its
affiliates. The Advisor may require the BDC to cease using "BlackRock Kelso
Capital" in the name of the BDC if the BDC ceases to employ, for any reason,
the Advisor, any successor thereto or any affiliate thereof as investment
advisor of the BDC.
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors.
17. Capitalized Terms. Capitalized terms not defined herein shall have
the respective meanings given to them in the Confidential Private Placement
Memorandum of BlackRock Kelso Capital Holding LLC or, if not contained therein,
in the documents referenced therein.
18. Counterparts. This Agreement may be executed in counterparts by
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers, all as of the day
and the year first above written.
BLACKROCK KELSO CAPITAL CORPORATION
By: /s/ Frank Gordon
--------------------------------
Name: Frank Gordon
Title: Chief Financial Officer
BLACKROCK KELSO CAPITAL ADVISORS LLC
By: /s/ Michael B. Lazar
--------------------------------
Name: Michael B. Lazar
Title: Chief Operating Officer
Exhibit 10.2
ADMINISTRATION AGREEMENT
AGREEMENT (this "Agreement") made as of August 4, 2005 by and between
BlackRock Kelso Capital Corporation, a Delaware corporation (hereinafter
referred to as the "Corporation"), and BlackRock Financial Management, Inc., a
Delaware corporation (hereinafter referred to as the "Administrator").
W I T N E S S E T H:
WHEREAS, the Corporation is a newly organized closed-end management
investment company that has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended (hereinafter
referred to as the "Investment Company Act");
WHEREAS, the Corporation desires to retain the Administrator to
provide administrative services to the Corporation in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Administrator is willing to provide administrative
services to the Corporation on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Corporation and the
Administrator hereby agree as follows:
1. Duties of the Administrator.
(a) Employment of Administrator. The Corporation hereby
employs the Administrator to act as administrator of the Corporation,
and to furnish, or arrange for others to furnish, the administrative
services, personnel and facilities described below, subject to review
by and the overall control of the Board of Directors of the
Corporation, for the period and on the terms and conditions set forth
in this Agreement. The Administrator hereby accepts such employment
and agrees during such period to render, or arrange for the rendering
of, such services and to assume the obligations herein set forth
subject to the reimbursement of costs and expenses as provided for
below. The Administrator and any such other persons providing services
arranged for by the Administrator shall for all purposes herein be
deemed to be independent contractors and shall, unless otherwise
expressly provided or authorized herein, have no authority to act for
or represent the Corporation in any way or otherwise be deemed agents
of the Corporation.
(b) Services. The Administrator shall perform (or oversee, or
arrange for, the performance of) the administrative services necessary
for the operation of the Corporation. Without limiting the generality
of the foregoing, the Administrator shall provide the Corporation with
office facilities, equipment, clerical, bookkeeping and record keeping
services at such office facilities and such other services as the
Administrator, subject to review by the Board of Directors of the
Corporation, shall from time to time determine to be necessary or
useful to perform its obligations under this Agreement. The
Administrator shall also, on behalf of the Corporation, arrange for
the services of, and oversee, custodians, depositories, transfer
agents, dividend disbursing agents, other stockholder servicing
agents, accountants, attorneys, underwriters, brokers and dealers,
corporate fiduciaries, insurers, banks and such other persons in any
such other capacity deemed to be necessary or desirable. The
Administrator shall make reports to the Corporation's Board of
Directors of its performance of obligations hereunder and furnish
advice and recommendations with respect to such other aspects of the
business and affairs of the Corporation as it shall determine to be
desirable; provided that nothing herein shall be construed to require
the Administrator to, and the Administrator shall not, provide any
advice or recommendation relating to the securities and other assets
that the Corporation should purchase, retain or sell or any other
investment advisory services to the Corporation. The Administrator
shall be responsible for the financial and other records that the
Corporation is required to maintain and shall prepare all reports and
other materials required to be filed with the Securities and Exchange
Commission (the "SEC") or any other regulatory authority, including
reports to stockholders. At the Corporation's request, the
Administrator will provide on the Corporation's behalf significant
managerial assistance to those portfolio companies to which the
Corporation is required to provide such assistance. In addition, the
Administrator will assist the Corporation in determining and
publishing the Corporation's net asset value, overseeing the
preparation and filing of the Corporation's tax returns, and the
printing and dissemination of reports to stockholders of the
Corporation, and generally overseeing the payment of the Corporation's
expenses and the performance of administrative and professional
services rendered to the Corporation by others.
2. Records. The Administrator agrees to maintain and keep all books,
accounts and other records of the Corporation that relate to activities
performed by the Administrator hereunder and, if required by the Investment
Company Act, will maintain and keep such books, accounts and records in
accordance with that act. In compliance with the requirements of Rule 31a-3
under the Investment Company Act, the Administrator agrees that all records
that it maintains for the Corporation shall at all times remain the property of
the Corporation, shall be readily accessible during normal business hours, and
shall be promptly surrendered upon the termination of this Agreement or
otherwise on written request. The Administrator further agrees that all records
which it maintains for the Corporation pursuant to Rule 31a-1 under the
Investment Company Act will be preserved for the periods prescribed by Rule
31a-2 under the Investment Company Act unless any such records are earlier
surrendered as provided above. Records shall be surrendered in usable
machine-readable form. The Administrator shall have the right to retain copies
of such records subject to observance of its confidentiality obligations under
this Agreement.
3. Confidentiality. The parties hereto agree that each shall treat
confidentially all information provided by each party to the other regarding
its business and operations. All confidential information provided by a party
hereto, including nonpublic personal information pursuant to Regulation S-P of
the SEC, shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party, without
the prior consent of such providing party. The foregoing shall not be
applicable to any information that is publicly available when provided or
thereafter becomes publicly available other than through a breach of this
Agreement, or that is required to be disclosed by any regulatory authority, any
authority or legal counsel of the parties hereto, by judicial or administrative
process or otherwise by applicable law or regulation.
4. Compensation; Allocation of Costs and Expenses.
(a) In full consideration of the provision of the services of
the Administrator, the Corporation shall reimburse the Administrator
for the costs and expenses incurred by the Administrator in performing
its obligations and providing personnel and facilities hereunder.
(b) The Corporation will bear all costs and expenses that are
incurred in its operation and transactions and not specifically
assumed by the Corporation's investment adviser (the "Adviser"),
pursuant to that certain Investment Management Agreement, dated as of
July 25, 2005 by and between the Corporation and the Adviser. Costs
and expenses to be borne by the Corporation include, but are not
limited to, those relating to: organization and offering; calculating
the Corporation's net asset value (including the cost and expenses of
any independent valuation firm); expenses incurred by the Adviser
payable to third parties, including agents, consultants or other
advisors, in monitoring financial and legal affairs for the
Corporation and in monitoring the Corporation's investments and
performing due diligence on its prospective portfolio companies;
interest payable on debt, if any, incurred to finance the
Corporation's investments; offerings of the Corporation's common stock
and other securities; investment advisory and management fees;
administration fees, if any, payable under this Agreement; fees
payable to third parties, including agents, consultants or other
advisors, relating to, or associated with, evaluating and making
investments; transfer agent and custodial fees; federal and state
registration fees; all costs of registration and listing the
Corporation's shares on any securities exchange; federal, state and
local taxes; independent directors' fees and expenses; costs of
preparing and filing reports or other documents required by the SEC;
costs of any reports, proxy statements or other notices to
stockholders, including printing costs; the Corporation's allocable
portion of the fidelity bond, directors and officers/errors and
omissions liability insurance, and any other insurance premiums;
direct costs and expenses of administration, including printing,
mailing, long distance telephone, copying, secretarial and other
staff, independent auditors and outside legal costs; and all other
expenses incurred by the Corporation or the Administrator in
connection with administering the Corporation's business, including
payments under this Agreement based upon the Corporation's allocable
portion of the Administrator's overhead in performing its obligations
under this Agreement, including rent and the allocable portion of the
cost of the Corporation's officers and their respective staffs.
5. Limitation of Liability of the Administrator; Indemnification. The
Administrator, its affiliates and their respective officers, managers,
partners, agents, employees, controlling persons, members, and any other person
or entity affiliated with any of them (collectively, the "Indemnified
Parties"), shall not be liable to the Corporation for any action taken or
omitted to be taken by the Administrator in connection with the performance of
any of its duties or obligations under this Agreement or otherwise as
administrator for the Corporation, and the Corporation shall indemnify, defend
and protect the Administrator (and its officers, managers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with the Administrator, including without limitation the Indemnified
Parties (each of whom shall be deemed a third party beneficiary hereof) and
hold them harmless from and against all damages, liabilities, costs and
expenses (including reasonable attorneys' fees and amounts reasonably paid in
settlement) incurred by the Indemnified Parties in or by reason of any pending,
threatened or completed action, suit, investigation or other proceeding
(including an action or suit by or in the right of the Corporation or its
security holders) arising out of or otherwise based upon the performance of any
of the Administrator's duties or obligations under this Agreement or otherwise
as administrator for the Corporation. Notwithstanding the preceding sentence of
this Paragraph 5 to the contrary, nothing contained herein shall protect or be
deemed to protect the Indemnified Parties against or entitle or be deemed to
entitle the Indemnified Parties to indemnification in respect of, any liability
to the Corporation or its security holders to which the Indemnified Parties
would otherwise be subject by reason of criminal conduct, willful misfeasance,
bad faith or negligence in the performance of the Administrator's duties or by
reason of the reckless disregard of the Administrator's duties and obligations
under this Agreement (to the extent applicable, as the same shall be determined
in accordance with the Investment Company Act and any interpretations or
guidance by the SEC or its staff thereunder).
6. Activities of the Administrator. The services of the Administrator
to the Corporation are not to be deemed to be exclusive, and the Administrator
and each other person providing services as arranged by the Administrator is
free to render services to others. It is understood that directors, officers,
employees and stockholders of the Corporation are or may become interested in
the Administrator and its affiliates, as directors, officers, members,
managers, employees, partners, stockholders or otherwise, and that the
Administrator and directors, officers, members, managers, employees, partners
and stockholders of the Administrator and its affiliates are or may become
similarly interested in the Corporation as stockholders or otherwise.
7. Duration and Termination of this Agreement.
(a) This Agreement shall become effective as of the date
hereof, and shall remain in force with respect to the Corporation for
two years thereafter, and thereafter continue from year to year, but
only so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Corporation and (ii) a
majority of those members of the Corporation's Board of Directors who
are not parties to this Agreement or "interested persons" (as defined
in the Investment Company Act) of any such party.
(b) This Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Corporation's Board of
Directors, or by the Administrator, upon 60 days' written notice to
the other party. This Agreement may not be assigned by a party without
the consent of the other party.
8. Amendments of this Agreement. This Agreement may not be amended or
modified except by an instrument in writing signed by all parties hereto.
9. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Neither party may assign, delegate or otherwise transfer this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the other party. No assignment by either party permitted
hereunder shall relieve the applicable party of its obligations under this
Agreement. Any assignment by either party in accordance with the terms of this
Agreement shall be pursuant to a written assignment agreement in which the
assignee expressly assumes the assigning party's rights and obligations
hereunder.
10. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, including without
limitation Sections 5-1401 and 5-1402 of the New York General Obligations Law
and New York Civil Practice Laws and Rules 327(b), and the applicable
provisions of the Investment Company Act, if any. To the extent that the
applicable laws of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, if any,
the latter shall control. The parties unconditionally and irrevocably consent
to the exclusive jurisdiction of the courts located in the State of New York
and waive any objection with respect thereto, for the purpose of any action,
suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
11. No Waiver. The failure of either party to enforce at any time for
any period the provisions of or any rights deriving from this Agreement shall
not be construed to be a waiver of such provisions or rights or the right of
such party thereafter to enforce such provisions, and no waiver shall be
binding unless executed in writing by all parties hereto.
12. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy,
all other terms and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner in order
that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
13. Headings. The descriptive headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning
or interpretation of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed to be an original
instrument and all of which taken together shall constitute one and the same
agreement.
15. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by overnight courier service (with signature required), by facsimile,
or by registered or certified mail (postage prepaid, return receipt requested)
to the respective parties at their respective principal executive office
addresses.
16. Entire Agreement. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter hereof and supersedes all
prior agreements and undertakings, both written and oral, between the parties
with respect to such subject matter.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
BLACKROCK KELSO CAPITAL CORPORATION
/s/ Frank Gordon
-----------------------------------
By: Frank Gordon
Title: Chief Financial Officer
BLACKROCK FINANCIAL MANAGEMENT, INC.
/s/ James Kong
----------------------------------
By: James Kong
Title: Managing Director
[SIGNATURE PAGE TO ADMINISTRATION
AGREEMENT BY AND BETWEEN BLACKROCK KELSO CAPITAL
CORPORATION AND BLACKROCK FINANCIAL MANAGEMENT, INC.]
Exhibit 10.3
AUTOMATIC DIVIDEND REINVESTMENT PLAN
OF
BLACKROCK KELSO CAPITAL CORPORATION
TERMS AND CONDITIONS
Pursuant to this Automatic Dividend Reinvestment Plan (the "Plan") of
the undersigned BlackRock Kelso Capital Corporation, a Delaware corporation
(the "Corporation"), unless a holder (a "Shareholder") of the Corporation's
common shares of beneficial interest (the "Common Shares") otherwise elects,
all dividends and distributions on such Shareholder's Common Shares will be
automatically reinvested by PFPC Inc., a Massachusetts corporation ("PFPC"), as
agent for Shareholders in administering the Plan (the "Plan Agent"), in
additional Common Shares of the Corporation. Shareholders who elect not to
participate in the Plan will receive all dividends and other distributions in
cash paid by check mailed directly to the Shareholder of record (or, if the
Common Shares are held in street or other nominee name, then to such nominee)
by PFPC as the Dividend Disbursing Agent. Participants may elect not to
participate in the Plan and to receive all dividends and distributions in cash
by sending written instructions to PFPC, as the Dividend Disbursing Agent, at
the address set forth below. Participation in the Plan is completely voluntary
and may be terminated or resumed at any time without penalty by written notice
if received by the Plan Agent not less than ten days prior to any dividend or
distribution payment date; otherwise such termination or resumption will be
effective with respect to any subsequently declared dividend or distribution.
The Plan Agent will open an account for each Shareholder under the
Plan in the same name in which such Shareholder's Common Shares are registered.
Whenever the Corporation declares a dividend or a distribution (collectively
referred to as "dividends") payable in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the equivalent in Common
Shares. The Common Shares will be acquired by the Plan Agent for the
participants' accounts through receipt of additional unissued but authorized
Common Shares from the Corporation ("newly issued Common Shares"). The number
of newly issued Common Shares to be credited to each participant's account will
be determined by dividing the dollar amount of the dividend by the net asset
value per Common Share most recently determined on or prior to the payment
date.
The Plan Agent will maintain all Shareholders' accounts in the Plan
and furnish written confirmation of all transactions in the accounts, including
information needed by Shareholders for tax records. Common Shares acquired by
the Plan Agent on behalf of the Plan participant shall be credited to the
Shareholders' Common Share accounts maintained by the Corporation's transfer
agent.
In the case of Shareholders such as banks, brokers or nominees that
hold Common Shares for others who are the beneficial owners, the Plan Agent
will administer the Plan on the basis of the number of Common Shares certified
from time to time by the record Shareholder and held for the account of
beneficial owners who participate in the Plan and shall credit Common Shares
acquired for the accounts of such Shareholders to their Common Share accounts
maintained by the Corporation's transfer agent.
There will be no brokerage charges with respect to Common Shares
issued directly by the Corporation as a result of dividends or capital gains
distributions payable either in Common Shares or in cash.
For the avoidance of doubt, no Common Shares will be issued under the
Plan at a price less than net asset value or under any circumstance that may
violate the Investment Company Act of 1940, as amended, or any rules issued
thereunder.
VOTING
Each Shareholder proxy will include those Common Shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for Common Shares held
pursuant to the Plan in accordance with the instructions of the participants.
TAXATION
The automatic reinvestment of dividends will not relieve participants
of any federal, state or local income tax that may be payable (or required to
be withheld) on such dividends.
AMENDMENT OF THE PLAN
The Plan may be amended or terminated by the Corporation. There is no
direct service charge to participants in the Plan; however, the Corporation
reserves the right to amend the Plan to include a service charge payable by the
participants. Notice will be sent to Plan participants of any amendments as
soon as practicable after such action by the Corporation.
INQUIRIES REGARDING THE PLAN
All correspondence concerning the Plan should be directed to the Plan
Agent at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention:
President.
APPLICABLE LAW
These terms and conditions shall be governed by the laws of the State
of New York without regard to its conflicts of laws provisions.
EXECUTION
To record the adoption of the Plan as of August 4, 2005, the
Corporation has caused this Plan to be executed in the name and on behalf of
the Corporation by a duly authorized officer.
By and on behalf of
BLACKROCK KELSO CAPITAL CORPORATION
/s/ Michael B. Lazar
------------------------------------
By: Michael B. Lazar
Title: Chief Operating Officer
EXHIBIT 10.4
CUSTODIAN SERVICES AGREEMENT
----------------------------
THIS AGREEMENT is made as of July 18, 2005 by and between PFPC TRUST
COMPANY, a limited purpose trust company incorporated under the laws of
Delaware ("PFPC Trust"), and BLACKROCK KELSO CAPITAL CORPORATION, a Delaware
corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund wishes to retain PFPC Trust to provide custodian
services provided for herein, and PFPC Trust wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions. As used in this Agreement:
----------------------------------------
(a) "Authorized Person" means any officer of the Fund and any other
person authorized by the Fund to give Oral Instructions or
Written Instructions on behalf of the Fund. An Authorized
Person's scope of authority may be limited by setting forth
such limitation in a written document signed by both parties
hereto.
(b) "Book-Entry System" means the Federal Reserve Treasury
book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or
nominees and any book-entry system registered with the
Securities and Exchange Commission under the Securities
Exchange Act of 1934.
(c) "Oral Instructions" mean oral instructions received by PFPC
Trust from an Authorized Person or from a person reasonably
believed by PFPC Trust to be an Authorized Person. PFPC Trust
may, in its sole discretion in each separate instance, consider
and rely upon instructions it receives from an Authorized
Person via electronic mail as Oral Instructions.
(d) "Shares" mean the shares of beneficial interest of any series
or class of the Fund.
(e) "Property" means:
(i) any and all securities and other investment items
which the Fund may from time to time deposit, or
cause to be deposited, with PFPC Trust or which PFPC
Trust may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or
other investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of Shares issued by the
Fund, which are received by PFPC Trust from time to
time, from or on behalf of the Fund.
(f) "Written Instructions" means (i) written instructions signed by
an Authorized Person (or a person reasonably believed by PFPC
Trust to be an Authorized Person) and received by PFPC Trust or
(ii) trade instructions transmitted (and received by PFPC
Trust) by means of an electronic transaction reporting system
access to which requires use of a password or other authorized
identifier
(g) "1940 Act" means the Investment Company Act of 1940, as
amended.
2. Appointment. The Fund hereby appoints PFPC Trust to provide custodian
services in accordance with the terms set forth in this Agreement. PFPC
Trust accepts such appointment and agrees to furnish such services.
3. Compliance with Rules and Regulations.
PFPC Trust will comply with the requirements of any laws, rules and
regulations of governmental authorities that are applicable to the
duties to be performed by PFPC Trust under this Agreement. Except as
specifically set forth in this Agreement, PFPC Trust assumes no
responsibility for compliance by the Fund with any laws, rules and
regulations.
4. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC Trust shall
act only upon Oral Instructions or Written Instructions.
(b) PFPC Trust shall be entitled to rely upon any Oral Instruction
or Written Instruction it receives from an Authorized Person
(or from a person reasonably believed by PFPC Trust to be an
Authorized Person) pursuant to this Agreement. PFPC Trust may
assume that any Oral Instructions or Written Instructions
received hereunder are not in any way inconsistent with the
provisions of organizational documents of the Fund or of any
vote, resolution or proceeding of the Fund's board of directors
or shareholders, unless and until PFPC Trust receives Written
Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Trust Written Instructions
confirming Oral Instructions so that PFPC Trust receives the
Written Instructions by the close of business on the same day
that such Oral Instructions are received. The fact that such
confirming Written Instructions are not received by PFPC Trust
or differ from the Oral Instructions shall in no way invalidate
the transactions or enforceability of the transactions
authorized by the Oral Instructions or PFPC Trust's ability to
rely upon such Oral Instructions.
5. Right to Receive Advice.
(a) Advice of the Fund. If PFPC Trust is in doubt as to any action
it should or should not take, PFPC Trust may request directions
or advice, by way of Oral Instructions or Written Instructions.
(b) Advice of Counsel. If PFPC Trust shall be in doubt as to any
question of law pertaining to any action it should or should
not take, PFPC Trust may request advice from counsel of its own
choosing (who may be counsel for the Fund, the Fund's sponsor
or adviser or PFPC Trust, at the option of PFPC Trust).
(c) Conflicting Advice. In the event of a conflict between Oral
Instructions or Written Instructions and the advice PFPC Trust
receives from counsel, PFPC Trust may rely upon and follow the
advice of counsel.
(d) Protection of PFPC Trust. PFPC Trust shall be indemnified by
the Fund and without liability for any action PFPC Trust takes
or does not take in reliance upon Oral Instructions or Written
Instructions PFPC Trust receives from or on behalf of the Fund
or advice from counsel and which PFPC Trust believes, in good
faith, to be consistent with those Oral Instructions or Written
Instructions or that advice. Nothing in this section shall be
construed so as to impose an obligation upon PFPC Trust (i) to
seek such advice or Oral Instructions or Written Instructions,
or (ii) to act in accordance with such advice or Oral
Instructions or Written Instructions. Nothing in this
subsection shall excuse PFPC Trust from liability for its acts
or omissions in carrying out such Oral Instructions or Written
Instructions to the extent such acts or omissions constitute
willful misfeasance, bad faith, negligence or reckless
disregard by PFPC Trust of any duties, obligations or
responsibilities set forth in this Agreement.
6. Records; Visits. The books and records pertaining to the Fund, which are
in the possession or under the control of PFPC Trust, shall be the
property of the Fund. PFPC Trust may house such books and records in a
third party storage facility. The Fund and Authorized Persons, and such
other persons the Fund by means of Written Instructions reasonably
authorizes (including but not limited to the Fund's independent
accountants), shall have access to such books and records at all times
during PFPC Trust's normal business hours; provided that the Fund shall
not authorize access by any individuals employed by PFPC Trust's direct
competitors. Upon the reasonable request of the Fund, copies of any such
books and records shall be provided by PFPC Trust to the Fund, an
Authorized Person, or such other person, at the Fund's expense.
7. Confidentiality. Each party shall keep confidential any information it
receives hereunder relating to the other party's business ("Confidential
Information"). Confidential Information shall include (a) any data or
information that is competitively sensitive material, and not generally
known to the public, including, but not limited to, information about
product plans, marketing strategies, finances, operations, customer
relationships, customer profiles and information, customer lists, sales
estimates, business plans, and internal performance results relating to
the past, present or future business activities of the Fund or PFPC
Trust; (b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and
secret in the sense that its confidentiality affords the Fund or PFPC
Trust a competitive advantage over its competitors; (c) all confidential
or proprietary concepts, documentation, reports, data, specifications,
computer software, source code, object code, flow charts, databases,
inventions, know-how, and trade secrets, whether or not patentable or
copyrightable; and (d) anything designated as confidential.
Notwithstanding the foregoing, information shall not be Confidential
Information and shall not be subject to such confidentiality obligations
if it: (a) is already known to the receiving party at the time it is
obtained; (b) is or becomes publicly known or available through no
wrongful act of the receiving party; (c) is rightfully received from a
third party who, to the best of the receiving party's knowledge, is not
under a duty of confidentiality; (d) is released by the protected party
to a third party without restriction; (e) is requested or required to be
disclosed by the receiving party pursuant to a court order, subpoena,
governmental or regulatory agency request or law (provided the receiving
party will provide the other party written notice of the same, to the
extent such notice is permitted); (f) is relevant to the defense of any
claim or cause of action asserted against the receiving party; (g) is
necessary or desirable for PFPC Trust to release such information in
connection with the provision of services under this Agreement; or (h)
has been or is independently developed or obtained by the receiving
party.
8. Cooperation with Accountants. PFPC Trust shall cooperate with the Fund's
independent public accountants and shall take all reasonable action to
make any requested information available to such accountants as
reasonably requested by the Fund.
9. PFPC System. PFPC Trust shall retain title to and ownership of any and
all data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions,
discoveries, patentable or copyrightable matters, concepts, expertise,
patents, copyrights, trade secrets, and other related legal rights
utilized by PFPC Trust in connection with the services provided by PFPC
Trust to the Fund.
10. Disaster Recovery. PFPC Trust shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to
the extent appropriate equipment is available. In the event of equipment
failures, PFPC Trust shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions. PFPC Trust shall
have no liability with respect to the loss of data or service
interruptions caused by equipment failure, provided such loss or
interruption is not caused by PFPC Trust's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties or obligations
under this Agreement.
11. Compensation.
(a) As compensation for custody services that are rendered by PFPC
Trust during the term of this Agreement, the Fund will pay to
PFPC Trust a fee or fees as may be agreed to in writing by the
Fund and PFPC Trust. The Fund acknowledges that PFPC Trust may
receive float benefits in connection with maintaining certain
accounts required to provide services under this Agreement.
(b) The undersigned hereby represents and warrants to PFPC Trust
that (i) the terms of this Agreement, (ii) the fees and
expenses associated with this Agreement, and (iii) any benefits
accruing to PFPC Trust or to the adviser or sponsor to the Fund
in connection with this Agreement, including but not limited to
any fee waivers, conversion cost reimbursements, up front
payments, signing payments or periodic payments made or to be
made by PFPC Trust to such adviser or sponsor or any affiliate
of the Fund relating to this Agreement have been fully
disclosed to the board of directors of the Fund and that, if
required by applicable law, such board of directors has
approved or will approve the terms of this Agreement, any such
fees and expenses, and any such benefits.
12. Indemnification. The Fund agrees to indemnify, defend and hold harmless
PFPC Trust and its affiliates (other than the Fund, BlackRock Kelso
Capital Advisors LLC and BlackRock, Inc. and its subsidiaries, to the
extent any of the foregoing may be deemed to be affiliates of PFPC
Trust) including their respective officers, directors, agents and
employees (each, a "PFPC Trust Indemnified Party") from all taxes,
charges, expenses, assessments, claims and liabilities (including,
without limitation, reasonable attorneys' fees and disbursements and
liabilities arising under applicable securities laws and any state and
foreign securities and blue sky laws) (collectively, "Losses") arising
directly or indirectly from any action or omission to act which PFPC
Trust takes or omits to take in connection with the provision of
services to the Fund hereunder. No PFPC Trust Indemnified Party shall be
indemnified against any Losses caused by PFPC Trust's or such PFPC Trust
Indemnified Party's own willful misfeasance, bad faith, negligence or
reckless disregard in the performance of PFPC Trust's duties under this
Agreement. The provisions of this Section 12 shall survive termination
of this Agreement.
13. Responsibility of PFPC Trust.
(a) PFPC Trust shall be under no duty hereunder to take any action
on behalf of the Fund except as specifically set forth herein
or as may be specifically agreed to by PFPC Trust and the Fund
in a written amendment hereto. In particular but without
limiting the generality of the foregoing, PFPC Trust shall have
no responsibility or obligation under Section 14 of this
Agreement with respect to any loan documentation or with
respect to any loan made or purchased by the Fund unless
specific language in Section 14 of this Agreement states with
specificity that a particular provision of Section 14 of this
Agreement relates to loan documentation or to loans made or
purchased by the Fund. In no event will PFPC Trust have any
duty to review or examine any loan documentation received by it
hereunder, nor in any event will PFPC Trust have any
responsibility for the content or sufficiency of any such loan
documentation. PFPC Trust shall be obligated to exercise care
and diligence in the performance of its duties hereunder and to
act in good faith in performing services provided for under
this Agreement. PFPC Trust shall be liable only for any Losses
suffered by the Fund arising out of PFPC Trust's performance of
or failure to perform its duties under this Agreement and only
to the extent such Losses arise out of PFPC Trust's willful
misfeasance, bad faith, negligence or reckless disregard of
such duties.
(b) Notwithstanding anything in this Agreement to the contrary, (i)
PFPC Trust shall not be liable for losses, delays, failure,
errors, interruption or loss of data occurring directly or
indirectly by reason of circumstances beyond its reasonable
control, including without limitation acts of God; action or
inaction of civil or military authority; public enemy; war;
terrorism; riot; fire; flood; sabotage; epidemics; labor
disputes; civil commotion; interruption, loss or malfunction of
utilities, transportation, computer or communications
capabilities; insurrection; elements of nature; or
non-performance by a third party (other than employees,
officers or affiliates of PFPC Trust (other than the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc. and
its subsidiaries, to the extent any of the foregoing may be
deemed to be affiliates of PFPC Trust)); and (ii) PFPC Trust
shall not be under any duty or obligation to inquire into and
shall not be liable for the validity or invalidity, authority
or lack thereof, or truthfulness or accuracy or lack thereof,
of any instruction, direction, notice, instrument or other
information which PFPC Trust reasonably believes to be genuine.
Notwithstanding the foregoing, PFPC Trust shall use
commercially reasonable efforts to mitigate the effect of
events enumerated in clause (i) of the preceding sentence,
although such efforts shall not impute any liability to PFPC
Trust.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC Trust nor its affiliates (not including the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc. and
its subsidiaries, to the extent any of the foregoing may be
deemed to be affiliates of PFPC Trust) shall be liable for any
consequential, special or indirect losses or damages, whether
or not the likelihood of such losses or damages was known by
PFPC Trust or its affiliates.
(d) Each party shall have a duty to mitigate damages for which the
other party may become responsible.
(e) Notwithstanding anything in this Agreement to the contrary
(other than as specifically provided in Section 14(h)(ii)(B)(4)
and Section 14(h)(iii)(A) of this Agreement), the Fund shall be
responsible for all filings, tax returns and reports on any
transactions undertaken or amounts received pursuant to this
Agreement, or in respect of the Property or any collections
undertaken pursuant to this Agreement, which may be requested
by any relevant authority. In addition, the Fund shall be
responsible for the payment of all taxes and similar items
(including without limitation penalties and interest related
thereto).
(f) The provisions of this Section 13 shall survive termination of
this Agreement.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange for
delivery to PFPC Trust, all the Property owned by the Fund,
including cash received as a result of the issuance of Shares,
during the term of this Agreement. In addition, the Fund will
deliver or arrange for delivery to PFPC Trust loan
documentation relating to loans made or purchased by the Fund.
PFPC Trust will safekeep loan documentation received by it
hereunder and PFPC Trust will in accordance with Oral
Instructions or Written Instructions transfer, release or
dispose of loan documentation received by it hereunder, but
notwithstanding anything in this Agreement to the contrary PFPC
Trust will not otherwise have any responsibility with respect
to any loan documentation received by it hereunder. PFPC Trust
will not be responsible for any assets or loan documentation
until actual receipt.
(b) Receipt and Disbursement of Money. PFPC Trust, acting upon
Written Instructions, shall open and maintain a separate
account for the Fund (the "Account") and shall maintain in the
Account all cash and other assets received from or for the
Fund. PFPC Trust will also in accordance with Oral Instructions
or Written Instructions reflect on its books and records the
loans made or purchased by the Fund (provided PFPC Trust has
been informed of such loans pursuant to Oral Instructions or
Written Instructions).
PFPC Trust shall make cash payments from or for the Account
only for:
(i) purchases of securities in the name of the Fund, PFPC
Trust, PFPC Trust's nominee or a sub-custodian or
nominee thereof as provided in sub-section (j) and for
which PFPC Trust has received a copy of the broker's
or dealer's confirmation or payee's invoice, as
appropriate;
(ii) loans made or purchased by the Fund, upon receipt of
Written Instructions;
(iii) purchase or redemption of Shares of the Fund delivered
to PFPC Trust;
(iv) payment of, subject to Written Instructions, interest,
taxes (provided that tax which PFPC Trust considers is
required to be deducted or withheld "at source" will
be governed by Section 14(h)(iii)(B) of this
Agreement), and administration, accounting,
distribution, advisory, management and other fees
which are to be borne by the Fund;
(v) payment to, subject to receipt of Written
Instructions, the Fund's transfer agent, as agent for
the shareholders, of an amount equal to the amount of
dividends and distributions stated in the Written
Instructions to be distributed in cash by the transfer
agent to shareholders, or, in lieu of paying the
Fund's transfer agent, PFPC Trust may arrange for the
direct payment of cash dividends and distributions to
shareholders in accordance with procedures mutually
agreed upon from time to time by and among the Fund,
PFPC Trust and the Fund's transfer agent;
(vi) payments, upon receipt of Written Instructions, in
connection with the conversion, exchange or surrender
of securities owned or subscribed to by the Fund and
held by or delivered to PFPC Trust;
(vii) payments of the amounts of dividends received with
respect to securities sold short;
(viii) payments to PFPC Trust for its services hereunder;
(ix) payments made to a sub-custodian; and
(x) other payments, upon Written Instructions.
PFPC Trust is hereby authorized to endorse and collect all checks,
drafts or other orders for the payment of money received as custodian
for the Account.
(c) Receipt of Securities; Subcustodians.
PFPC Trust shall hold all securities received by it for the Account in a
separate account that physically segregates such securities from those
of any other persons, firms or corporations, except for securities held
in a Book-Entry System or through a sub-custodian or depository. All
such securities shall be held or disposed of only upon Written
Instructions or otherwise pursuant to the terms of this Agreement. In
addition, PFPC Trust will hold all loan documentation received by it for
the Fund in a separate account that physically segregates such loan
documentation from that relating to any other persons, firms or
corporations. PFPC Trust shall have no power or authority to assign,
hypothecate, pledge or otherwise dispose of any securities or other
investments, except upon the express terms of this Agreement or upon
Written Instructions authorizing the transaction. In no case may any
member of the Fund's board of directors, or any officer, employee or
agent of the Fund withdraw any securities.
At PFPC Trust's own expense and for its own convenience, PFPC Trust may
enter into sub-custodian agreements with other banks or trust companies
to perform duties with respect to domestic assets and with respect to
loan documentation maintained within the U.S. Such bank or trust company
shall have aggregate capital, surplus and undivided profits, according
to its last published report, of at least one million dollars
($1,000,000), if it is a subsidiary or affiliate of PFPC Trust, or at
least twenty million dollars ($20,000,000) if such bank or trust company
is not a subsidiary or affiliate of PFPC Trust. Any such arrangement
will not be entered into without prior written notice to the Fund (or as
otherwise provided in the 1940 Act).
In addition, PFPC Trust may enter into arrangements with sub-custodians
with respect to services regarding foreign assets and with respect to
services regarding loan documentation maintained outside the U.S. Any
such arrangement will not be entered into without prior written notice
to the Fund (or as otherwise provided in the 1940 Act).
PFPC Trust shall remain responsible for the acts and omissions of any
sub-custodian chosen by PFPC Trust under the terms of this sub-section
(c) to the same extent that PFPC Trust is responsible for its own acts
and omissions under this Agreement.
(d) Transactions Requiring Instructions. Upon receipt of Oral
Instructions or Written Instructions and not otherwise, PFPC
Trust shall:
(i) deliver any securities held for the Fund against the
receipt of payment for the sale of such securities or
otherwise in accordance with standard market practice;
(ii) execute and deliver to such persons as may be
designated in such Oral Instructions or Written
Instructions, proxies, consents, authorizations, and
any other instruments whereby the authority of the
Fund as owner of any securities may be exercised;
(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are called, redeemed,
retired or otherwise become payable at the option of
the holder; provided that, in any such case, the cash
or other consideration is to be delivered to PFPC
Trust;
(iv) deliver any securities held for the Fund against
receipt of other securities or cash issued or paid in
connection with the liquidation, reorganization,
refinancing, tender offer, merger, consolidation or
recapitalization of any corporation, or the exercise
of any conversion privilege;
(v) deliver any securities held for the Fund to any
protective committee, reorganization committee or
other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization
or sale of assets of any corporation, and receive and
hold under the terms of this Agreement such
certificates of deposit, interim receipts or other
instruments or documents as may be issued to it to
evidence such delivery;
(vi) make such transfer or exchanges of the assets of the
Fund and take such other steps as shall be stated in
said Oral Instructions or Written Instructions to be
for the purpose of effectuating a duly authorized plan
of liquidation, reorganization, merger, consolidation
or recapitalization of the Fund;
(vii) release securities belonging to the Fund to any bank
or trust company for the purpose of a pledge or
hypothecation to secure any loan incurred by the Fund;
provided, however, that securities shall be released
only upon payment to PFPC Trust of the monies
borrowed, except that in cases where additional
collateral is required to secure a borrowing already
made, subject to proper prior authorization, further
securities may be released for that purpose; and repay
such loan upon redelivery to it of the securities
pledged or hypothecated therefor and upon surrender of
the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in
connection with any repurchase agreement entered into
by the Fund, but only on receipt of payment therefor;
and pay out monies of the Fund in connection with such
repurchase agreements, but only upon the delivery of
the securities;
(ix) release and deliver or exchange securities owned by
the Fund in connection with any conversion of such
securities, pursuant to their terms, into other
securities;
(x) release and deliver securities to a broker in
connection with the broker's custody of margin
collateral relating to futures and options
transactions;
(xi) release and deliver securities owned by the Fund for
the purpose of redeeming in kind Shares of the Fund
upon delivery thereof to PFPC Trust; and
(xii) release and deliver or exchange securities or other
assets (not including cash) owned by the Fund for
other purposes.
(e) Use of Book-Entry System or Other Depository. PFPC Trust will
deposit in Book-Entry Systems and other depositories all
securities belonging to the Fund eligible for deposit therein
and will utilize Book-Entry Systems and other depositories to
the extent possible in connection with settlements of purchases
and sales of securities by the Fund, and deliveries and returns
of securities loaned, subject to repurchase agreements or used
as collateral in connection with borrowings. PFPC Trust shall
continue to perform such duties until it receives Written
Instructions or Oral Instructions authorizing contrary actions.
Notwithstanding anything in this Agreement to the contrary,
PFPC Trust's use of a Book-Entry System shall comply with the
requirements of Rule 17f-4 under the 1940 Act.
PFPC Trust shall administer a Book-Entry System or other depository as
follows:
(i) With respect to securities of the Fund which are
maintained in a Book-Entry System or another
depository, the records of PFPC Trust shall identify
by book-entry or otherwise those securities as
belonging to the Fund.
(ii) Assets of the Fund deposited in a Book-Entry System or
another depository will (to the extent consistent with
applicable law and standard practice) at all times be
segregated from any assets and cash controlled by PFPC
Trust in other than a fiduciary or custodian capacity
but may be commingled with other assets held in such
capacities.
PFPC Trust will provide the Fund with such reports on its own system of
internal control as the Fund may reasonably request from time to time.
In addition, if permitted to do so PFPC Trust will provide the Fund with
copies of any report obtained by PFPC Trust regarding the system of
internal accounting control of the Book-Entry System promptly after
receipt of such a report by PFPC Trust.
(f) Registration of Securities. All securities held for the Fund
which are issued or issuable only in bearer form, except such
securities maintained in the Book-Entry System or in another
depository, shall be held by PFPC Trust in bearer form; all
other securities maintained for the Fund may be registered in
the name of the Fund, PFPC Trust, a Book-Entry System, another
depository, a sub-custodian, or any duly appointed nominee of
the Fund, PFPC Trust, Book-Entry System, depository or
sub-custodian. The Fund reserves the right to instruct PFPC
Trust as to the method of registration and safekeeping of the
securities of the Fund. The Fund agrees to furnish to PFPC
Trust appropriate instruments to enable PFPC Trust to maintain
or deliver in proper form for transfer, or to register in the
name of its nominee or in the name of the Book-Entry System or
in the name of another appropriate entity, any securities which
it may maintain for the Account. With respect to uncertificated
securities which are registered in the name of the Fund or a
nominee thereof (for clarity, such reference is not intended to
include loans made or purchased by the Fund), PFPC Trust will
reflect such securities on its records based upon the holdings
information provided to it by the issuer of such securities,
but notwithstanding anything in this Agreement to the contrary
PFPC Trust shall not be obligated to safekeep such securities
or to perform other duties with respect to such securities
other than to make payment for the purchase of such securities
upon receipt of Oral or Written Instructions, accept in sale
proceeds received by PFPC Trust upon the sale of such
securities of which PFPC Trust is informed pursuant to Oral or
Written Instructions, and accept in other distributions
received by PFPC Trust with respect to such securities or
reflect on its records any reinvested distributions with
respect to such securities of which it is informed by the
issuer of the securities.
(g) Voting and Other Action. Neither PFPC Trust nor its nominee
shall vote any of the securities held pursuant to this
Agreement by or for the account of the Fund, except in
accordance with Written Instructions. PFPC Trust, directly or
through the use of another entity, shall execute in blank and
promptly deliver all notices, proxies and proxy soliciting
materials received by PFPC Trust as custodian of the Property
to the registered holder of such securities. If the registered
holder is not the Fund, then Written Instructions or Oral
Instructions must designate the person who owns such
securities.
(h) Transactions Not Requiring Instructions. Notwithstanding
anything in this Agreement requiring instructions in order to
take a particular action, in the absence of a contrary Written
Instruction, PFPC Trust is authorized to take the following
actions without the need for instructions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund,
all income, dividends, distributions, coupons,
option premiums, other payments and similar
items, included or to be included in the
Property, and, in addition, promptly advise the
Fund of such receipt and credit such income to
the Account;
(B) endorse and deposit for collection, in the name
of the Fund, checks, drafts, or other orders for
the payment of money;
(C) receive and hold for the account of the Fund all
securities received as a distribution on the
Fund's securities as a result of a stock
dividend, share split-up or reorganization,
recapitalization, readjustment or other
rearrangement or distribution of rights or
similar securities issued with respect to any
securities belonging to the Fund and held by
PFPC Trust hereunder;
(D) present for payment and collect the amount
payable upon all securities which may mature or
be called, redeemed, retired or otherwise become
payable (on a mandatory basis) on the date such
securities become payable; and
(E) take any action which may be necessary and
proper in connection with the collection and
receipt of such income and other payments and
the endorsement for collection of checks,
drafts, and other negotiable instruments.
(ii) Miscellaneous Transactions.
(A) PFPC Trust is authorized to deliver or cause to
be delivered Property against payment or other
consideration or written receipt therefor in the
following cases:
(1) for examination by a broker or dealer
selling for the account of the Fund in
accordance with street delivery
custom;
(2) for the exchange of interim receipts
or temporary securities for definitive
securities; and
(3) for transfer of securities into the
name of the Fund or PFPC Trust or a
sub-custodian or a nominee of one of
the foregoing, or for exchange of
securities for a different number of
bonds, certificates, or other
evidence, representing the same
aggregate face amount or number of
units bearing the same interest rate,
maturity date and call provisions, if
any; provided that, in any such case,
the new securities are to be delivered
to PFPC Trust.
(B) PFPC Trust shall:
(1) pay all income items held by it which
call for payment upon presentation,
and hold the cash received by it upon
such payment for the account of the
Fund;
(2) collect interest and cash dividends
received, with notice to the Fund, to
the account of the Fund;
(3) hold for the account of the Fund all
stock dividends, rights and similar
securities issued with respect to any
securities held by PFPC Trust; and
(4) subject to receipt of such
documentation and information as PFPC
Trust may request, execute as agent on
behalf of the Fund all necessary
ownership certificates required by a
national governmental taxing authority
or under the laws of any U.S. state
now or hereafter in effect, inserting
the Fund's name on such certificate as
the owner of the securities covered
thereby, to the extent it may lawfully
do so.
(iii) Other Matters.
(A) subject to receipt of such documentation and
information as PFPC Trust may request, PFPC
Trust will, in such jurisdictions as PFPC Trust
may agree from time to time, seek to reclaim or
obtain a reduction with respect to any
withholdings or other taxes relating to assets
maintained hereunder (provided that PFPC Trust
will not be liable for failure to obtain any
particular relief in a particular jurisdiction);
and
(B) PFPC Trust is authorized to deduct or withhold
any sum in respect of tax which PFPC Trust
considers is required to be deducted or withheld
"at source" by any relevant law or practice.
(i) Segregated Accounts. PFPC Trust shall upon receipt of Written
Instructions or Oral Instructions establish and maintain
segregated accounts on its records for and on behalf of the
Fund. Such accounts may, among other things, be used to
transfer cash and other assets of the Fund.
(j) Purchases of Securities. PFPC Trust shall settle purchased
securities upon receipt of Oral Instructions or Written
Instructions that specify:
(i) the name of the issuer and the title of the
securities, including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased
and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through
whom the purchase was made. PFPC Trust shall upon
receipt of securities purchased by or for the Fund (or
otherwise in accordance with standard market practice)
pay out of the monies held for the account of the Fund
the total amount payable to the person from whom or
the broker through whom the purchase was made,
provided that the same conforms to the total amount
payable as set forth in such Oral Instructions or
Written Instructions.
(k) Sales of Securities. PFPC Trust shall settle sold securities
upon receipt of Oral
Instructions or Written Instructions that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and
accrued interest, if any;
(iii) the date of trade and settlement;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to
whom the sale was made; and
(vii) the location to which the security must be delivered
and delivery deadline, if any.
PFPC Trust shall deliver the securities upon receipt of the total
amount payable to the Fund upon such sale, provided that the total
amount payable is the same as was set forth in the Oral Instructions or
Written Instructions. Notwithstanding anything to the contrary in this
Agreement, PFPC Trust may accept payment in such form as is consistent
with standard market practice and may deliver assets and arrange for
payment in accordance with standard market practice.
(l) Reports; Proxy Materials.
(i) PFPC Trust shall furnish to the Fund the following
reports:
(A) such periodic and special reports as the Fund
may reasonably request;
(B) a monthly statement (1) summarizing the
transactions and entries for the account of the
Fund during such month (including cash
disbursements and including loans made or
purchased by the Fund (provided PFPC Trust has
been informed of such loan transaction
information pursuant to Oral Instructions or
Written Instructions)) and (2) listing each
portfolio security belonging to the Fund (with
the corresponding security identification
number) held at the end of such month, the loans
reflected on PFPC Trust's books and records as
both made or purchased by the Fund and held by
the Fund at the end of such month, and the cash
balance of the Fund held at the end of such
month;
(C) the reports required to be furnished to the Fund
pursuant to Rule 17f-4 of the 1940 Act; and
(D) such other information as may be agreed upon
from time to time between the Fund and PFPC
Trust.
(ii) PFPC Trust shall transmit promptly to the Fund any
proxy statement, proxy material, notice of a call or
conversion or similar communication received by it as
custodian of the Property. PFPC Trust shall be under
no other obligation to inform the Fund as to such
actions or events. For clarification, upon termination
of this Agreement PFPC Trust shall have no
responsibility to transmit such material or to inform
the Fund or any other person of such actions or
events.
(m) Crediting of the Account. PFPC Trust may in its sole discretion
credit the Account with respect to income, dividends,
distributions, coupons, option premiums, other payments or
similar items prior to PFPC Trust's actual receipt thereof, and
in addition PFPC Trust may in its sole discretion credit or
debit the assets in the Account on a contractual settlement
date with respect to any sale, exchange, purchase or other
transaction applicable to the Fund; provided that nothing in
this Agreement or otherwise shall require PFPC Trust to make
any advances or to credit any amounts until PFPC Trust's actual
receipt thereof. If PFPC Trust credits the Account with respect
to (a) income, dividends, distributions, coupons, option
premiums, other payments or similar items on a contractual
payment date or otherwise in advance of PFPC Trust's actual
receipt of the amount due, (b) the proceeds of any sale or
other disposition of assets on the contractual settlement date
or otherwise in advance of PFPC Trust's actual receipt of the
amount due or (c) provisional crediting of any amounts due, and
(i) PFPC Trust is subsequently unable to collect full and final
payment for the amounts so credited within a reasonable time
period using reasonable efforts or (ii) pursuant to standard
industry practice, law or regulation PFPC Trust is required to
repay to a third party such amounts so credited, or if any
Property has been incorrectly credited, PFPC Trust shall have
the absolute right in its sole discretion without demand to
reverse any such credit or payment, to debit or deduct the
amount of such credit or payment from the Account, and to
otherwise pursue recovery of any such amounts so credited from
the Fund. The Fund hereby grants to PFPC Trust and to each
sub-custodian utilized by PFPC Trust in connection with
providing services to the Fund a first priority contractual
possessory security interest in and a right of setoff against
the assets maintained in the Account in the amount necessary to
secure the return and payment to PFPC Trust and to each such
sub-custodian of any advance or credit made by PFPC Trust
and/or by such sub-custodian (including charges related
thereto) to the Account. Notwithstanding anything in this
Agreement to the contrary, PFPC Trust shall be entitled to
assign any rights it has under this sub-section (m) to any
sub-custodian utilized by PFPC Trust in connection with
providing services to the Fund which sub-custodian makes any
credits or advances with respect to the Fund.
(n) Collections. All collections of monies or other property in
respect, or which are to become part, of the Property (but not
the safekeeping thereof upon receipt by PFPC Trust) shall be at
the sole risk of the Fund. If payment is not received by PFPC
Trust within a reasonable time after proper demands have been
made by PFPC Trust, PFPC Trust shall notify the Fund in
writing, including copies of all demand letters, any written
responses and memoranda of all oral responses thereto and shall
await instructions from the Fund. PFPC Trust shall not be
obliged to take legal action for collection unless and until
reasonably indemnified to its satisfaction. PFPC Trust shall
also notify the Fund as soon as reasonably practicable whenever
income due on securities is not collected in due course and
shall provide the Fund with periodic status reports of such
income collected after a reasonable time. Notwithstanding
anything in this Agreement to the contrary, PFPC Trust shall
have no duty to take any action (other than to transfer or
release loan documentation in accordance with Oral or Written
Instructions as set forth in Section 14(a) of this Agreement)
to collect any principal, interest or other payments with
respect to any loans made or purchased by the Fund; rather,
upon receipt of such payments (and upon receipt of further
documentation and clarification if required by PFPC Trust),
PFPC Trust's only duty will be to post such payments to the
Account and then to safekeep such amounts as provided herein.
(o) Excess Cash Sweep. PFPC Trust will, consistent with applicable
law, sweep any net excess cash balances daily into an
investment vehicle or other instrument designated in writing by
the Fund, so long as the investment vehicle or instrument is
acceptable to PFPC Trust, subject to a fee, paid to PFPC Trust
for such service, to be agreed between the parties. Such
investment vehicle or instrument may be offered by an affiliate
of PFPC Trust or by a PFPC Trust client and PFPC Trust may
receive compensation therefrom.
(p) Foreign Exchange. PFPC Trust and/or sub-custodians may enter
into or arrange foreign exchange transactions (at such rates as
they may consider appropriate) in order to facilitate
transactions under this Agreement, and such entities and/or
their affiliates may receive compensation in connection with
such foreign exchange transactions. Any foreign exchange
transactions with affiliates of the Fund shall be subject to
the applicable requirements of the 1940 Act.
15. Duration and Termination. This Agreement shall continue until terminated
by the
Fund or PFPC Trust on sixty (60) days' prior written notice to the
other party. In the event this Agreement is terminated (pending
appointment of a successor to PFPC Trust or vote of the shareholders of
the Fund to dissolve or to function without a custodian of its cash,
securities or other property), PFPC Trust shall not deliver cash,
securities, other property or loan documentation to the Fund. It may
deliver them to a bank or trust company of PFPC Trust's choice, having
aggregate capital, surplus and undivided profits, as shown by its last
published report, of not less than twenty million dollars
($20,000,000), as a custodian for the Fund to be held under terms
similar to those of this Agreement. PFPC Trust shall not be required to
make any delivery or payment of assets or loan documentation upon
termination until full payment shall have been made to PFPC Trust of
all of its fees, compensation, costs and expenses (including without
limitation fees and expenses associated with conversion to another
service provider and other trailing expenses incurred by PFPC Trust).
PFPC Trust shall have a first priority contractual possessory security
interest in and shall have a right of setoff against the Property and
the loan documentation as security for the payment of such fees,
compensation, costs and expenses.
16. Notices. Notices shall be addressed (a) if to PFPC Trust, at 8800
Tinicum Boulevard, 3rd Floor, Philadelphia, Pennsylvania 19153,
Attention: Sam Sparhawk (or such other address as PFPC Trust may inform
the Fund in writing); (b) if to the Fund, at c/o BlackRock Kelso Capital
Advisors LLC, 40 East 52nd Street, new York, New York 10022, Attention:
Frank Gordon; or (c) if to neither of the foregoing, at such other
address as shall have been given by like notice to the sender of any
such notice or other communication by the other party. If notice is sent
by confirming facsimile sending device, it shall be deemed to have been
given immediately. If notice is sent by first-class mail, it shall be
deemed to have been given three days after it has been mailed. If notice
is sent by messenger, it shall be deemed to have been given on the day
it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or waived
only by written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. Assignment. PFPC Trust may assign this Agreement to any majority owned
direct or indirect subsidiary of PFPC Trust or of The PNC Financial
Services Group, Inc. (other than BlackRock, Inc. and its subsidiaries),
provided that PFPC Trust gives the Fund 30 days' prior written notice of
such assignment.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
20. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter
hereof, provided that the parties may embody in one or more
separate documents their agreement, if any, with respect to
delegated duties and compensation of PFPC Trust.
(b) No Representations or Warranties. Except as expressly provided
in this Agreement, PFPC Trust hereby disclaims all
representations and warranties, express or implied, made to the
Fund or any other person, including, without limitation, any
warranties regarding quality, suitability, merchantability,
fitness for a particular purpose or otherwise (irrespective of
any course of dealing, custom or usage of trade), of any
services or any goods provided incidental to services provided
under this Agreement. PFPC Trust disclaims any warranty of
title or non-infringement except as otherwise set forth in this
Agreement.
(c) No Changes that Materially Affect Obligations. Notwithstanding
anything in this Agreement to the contrary, the Fund agrees not
to make any modifications to its offering document or
registration statement or adopt any policies which would affect
materially the obligations or responsibilities of PFPC Trust
hereunder without the prior written approval of PFPC Trust,
which approval shall not be unreasonably withheld or delayed.
(d) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit
any of the provisions hereof or otherwise affect their
construction or effect.
(e) Information. The Fund will provide such information and
documentation as PFPC Trust may reasonably request in
connection with services provided by PFPC Trust to the Fund.
(f) Governing Law. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law, without regard
to principles of conflicts of law.
(g) Partial Invalidity. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be
affected thereby.
(h) Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
(i) Facsimile Signatures. The facsimile signature of any party to
this Agreement shall constitute the valid and binding execution
hereof by such party.
(j) Customer Identification Program Notice. To help the U.S.
government fight the funding of terrorism and money laundering
activities, U.S. Federal law requires each financial
institution to obtain, verify, and record certain information
that identifies each person who initially opens an account with
that financial institution on or after October 1, 2003.
Consistent with this requirement, PFPC Trust will request (or
already has requested) the Fund's name, address and taxpayer
identification number or other government-issued identification
number, and, if such party is a natural person, that party's
date of birth. PFPC Trust may also ask (and may have already
asked) for additional identifying information, and PFPC Trust
may take steps (and may have already taken steps) to verify the
authenticity and accuracy of these data elements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC TRUST COMPANY
By: /s/ Edward A. Smith, III
-------------------------
Title: Vice President
BLACKROCK KELSO CAPITAL CORPORATION
By: /s/ Frank Gordon
--------------------------
Title: Chief Financial Officer
EXHIBIT 10.5
TRANSFER AGENCY SERVICES AGREEMENT
THIS AGREEMENT is made as of July 18, 2005 by and between PFPC INC., a
Massachusetts corporation ("PFPC"), and BLACKROCK KELSO CAPITAL CORPORATION, a
Delaware corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund wishes to retain PFPC to provide transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent services
provided for herein, and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions. As Used in this Agreement:
(a) "Authorized Person" means any officer of the Fund and any
other person duly authorized by the Fund to give Oral
Instructions or Written Instructions on behalf of the Fund. An
Authorized Person's scope of authority may be limited by
setting forth such limitation in a written document signed by
both parties hereto.
(b) "Dividend Reinvestment Plan" means the Fund's Dividend
Reinvestment Plan, as the details of such Plan (and any
changes thereto) are provided by the Fund to PFPC from time to
time in writing.
(c) "Oral Instructions" mean oral instructions received by PFPC
from an Authorized Person or from a person reasonably believed
by PFPC to be an Authorized Person. PFPC may, in its sole
discretion in each separate instance, consider and rely upon
instructions it receives from an Authorized Person via
electronic mail as Oral Instructions.
(d) "Shares" mean the shares of beneficial interest of any series
or class of the Fund.
(e) "Written Instructions" mean (i) written instructions signed by
an Authorized Person (or a person reasonably believed by PFPC
to be an Authorized Person) and received by PFPC or (ii) trade
instructions transmitted (and received by PFPC) by means of an
electronic transaction reporting system access to which
requires use of a password or other authorized identifier.
(f) "1940 Act" means the Investment Company Act of 1940, as
amended.
2. Appointment. The Fund hereby appoints PFPC to provide transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent
services in accordance with the terms set forth in this Agreement. PFPC
accepts such appointment and agrees to furnish such services.
3. Compliance with Rules and Regulations. PFPC will comply with the
requirements of any laws, rules and regulations of governmental
authorities that are applicable to the duties to be performed by PFPC
under this Agreement. Except as specifically set forth in this
Agreement, PFPC assumes no responsibility for compliance by the Fund
with any laws, rules and regulations.
4. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC shall act
only upon Oral Instructions or Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instruction or
Written Instruction it receives from an Authorized Person (or
from a person reasonably believed by PFPC to be an Authorized
Person) pursuant to this Agreement. PFPC may assume that any
Oral Instructions or Written Instructions received hereunder
are not in any way inconsistent with the provisions of
organizational documents of the Fund or of any vote,
resolution or proceeding of the Fund's board of directors or
shareholders, unless and until PFPC receives Written
Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the Written
Instructions by the close of business on the same day that
such Oral Instructions are received. The fact that such
confirming Written Instructions are not received by PFPC or
differ from the Oral Instructions shall in no way invalidate
the transactions or enforceability of the transactions
authorized by the Oral Instructions or PFPC's ability to rely
upon such Oral Instructions.
5. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or
advice, by way of Oral Instructions or Written Instructions.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should
not take, PFPC may request advice from counsel of its own
choosing (who may be counsel for the Fund, the Fund's sponsor
or adviser or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between Oral
Instructions or Written Instructions and the advice PFPC
receives from counsel, PFPC may rely upon and follow the
advice of counsel.
(d) Protection of PFPC. PFPC shall be indemnified by the Fund and
without liability for any action PFPC takes or does not take
in reliance upon Oral Instructions or Written Instructions
PFPC receives from or on behalf of the Fund or advice from
counsel and which PFPC believes, in good faith, to be
consistent with those Oral Instructions or Written
Instructions or that advice. Nothing in this section shall be
construed so as to impose an obligation upon PFPC (i) to seek
such advice or Oral Instructions or Written Instructions, or
(ii) to act in accordance with such advice or Oral
Instructions or Written Instructions. Nothing in this
subsection shall excuse PFPC from liability for its acts or
omissions in carrying out such Oral Instructions or Written
Instructions to the extent such acts or omissions constitute
willful misfeasance, bad faith, negligence or reckless
disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.
6. Records; Visits. The books and records pertaining to the Fund, which
are in the possession or under the control of PFPC, shall be the
property of the Fund. PFPC may house such books and records in a third
party storage facility. Such books and records shall be prepared and
maintained as required by the 1940 Act. The Fund and Authorized
Persons, and such other persons the Fund by means of Written
Instructions reasonably authorizes (including but not limited to the
Fund's independent accountants), shall have access to such books and
records at all times during PFPC's normal business hours; provided that
the Fund shall not authorize access by individuals employed by PFPC's
direct competitors. Upon the reasonable request of the Fund, copies of
any such books and records shall be provided by PFPC to the Fund, an
Authorized Person, or such other person, at the Fund's expense.
7. Confidentiality. Each party shall keep confidential any information it
receives hereunder relating to the other party's business
("Confidential Information"). Confidential Information shall include
(a) any data or information that is competitively sensitive material,
and not generally known to the public, including, but not limited to,
information about product plans, marketing strategies, finances,
operations, customer relationships, customer profiles and information,
customer lists, sales estimates, business plans, and internal
performance results relating to the past, present or future business
activities of the Fund or PFPC; (b) any scientific or technical
information, design, process, procedure, formula, or improvement that
is commercially valuable and secret in the sense that its
confidentiality affords the Fund or PFPC a competitive advantage over
its competitors; (c) all confidential or proprietary concepts,
documentation, reports, data, specifications, computer software, source
code, object code, flow charts, databases, inventions, know-how, and
trade secrets, whether or not patentable or copyrightable; and (d)
anything designated as confidential. Notwithstanding the foregoing,
information shall not be Confidential Information and shall not be
subject to such confidentiality obligations if it: (a) is already known
to the receiving party at the time it is obtained; (b) is or becomes
publicly known or available through no wrongful act of the receiving
party; (c) is rightfully received from a third party who, to the best
of the receiving party's knowledge, is not under a duty of
confidentiality; (d) is released by the protected party to a third
party without restriction; (e) is requested or required to be disclosed
by the receiving party pursuant to a court order, subpoena,
governmental or regulatory agency request or law (provided the
receiving party will provide the other party written notice of the
same, to the extent such notice is permitted); (f) is relevant to the
defense of any claim or cause of action asserted against the receiving
party; (g) is necessary or desirable for PFPC to release such
information in connection with the provision of services under this
Agreement; or (g) has been or is independently developed or obtained by
the receiving party.
8. Cooperation with Accountants. PFPC shall cooperate with the Fund's
independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that
the necessary information is made available to such accountants for the
expression of their opinion, as reasonably requested by the Fund.
9. PFPC System. PFPC shall retain title to and ownership of any and all
data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions,
discoveries, patentable or copyrightable matters, concepts, expertise,
patents, copyrights, trade secrets, and other related legal rights
utilized by PFPC in connection with the services provided by PFPC to
the Fund.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to
the extent appropriate equipment is available. In the event of
equipment failures, PFPC shall, at no additional expense to the Fund,
take reasonable steps to minimize service interruptions. PFPC shall
have no liability with respect to the loss of data or service
interruptions caused by equipment failure, provided such loss or
interruption is not caused by PFPC's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties or obligations
under this Agreement.
11. Compensation.
(a) As compensation for services set forth herein that are
rendered by PFPC during the term of this Agreement, the Fund
will pay to PFPC a fee or fees as may be agreed to in writing
by the Fund and PFPC. In addition, the Fund agrees to pay, and
will be billed separately in arrears for, reasonable expenses
incurred by PFPC in the performance of its duties hereunder.
(b) PFPC shall establish certain cash management accounts
("Service Accounts") required to provide services under this
Agreement. The Fund acknowledges (i) PFPC may receive
investment earnings from sweeping the funds in such Service
Accounts into investment accounts including, but not limited,
investment accounts maintained at an affiliate or client of
PFPC; (ii) balance credits earned with respect to the amounts
in such Service Accounts ("Balance Credits") will be used to
offset the banking service fees imposed by the cash management
service provider (the "Banking Service Fees"); (iii) PFPC
shall retain any excess Balance Credits for its own use; and
(iv) Balance Credits will be calculated and applied toward the
Fund's Banking Service Fees regardless of the Service Account
balance sweep described in sub-section (i) of this Section 11
(b).
(c) The undersigned hereby represents and warrants to PFPC that
(i) the terms of this Agreement, (ii) the fees and expenses
associated with this Agreement, and (iii) any benefits
accruing to PFPC or to the adviser or sponsor to the Fund in
connection with this Agreement, including but not limited to
any fee waivers, conversion cost reimbursements, up front
payments, signing payments or periodic payments made or to be
made by PFPC to such adviser or sponsor or any affiliate of
the Fund relating to the Agreement have been fully disclosed
to the board of directors of the Fund and that, if required by
applicable law, such board of directors has approved or will
approve the terms of this Agreement, any such fees and
expenses, and any such benefits.
12. Indemnification. The Fund agrees to indemnify, defend and hold harmless PFPC
and its affiliates (other than the Fund, BlackRock Kelso Capital Advisors LLC
and BlackRock, Inc. and its subsidiaries, to the extent any of the foregoing may
be deemed to be affiliates of PFPC) including their respective officers,
directors, agents and employees (each a "PFPC Indemnified Person"), from all
taxes, charges, expenses, assessments, claims and liabilities (including,
without limitation, reasonable attorneys' fees and disbursements and liabilities
arising under applicable securities laws and any state and foreign securities
and blue sky laws) (collectively, "Losses") arising directly or indirectly from
any action or omission to act which PFPC takes or omits to take in connection
with the provision of services to the Fund hereunder. No PFPC Indemnified Party
shall be indemnified against any Losses caused by PFPC's or such PFPC
Indemnified Party's own willful misfeasance, bad faith, negligence or reckless
disregard in the performance of PFPC's duties under this Agreement, provided
that in the absence of a finding to the contrary the acceptance, processing
and/or negotiation of a fraudulent payment for the purchase of Shares shall be
presumed not to have been the result of PFPC's or its affiliates own willful
misfeasance, bad faith, negligence or reckless disregard of such duties. The
provisions of this Section 12 shall survive termination of this Agreement.
13. Responsibility of PFPC.
(a) PFPC shall be under no duty hereunder to take any action on
behalf of the Fund except as specifically set forth herein or
as may be specifically agreed to by PFPC and the Fund in a
written amendment hereto. PFPC shall be obligated to exercise
care and diligence in the performance of its duties hereunder
and to act in good faith in performing services provided for
under this Agreement. PFPC shall be liable only for any Losses
suffered by the Fund arising out of PFPC's performance of or
failure to perform its duties under this Agreement and only to
the extent such Losses arise out of PFPC's willful
misfeasance, bad faith, negligence or reckless disregard of
such duties.
(b) Notwithstanding anything in this Agreement to the contrary,
(i) PFPC shall not be liable for losses, delays, failure,
errors, interruption or loss of data occurring directly or
indirectly by reason of circumstances beyond its reasonable
control, including without limitation acts of God; action or
inaction of civil or military authority; public enemy; war;
terrorism; riot; fire; flood; sabotage; epidemics; labor
disputes; civil commotion; interruption, loss or malfunction
of utilities, transportation, computer or communications
capabilities; insurrection; elements of nature; or
non-performance by a third party (other than employees,
officers or affiliates of PFPC (other than the Fund, BlackRock
Kelso Capital Advisors LLC and BlackRock, Inc. and its
subsidiaries, to the extent any of the foregoing may be deemed
to be affiliates of PFPC)); and (ii) PFPC shall not be under
any duty or obligation to inquire into and shall not be liable
for the validity or invalidity, authority or lack thereof, or
truthfulness or accuracy or lack thereof, of any instruction,
direction, notice, instrument or other information which PFPC
reasonably believes to be genuine. Notwithstanding the
foregoing, PFPC shall use commercially reasonable efforts to
mitigate the effect of events enumerated in clause (i) of the
preceding sentence, although such efforts shall not impute any
liability to PFPC.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates (not including the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc. and
its subsidiaries, to the extent any of the foregoing may be
deemed to be affiliates of PFPC) shall be liable for any
consequential, special or indirect losses or damages, whether
or not the likelihood of such losses or damages was known by
PFPC or its affiliates.
(d) Each party shall have a duty to mitigate damages for which the
other party may become responsible.
(e) The provisions of this Section 13 shall survive termination of
this Agreement.
14. Description of Services.
(a) Services Provided on an Ongoing Basis, If Applicable.
(i) Maintain shareholder registrations;
(ii) Provide toll-free lines for shareholder and
broker-dealer use;
(iii) Provide periodic shareholder lists and statistics;
(iv) Mailing of year-end tax information; and
(v) Periodic mailing of shareholder Dividend Reinvestment
Plan account information and Fund financial reports.
(b) Dividends and Distributions. PFPC must receive a resolution of
the Fund's board of directors authorizing the declaration and
payment of dividends and distributions. Upon receipt of the
resolution, PFPC shall issue the dividends and distributions
in cash, or, if the resolution so provides, pay such dividends
and distributions in Shares. Such issuance or payment shall be
made after deduction and payment of the required amount of
funds to be withheld in accordance with any applicable tax
laws or other laws, rules or regulations. PFPC shall timely
send to the Fund's shareholders tax forms and other
information, or permissible substitute notice, relating to
dividends and distributions, paid by the Fund as are required
to be filed and mailed by applicable law, rule or regulation.
PFPC shall maintain and file with the U.S. Internal Revenue
Service and other appropriate taxing authorities reports
relating to all dividends above a stipulated amount (currently
$10.00 accumulated yearly dividends) paid by the Fund to its
shareholders as required by tax or other law, rule or
regulation.
In accordance with such procedures and controls as are
mutually agreed upon from time to time by and among the Fund,
PFPC and the Fund's custodian, PFPC shall process applications
from Fund shareholders relating to the Fund's Dividend
Reinvestment Plan and will effect purchases of Shares in
connection with the Dividend Reinvestment Plan. As the
dividend disbursing agent, PFPC shall, on or before the
payment date of any dividend or distribution by the Fund,
notify the Fund's accounting agent or sub-accounting agent of
the estimated amount required to pay any portion of said
dividend or distribution which is payable in cash, and on or
before the payment date of such dividend or distribution, the
Fund shall instruct the Fund's custodian to make available to
PFPC sufficient funds for the cash amount to be paid out. If a
shareholder is entitled to receive additional Shares, by
virtue of any dividend or distribution, appropriate credits
will be made to the shareholder's account and/or certificates
delivered where requested, all in accordance with the Dividend
Reinvestment Plan.
(c) Communications to Shareholders. Upon timely Written
Instructions, PFPC shall mail all communications by the Fund
to its shareholders, including:
(i) Reports to shareholders;
(ii) Monthly or quarterly (whichever is requested pursuant
to Written Instructions) Dividend Reinvestment Plan
statements;
(iii) Dividend and distribution notices;
(iv) Proxy material; and
(v) Tax form information.
PFPC will receive and tabulate the proxy cards for the
meetings of the Fund's shareholders.
(d) Records. PFPC shall maintain records of the accounts for each
shareholder showing the following information:
(i) Name, address and U.S. Tax Identification or Social
Security number;
(ii) Number and class of shares held and number and class
of Shares for which certificates, if any, have been
issued, including certificate numbers and
denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions
paid and the date and price for all transactions on a
shareholder's account;
(iv) Any stop or restraining order placed against a
shareholder's account;
(v) Any correspondence relating to the current maintenance
of a shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for PFPC to perform
any calculations contemplated or required by this
Agreement.
(e) Shareholder Inspection of Stock Records. Upon request from a
Fund shareholder to inspect stock records, PFPC will notify
the Fund and require instructions granting or denying each
such request. Unless PFPC has acted contrary to the Fund's
instructions, the Fund agrees to release PFPC from any
liability for refusal of permission for a particular
shareholder to inspect the Fund's shareholder records.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PFPC on sixty (60) days' prior written
notice to the other party. In the event the Fund gives notice of
termination, all expenses associated with movement (or duplication) of
records and materials and conversion thereof to a successor service
provider (or each successive service provider), including expenses
incurred after termination, will be borne by the Fund and paid by the
Fund to PFPC.
16. Notices. Notices shall be addressed (a) if to PFPC, at 301 Bellevue
Parkway, Wilmington, Delaware 19809, Attention: President (or such
other address as PFPC may inform the Fund in writing); (b) if to the
Fund, at 40 East 52nd Street, New York, New York 10022, Attention:
Frank Gordon (or such other address as the Fund may inform PFPC in
writing) or (c) if to neither of the foregoing, at such other address
as shall have been given by like notice to the sender of any such
notice or other communication by the other party. If notice is sent by
confirming facsimile sending device, it shall be deemed to have been
given immediately. If notice is sent by first-class mail, it shall be
deemed to have been given three days after it has been mailed. If
notice is sent by messenger, it shall be deemed to have been given on
the day it is delivered.
17. Amendments. This Agreement, or any term thereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
18. Assignment. PFPC may assign this Agreement to any majority owned direct
or indirect subsidiary of PFPC or of The PNC Financial Services Group,
Inc. (other than BlackRock, Inc. and its subsidiaries), provided that
PFPC gives the Fund 30 days' prior written notice of such assignment.
19. Subcontractors. PFPC may, in its sole discretion, engage subcontractors
to perform any of the obligations contained in this Agreement to be
performed by PFPC; provided, however, PFPC shall remain responsible for
the acts and omissions of any such sub-contractors to the same extent
that PFPC is responsible for its own acts and omissions under this
Agreement.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the
purposes hereof.
22. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter
hereof, provided that the parties may embody in one or more
separate documents their agreement, if any, with respect to
delegated duties and compensation of PFPC.
(b) No Changes that Materially Affect Obligations. Notwithstanding
anything in this Agreement to the contrary, the Fund agrees
not to make any modifications to its offering document or
registration statement or adopt any policies which would
affect materially the obligations or responsibilities of PFPC
hereunder without the prior written approval of PFPC, which
approval shall not be unreasonably withheld or delayed.
(c) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit
any of the provisions hereof or otherwise affect their
construction or effect.
(d) Information. The Fund will provide such information and
documentation as PFPC may reasonably request in connection
with services provided by PFPC to the Fund.
(e) Governing Law. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law, without regard
to principles of conflicts of law.
(f) Partial Invalidity. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be
affected thereby.
(g) Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
(h) No Representations or Warranties. Except as expressly provided
in this Agreement, PFPC hereby disclaims all representations
and warranties, express or implied, made to the Fund or any
other person, including, without limitation, any warranties
regarding quality, suitability, merchantability, fitness for a
particular purpose or otherwise (irrespective of any course of
dealing, custom or usage of trade), of any services or any
goods provided incidental to services provided under this
Agreement. PFPC disclaims any warranty of title or
non-infringement except as otherwise set forth in this
Agreement.
(i) Facsimile Signatures. The facsimile signature of any party to
this Agreement shall constitute the valid and binding
execution hereof by such party.
(j) Regulation S-P. PFPC agrees that, subject to the reuse and
re-disclosure provisions of Regulation S-P, 17 CFR Part
248.11, it shall not disclose the non-public personal
information of investors in the Fund obtained under this
Agreement, except as necessary to carry out the services set
forth in this Agreement or as otherwise permitted by law or
regulation.
(k) Customer Identification Program Notice. To help the U.S.
government fight the funding of terrorism and money laundering
activities, U.S. Federal law requires each financial
institution to obtain, verify, and record certain information
that identifies each person who initially opens an account
with that financial institution on or after October 1, 2003.
Certain of PFPC's affiliates are financial institutions, and
as a matter of policy PFPC will request (or already has
requested) the Fund's name, address and taxpayer
identification number or other government-issued
identification number, and, if such party is a natural person,
that party's date of birth. PFPC may also ask (and may have
already asked) for additional identifying information, and
PFPC may take steps (and may have already taken steps) to
verify the authenticity and accuracy of these data elements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By: /s/ James W. Pasman
----------------------------
Title: Sr. Vice President
-------------------------
BLACKROCK KELSO CAPITAL
CORPORATION
By: /s/ Frank Gordon
--------------------------------
Title: CFO
-----------------------------
EXHIBIT 10.6
SUB-ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
----------------------------------------------------
THIS AGREEMENT is made as of July 18, 2005 by and among BLACKROCK
KELSO CAPITAL CORPORATION, a Delaware corporation (the "Fund"), PFPC INC., a
Massachusetts corporation ("PFPC") which is a subsidiary of The PNC Financial
Services Group, Inc., and BLACKROCK FINANCIAL MANAGEMENT, INC., a Delaware
corporation (the "Administrator") which is also a subsidiary of The PNC
Financial Services Group, Inc.
W I T N E S S E T H :
WHEREAS, the Administrator serves as administrator of the Fund; and
WHEREAS, the Fund and the Administrator wish to retain PFPC to
provide sub-administration and accounting services provided for herein with
respect to the Fund, and PFPC wishes to furnish such services with respect to
the Fund.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Definitions. As Used in this Agreement:
----------------------------------------
(a) "Authorized Person" means any officer of the Fund and any
other person duly authorized by the Fund to give Oral
Instructions or Written Instructions under this Agreement.
An Authorized Person's scope of authority may be limited by
setting forth such limitation in a written document signed
by the Fund and PFPC.
(b) "Oral Instructions" means oral instructions received by PFPC
from an Authorized Person or from a person reasonably
believed by PFPC to be an Authorized Person. PFPC may, in
its sole discretion in each separate instance, consider and
rely upon instructions it receives from an Authorized Person
via electronic mail as Oral Instructions.
(c) "Written Instructions" means (i) written instructions signed
by an Authorized Person (or a person reasonably believed by
PFPC to be an Authorized Person) and received by PFPC or
(ii) trade instructions transmitted (and received by PFPC)
by means of an electronic transaction reporting system
access to which requires use of a password or other
authorized identifier.
2. Appointment. The Fund and the Administrator hereby appoint PFPC to
provide sub-administration and accounting services with respect to
the Fund in accordance with the terms set forth in this Agreement.
PFPC accepts such appointment and agrees to furnish such services.
3. Compliance with Rules and Regulations. PFPC will comply with the
requirements of any laws, rules and regulations of governmental
authorities that are applicable to the duties to be performed by PFPC
under this Agreement. Except as specifically set forth in this
Agreement, PFPC assumes no responsibility for compliance by the
Administrator, the Fund or any other entity with any laws, rules and
regulations.
4. Instructions.
-------------
(a) Unless otherwise provided in this Agreement, PFPC shall act
only upon Oral Instructions or Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instruction or
Written Instruction it receives from an Authorized Person
(or from a person reasonably believed by PFPC to be an
Authorized Person) pursuant to this Agreement. PFPC may
assume that any Oral Instructions or Written Instructions
received hereunder are not in any way inconsistent with the
Administrator's obligations to the Fund or with the
provisions of organizational documents of the Fund or with
any vote, resolution or proceeding of the Fund's board of
directors or shareholders, unless and until PFPC receives
Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the
Written Instructions by the close of business on the same
day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by
PFPC or differ from the Oral Instructions shall in no way
invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions or PFPC's
ability to rely upon such Oral Instructions.
5. Right to Receive Advice.
------------------------
(a) Oral Instructions or Written Instructions. If PFPC is in
doubt as to any action it should or should not take, PFPC
may request directions or advice, by way of Oral
Instructions or Written Instructions.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should
not take, PFPC may request advice from counsel of its own
choosing (who may be counsel for the Administrator, the
Fund, the Fund's sponsor or adviser or PFPC, at the option
of PFPC).
(c) Conflicting Advice. In the event of a conflict between Oral
Instructions or Written Instructions and the advice PFPC
receives from counsel, PFPC may rely upon and follow the
advice of counsel.
(d) Protection of PFPC. PFPC shall be indemnified by the Fund
and without liability for any action PFPC takes or does not
take in reliance upon Oral Instructions or Written
Instructions PFPC receives regarding or relating to the Fund
or advice from counsel and which PFPC believes, in good
faith, to be consistent with those Oral Instructions or
Written Instructions or that advice. Nothing in this section
shall be construed so as to impose an obligation upon PFPC
(i) to seek such advice or Oral Instructions or Written
Instructions, or (ii) to act in accordance with such advice
or Oral Instructions or Written Instructions. Nothing in
this subsection shall excuse PFPC from liability for its
acts or omissions in carrying out such Oral Instructions or
Written Instructions to the extent such acts or omissions
constitute willful misfeasance, bad faith, negligence or
reckless disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.
6. Records; Visits. The books and records pertaining to the Fund, which
are in the possession or under the control of PFPC, shall be the
property of the Fund. PFPC may house such books and records in a
third party storage facility. The Fund, the Administrator and
Authorized Persons, and such other persons the Fund by means of
Written Instructions reasonably authorizes (including but not limited
to the Fund's independent accountants), shall have access to such
books and records at all times during PFPC's normal business hours;
provided that the Fund shall not authorize access by any individuals
employed by PFPC's direct competitors. Upon the reasonable request of
the Fund or the Administrator, copies of any such books and records
shall be provided by PFPC to the Fund, the Administrator, an
Authorized Person, or such other person, at the Fund's expense.
PFPC shall keep the following records:
(a) all books and records with respect to the Fund's books of
account; and
(b) records of the Fund's securities transactions.
7. Confidentiality. Each of the Fund and the Administrator shall keep
confidential any information it receives hereunder relating to PFPC's
business and PFPC shall keep confidential any information it receives
hereunder relating to the Fund's business. Confidential information
shall include (a) any data or information that is competitively
sensitive material, and not generally known to the public, including,
but not limited to, information about product plans, marketing
strategies, finances, operations, customer relationships, customer
profiles and information, customer lists, sales estimates, business
plans, and internal performance results relating to the past, present
or future business activities of the Fund or PFPC; (b) any scientific
or technical information, design, process, procedure, formula, or
improvement that is commercially valuable and secret in the sense
that its confidentiality affords the Fund or PFPC a competitive
advantage over its competitors; (c) all confidential or proprietary
concepts, documentation, reports, data, specifications, computer
software, source code, object code, flow charts, databases,
inventions, know-how, and trade secrets, whether or not patentable or
copyrightable; and (d) anything designated as confidential.
Notwithstanding the foregoing, information shall not be confidential
information and shall not be subject to the foregoing confidentiality
obligations if it: (a) is already known to the receiving party at the
time it is obtained; (b) is or becomes publicly known or available
through no wrongful act of the receiving party; (c) is rightfully
received from a third party who, to the best of the receiving party's
knowledge, is not under a duty of confidentiality; (d) is released by
the protected party to a third party without restriction; (e) is
requested or required to be disclosed by the receiving party pursuant
to a court order, subpoena, governmental or regulatory agency request
or law (provided the receiving party will provide the other party (in
the case of disclosure by the Fund or the Administrator the "other
party" will be PFPC, and in the case of disclosure by PFPC the "other
party" will be the Fund) written notice of the same, to the extent
such notice is permitted); (f) is relevant to the defense of any
claim or cause of action asserted against the receiving party; (g) is
necessary or desirable for PFPC to release such information in
connection with the provision of services under this Agreement; or
(h) has been or is independently developed or obtained by the
receiving party.
PFPC agrees that, subject to the reuse and re-disclosure
provisions of Regulation S-P, 17 CFR Part 248.11, it shall not
disclose the non-public personal information of investors in the Fund
obtained under this Agreement, except as necessary to carry out the
services set forth in this Agreement or as otherwise permitted by law
or regulation.
8. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses,
fiscal year summaries, and other audit-related schedules with respect
to the Fund. PFPC shall take all reasonable action in the performance
of its duties under this Agreement to assure that the necessary or
appropriate information is made available to such accountants for the
expression of their opinion, as reasonably requested by the Fund.
9. PFPC System. PFPC shall retain title to and ownership of any and all
data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions,
discoveries, patentable or copyrightable matters, concepts,
expertise, patents, copyrights, trade secrets, and other related
legal rights utilized by PFPC in connection with the services
provided by PFPC with respect to the Fund.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment
to the extent appropriate equipment is available. In the event of
equipment failures, PFPC shall, at no additional expense to the Fund
or the Administrator, take reasonable steps to minimize service
interruptions. PFPC shall have no liability with respect to the loss
of data or service interruptions caused by equipment failure,
provided such loss or interruption is not caused by PFPC's own
willful misfeasance, bad faith, negligence or reckless disregard of
its duties or obligations under this Agreement.
11. Compensation.
(a) As compensation for services set forth herein that are
rendered by PFPC during the term of this Agreement, the
Fund will pay to PFPC a fee or fees as may be agreed to in
writing by the Fund and PFPC.
(b) The Fund and the Administrator hereby represent and warrant
to PFPC that (i) the terms of this Agreement, (ii) the fees
and expenses associated with this Agreement, and (iii) any
benefits accruing to PFPC or to the Administrator (or any
affiliate thereof) or to the adviser or sponsor to the Fund
in connection with this Agreement, including but not
limited to any fee waivers, conversion cost reimbursements,
up front payments, signing payments or periodic payments
made or to be made by PFPC to the Administrator (or any
affiliate thereof) or to such adviser or sponsor or to any
affiliate of the Fund relating to this Agreement have been
fully disclosed to the board of directors of the Fund and
that, if required by applicable law, such board of
directors has approved or will approve the terms of this
Agreement, any such fees and expenses, and any such
benefits.
12. Indemnification. The Fund agrees to indemnify, defend and hold
harmless PFPC and its affiliates (other than the Fund, BlackRock
Kelso Capital Advisors LLC and BlackRock, Inc. and its subsidiaries,
to the extent any of the foregoing may be deemed to be affiliates of
PFPC) including their respective officers, directors, agents and
employees (each, a "PFPC Indemnified Party") from all taxes, charges,
expenses, assessments, claims and liabilities (including, without
limitation, reasonable attorneys' fees and disbursements and
liabilities arising under applicable securities laws and any state
and foreign securities and blue sky laws) (collectively, "Losses")
arising directly or indirectly from any action or omission to act
which PFPC takes or omits to take in connection with the provision of
services under this Agreement. No PFPC Indemnified Party shall be
indemnified against any Losses caused by PFPC's or such PFPC
Indemnified Party's own willful misfeasance, bad faith, negligence or
reckless disregard in the performance of PFPC's duties under this
Agreement. The provisions of this Section 12 shall survive
termination of this Agreement.
13. Responsibility of PFPC.
(a) PFPC shall be under no duty hereunder to take any action on
behalf of the Fund or the Administrator except as
specifically set forth herein or as may be specifically
agreed to by PFPC, the Fund and the Administrator in a
written amendment hereto. PFPC shall be obligated to
exercise care and diligence in the performance of its
duties hereunder and to act in good faith in performing
services provided for under this Agreement. PFPC shall be
liable only for any Losses suffered by the Fund arising out
of PFPC's performance of or failure to perform its duties
under this Agreement and only to the extent such Losses
arise out of PFPC's willful misfeasance, bad faith,
negligence or reckless disregard of such duties.
(b) Notwithstanding anything in this Agreement to the contrary,
(i) PFPC shall not be liable for losses, delays, failure,
errors, interruption or loss of data occurring directly or
indirectly by reason of circumstances beyond its reasonable
control, including without limitation acts of God; action
or inaction of civil or military authority; public enemy;
war; terrorism; riot; fire; flood; sabotage; epidemics;
labor disputes; civil commotion; interruption, loss or
malfunction of utilities, transportation, computer or
communications capabilities; insurrection; elements of
nature; or non-performance by a third party (other than
employees, officers or affiliates of PFPC (other than the
Fund, BlackRock Kelso Capital Advisors LLC and BlackRock,
Inc. and its subsidiaries, to the extent any of the
foregoing may be deemed to be affiliates of PFPC)); and
(ii) PFPC shall not be under any duty or obligation to
inquire into and shall not be liable for the validity or
invalidity, authority or lack thereof, or truthfulness or
accuracy or lack thereof, of any instruction, direction,
notice, instrument or other information which PFPC
reasonably believes to be genuine. Notwithstanding the
foregoing, PFPC shall use commercially reasonable efforts
to mitigate the effect of the events enumerated in clause
(i) of the preceding sentence, although such efforts shall
not impute any liability to PFPC.
(c) Notwithstanding anything in this Agreement to the contrary,
the Fund and the Administrator hereby acknowledge and agree
that (i) PFPC, in the course of providing tax-related
services or calculating and reporting portfolio performance
hereunder, may rely upon PFPC's interpretation of tax
positions or its interpretation of relevant circumstances
(as determined by PFPC) in providing such tax services and
in determining methods of calculating portfolio performance
to be used, and that (ii) PFPC shall not be liable for
losses or damages of any kind associated with such reliance
except to the extent such loss or damage is substantially
due to PFPC's willful misfeasance, bad faith, negligence or
reckless disregard in the performance of its duties under
this Agreement.
(d) Notwithstanding anything in this Agreement to the contrary,
without limiting anything in the immediately preceding
sub-section (c), the Fund and the Administrator hereby
acknowledge and agree that PFPC shall not be found to have
been negligent or to have acted with willful misfeasance,
bad faith or reckless disregard with respect to losses or
damages associated with areas of responsibility that the
judiciary, regulators (or other governmental officials) or
members of the investment fund industry determine would
otherwise apply to PFPC (or similar service providers) and
which, as of the date hereof, have yet to be identified by
such parties as areas for which PFPC (or any similar
service provider) is (or would be) responsible.
(e) Notwithstanding anything in this Agreement to the contrary
neither PFPC nor its affiliates (not including the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc.
and its subsidiaries, to the extent any of the foregoing
may be deemed to be affiliates of PFPC) shall be liable for
any consequential, special or indirect losses or damages,
whether or not the likelihood of such losses or damages was
known by PFPC or its affiliates.
(f) Each party shall have a duty to mitigate damages for which
any other party to this Agreement may become responsible.
(g) Notwithstanding anything in this Agreement to the contrary,
the services provided by PFPC do not constitute, nor shall
they be construed as constituting, legal advice or the
provision of legal services for or on behalf of the
Administrator, the Fund or any other person.
(h) The provisions of this Section 13 shall survive termination
of this Agreement.
14. Description of Accounting Services on a Continuous Basis.
PFPC will perform the following accounting services if required with
respect to the Fund:
(i) Journalize investment, capital share and income and
expense activities;
(ii) Record investment buy/sell trade tickets when
received from the Fund's investment adviser;
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each security;
(v) Record and reconcile corporate action activity and
all other capital changes;
(vi) Reconcile cash and investment balances of the Fund
with the Fund's custodian and provide the Fund's
investment adviser with the beginning cash balance
available for investment purposes;
(vii) Calculate contractual expenses, including
management fees and incentive allocation, as
applicable, in accordance with the Fund's
investment management agreement;
(viii) Monitor the expense accruals and notify an officer
of the Fund of any proposed adjustments;
(ix) Control all disbursements and authorize such
disbursements upon Written Instructions;
(x) Calculate capital gains and losses;
(xi) Determine net income;
(xii) Determine applicable foreign exchange gains and
losses on payables and receivables;
(xiii) Obtain market quotes and currency exchange rates
with respect to the Fund's investments from
independent pricing services approved by the Fund's
investment adviser, or if such quotes are
unavailable, then obtain such prices from the
Fund's investment adviser, and in either case
calculate the market value of the Fund's
investments on a monthly basis in accordance with
applicable valuation policies or guidelines
provided by the Fund to PFPC (provided PFPC does
not inform the Fund that it is unable to comply
with such policies or guidelines);
(xiv) Transmit or mail a copy of the portfolio valuation
on a monthly basis to the Fund's investment adviser
as agreed upon between the Fund and PFPC;
(xv) Arrange for the computation of the net asset value
of the Fund on a monthly basis in accordance with
the provisions of the Fund's offering memorandum;
and
(xvi) As appropriate, compute yields, total return,
expense ratios, portfolio turnover rate, and if
required, portfolio average dollar-weighted
maturity.
15. Description of Sub-Administration Services on a Continuous Basis.
PFPC will perform the following sub-administration services if
required with respect to the Fund:
(i) Supply various normal and customary Fund
statistical data to the Fund as requested on an
ongoing basis;
(ii) Prepare for execution and file the Fund's Federal
and state tax returns;
(iii) Coordinate the printing of the Fund's annual
shareholder reports;
(iv) Prepare monthly security transaction listings;
(v) Supply certain financial statements, schedules,
notes and related financial and supplementary data
in connection with the filing of the Fund's annual
and quarterly reports on Forms 10-K and 10-Q with
the Securities and Exchange Commission, as agreed
by PFPC from time to time; and (vi) Monitor the
Fund's status as a regulated investment company
under Sub-chapter M of the Internal Revenue Code of
1986, as amended.
16. Duration and Termination. This Agreement shall continue until
terminated by the Fund, the Administrator or PFPC on sixty (60) days'
prior written notice to the other parties. In the event the Fund or
the Administrator gives notice of termination, all expenses
associated with movement (or duplication) of records and materials
and conversion thereof to a successor service provider (or each
successive service provider), including expenses incurred after
termination, will be borne by the Fund and paid by the Fund to PFPC.
17. Notices. Notices shall be addressed (a) if to PFPC, at 301 Bellevue
Parkway, Wilmington, Delaware 19809, Attention: President (or such
other address as PFPC may inform the other parties in writing); (b)
if to the Fund, at 40 East 52nd Street, New York, NY 10022;
Attention: Frank Gordon (or such other address as the Fund may inform
the other parties in writing); (c) if to the Administrator, at 40
East 52nd Street, New York, NY 10022; Attention: James Kong (or such
other address as the Administrator may inform the other parties in
writing); or (d) if to none of the foregoing, at such other address
as shall have been provided by like notice to the sender of any such
notice or other communication. If notice is sent by confirming
facsimile sending device, it shall be deemed to have been given
immediately. If notice is sent by first-class mail, it shall be
deemed to have been given three days after it has been mailed. If
notice is sent by messenger, it shall be deemed to have been given on
the day it is delivered.
18. Amendments. This Agreement, or any term hereof, may be changed or
waived only by written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
19. Assignment. PFPC may assign this Agreement to any majority owned
direct or indirect subsidiary of PFPC or of The PNC Financial
Services Group, Inc. (other than BlackRock, Inc. and its
subsidiaries), provided that PFPC gives the Fund and the
Administrator 30 days' prior written notice of such assignment.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the
purposes hereof.
22. Miscellaneous.
(a) No Changes that Materially Affect Obligations.
Notwithstanding anything in this Agreement to the contrary,
PFPC shall have no responsibility under this Agreement with
respect to any modifications made by the Fund to its
offering memorandum, registration statement or policies
which would affect materially the obligations or
responsibilities of PFPC hereunder, without the prior
written approval of PFPC (which approval shall not be
unreasonably withheld or delayed).
(b) No Representations or Warranties. Except as expressly
provided in this Agreement, PFPC hereby disclaims all
representations and warranties, express or implied, made to
the Fund, the Administrator or any other person, including,
without limitation, any warranties regarding quality,
suitability, merchantability, fitness for a particular
purpose or otherwise (irrespective of any course of
dealing, custom or usage of trade), of any services or any
goods provided incidental to services provided under this
Agreement. PFPC disclaims any warranty of title or
non-infringement except as otherwise set forth in this
Agreement.
(c) Entire Agreement. This Agreement embodies the entire
agreement and understanding among the parties relating to
the subject matter hereof and supersedes all prior
agreements and understandings relating to the subject
matter hereof, provided that the parties (or, with respect
to compensation of PFPC, the Fund and PFPC) may embody in
one or more separate documents their agreement, if any,
with respect to delegated duties, subsequently agreed upon
services, and compensation of PFPC.
(d) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect
their construction or effect.
(e) Information. The Fund will provide such information and
documentation as PFPC may reasonably request in connection
with services provided by PFPC with respect to the Fund.
(f) Governing Law. This Agreement shall be deemed to be a
contract made in Delaware and governed by Delaware law,
without regard to principles of conflicts of law.
(g) Partial Invalidity. If any provision of this Agreement
shall be held or made invalid by a court decision, statute,
rule or otherwise, the remainder of this Agreement shall
not be affected thereby.
(h) Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
(i) Facsimile Signatures. The facsimile signature of any party
to this Agreement shall constitute the valid and binding
execution hereof by such party.
(j) Customer Identification Program Notice. To help the U.S.
government fight the funding of terrorism and money
laundering activities, U.S. Federal law requires each
financial institution to obtain, verify, and record certain
information that identifies each person who initially opens
an account with that financial institution on or after
October 1, 2003. Certain of PFPC's affiliates are financial
institutions, and as a matter of policy PFPC will request
(or already has requested) the Fund's name, address and
taxpayer identification number or other government-issued
identification number, and, if such party is a natural
person, that party's date of birth. PFPC may also ask (and
may have already asked) for additional identifying
information, and PFPC may take steps (and may have already
taken steps) to verify the authenticity and accuracy of
these data elements.
(k) No Third Party Beneficiary. Notwithstanding anything in
this Agreement to the contrary, (i) no other entity is
intended to be, nor shall it be, a third party beneficiary
of this Agreement (except as set forth in Section 12 and
Section 13(e) of this Agreement) and (ii) PFPC shall have
no liability under or as a result of this Agreement to any
third party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
PFPC INC.
By: /s/ Neal J. Andrews
-----------------------------------
Title: SVP
-----------------------------------
BLACKROCK KELSO CAPITAL CORPORATION
By: /s/ Frank Gordon
-----------------------------------
Title: CFO
-----------------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
By: /s/ James Kong
-----------------------------------
Title: Managing Director
-----------------------------------
EXHIBIT 10.7
BLACKROCK KELSO CAPITAL ADVISORS LLC
WAIVER RELIANCE LETTER
July 25, 2005
BlackRock Kelso Capital Corporation
40 East 52nd Street
New York, NY 10022
Ladies and Gentlemen:
BlackRock Kelso Capital Advisors LLC (the "Advisor") and BlackRock Kelso
Capital Corporation (the "BDC") have entered into an Investment Management
Agreement, dated July 25, 2005 (the "Management Agreement"), pursuant to which
the Advisor has agreed to furnish investment advisory services to the BDC and
the BDC has agreed to pay a management fee (the "Management Fee"), on the terms
and subject to the conditions of the Management Agreement. Capitalized terms
used but not defined herein shall have the meanings given to them in the Private
Offering Memorandum of BlackRock Kelso Capital Holding LLC. The advisor hereby
agrees with the BDC as follows:
1. The Advisor hereby waives its rights to receive 50% of the amount of the
Management Fee the Advisor would otherwise be entitled to receive from the
BDC until the first date on which 90% of the assets of the BDC are invested
in portfolio companies in accordance with the BDC's investment objective,
excluding investments in cash, cash equivalents, U.S. government securities
and other high-quality debt investments that mature in one year or less
from the date of investment, or the Ramp-Up Date, whichever is sooner.
2. Thereafter, the Advisor hereby waives, until such time as the BDC has
completed an initial public offering of its common shares registered under
the Securities Act and listed such common shares on a national securities
exchange (collectively, the "Public Market Event"), 25% of the amount of
the Management Fee the Advisor would otherwise be entitled to receive from
the BDC.
3. In addition, the Advisor hereby
(a) waives Management Fees for any calendar year in excess of $11.936224
million until the earlier of (i) such time as the BDC has completed
the Public Market Event or (ii) the fourth anniversary of the
commencement of operations of the BDC and
(b) waives its Management Fee in excess of $5.570238 million during the
fifth year of the BDC's existence unless the BDC has completed the
Public Market Event.
Supporting calculations with respect to the waiver thresholds are contained
in the attached spreadsheet.
Please acknowledge the foregoing by signing the enclosed copy of this
letter in the space provided below and returning the executed copy to the
Advisor.
Sincerely,
BLACKROCK KELSO CAPITAL
ADVISORS LLC
By: /s/ Michael B. Lazar
-----------------------
Name: Michael B. Lazar
Title: Chief Operating Officer
CONFIRMED AND ACCEPTED:
BLACKROCK KELSO CAPITAL CORPORATION
By: /s/ Frank Gordon
-----------------------
Name: Frank Gordon
Title: Chief Financial Officer
BlackRock Kelso Capital Corporation
BlackRock Kelso Capital Advisors LLC
Adjusted Fee Waiver Threshold Calculations
(in millions)
Fee Waiver Threshold per Offering Memorandum*:
Earlier of completion of Public Market Event or fourth
anniversary of commencement of BDC $ 11.25 A
During fifth year of existence 5.25 B
Based upon assumed gross proceeds of 500.0 C
Fee Waiver Threshold Adjusted to Reflect Actual Gross Proceeds:
Actual gross proceeds 530.498845 D
Actual gross proceeds divided by assumed gross proceeds 1.06099769 E = D / C
Adjusted Fee Waiver:
------------
Earlier of completion of Public Market Event or fourth | |
anniversary of commencement of BDC | 11.936224 | A x E
During fifth year of existence | 5.570238 | B x E
------------
* Confidential Private Offering Memorandum of BlackRock Kelso Capital Holding
LLC, dated June 2005, relating to its Membership Interests (related excerpt
attached)
Excerpt from Confidential Private Offering Memorandum of BlackRock Kelso Capital
Holding LLC, dated June 2005, relating to its Membership Interests.
In any event and assuming gross proceeds from this offering of $500 million, the
Advisor has agreed (A) to waive Management Fees for any calendar year in excess
of $11.25 million until the earlier of (i) such time as the BDC has completed
the Public Market Event or (ii) the fourth anniversary of the commencement of
the BDC and (B) to waive its Management Fee in excess of $5.25 million during
the fifth year of the BDC's existence unless the BDC has completed the Public
Market Event. If there is no Public Market Event, the BDC will begin the process
of winding down its assets in the beginning of the sixth year of the BDC's
existence. The BDC would need to have greater than $750 million in total assets
during the initial waiver period for the $11.25 million cap to be operative and
greater than $350 million in total assets during the fifth year for the $5.25
million cap to be operative. The foregoing amounts assume gross proceeds from
this offering of $500 million. To the extent that such gross proceeds differ
from $500 million, the fee cap and total asset thresholds described above will
change in direct proportion to the ratio of the actual gross proceeds to $500
million. For example, if the gross proceeds from this offering were $520
million, the $11.25 million and $5.25 million fee caps described above would
increase to $11.70 million and $5.46 million, respectively, and the total asset
thresholds of $750 million and $350 million described above would increase to
$780 million and $364 million, respectively. Although it is anticipated that the
Carried Interest will be paid through distributions on the Series S Share (as
defined below under "Description of Shares of the BDC - Series S Preferred
Shares; Carried Interest), the Carried Interest (as defined below) is also
provided for in the Management Agreement.
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
The following information sets forth the computation of basic and diluted net
investment income per share and the net increase in net assets per share
resulting from operations for the period July 25, 2005 (inception of operations)
through December 31, 2005:
Numerator for net investment income per share: $ 6,202,991
Numerator for net increase in net assets per share: $ 6,444,368
Denominator for basic and diluted weighted average shares: 35,366,589
Basic and diluted net investment income per share: $ 0.17
Basic and diluted net increase in net assets per share
resulting from operations: $ 0.18
EXHIBIT 14.1
BLACKROCK KELSO CAPITAL CORPORATION
CODE OF ETHICS
I. Introduction.
-------------
The purpose of this Code of Ethics is to prevent Access Persons (as
defined below) of BlackRock Kelso Capital Corporation (the "BDC") from engaging
in any act, practice or course of business prohibited by paragraph (b) of Rule
17j-l (the "Rule") under the Investment Company Act of 1940, as amended (the
"Act"). This Code of Ethics is required by paragraph (c) of the Rule.
Access Persons of the BDC, in conducting their personal securities
transactions, owe a fiduciary duty to the shareholders of the BDC. The
fundamental standard to be followed in personal securities transactions is that
Access Persons may not take inappropriate advantage of their positions. All
personal securities transactions by Access Persons must be conducted in such a
manner as to avoid any actual or potential conflict of interest between the
Access Person's interest and the interests of the BDC, or any abuse of an
Access Person's position of trust and responsibility. Potential conflicts
arising from personal investment activities could include buying or selling
securities based on knowledge of the BDC's trading position or plans (sometimes
referred to as front-running), and acceptance of personal favors that could
influence trading judgments on behalf of the BDC. While this Code of Ethics is
designed to address identified conflicts and potential conflicts, it cannot
possibly be written broadly enough to cover all potential situations and, in
this regard, Access Persons are expected to adhere not only to the letter, but
also the spirit, of the policies contained herein.
II. Definitions.
------------
In order to understand how this Code of Ethics applies to particular
persons and transactions, familiarity with the key terms and concepts used in
this Code of Ethics is necessary. Those key terms and concepts are:
1. "Access Person" means any director, officer or "advisory person" of
the BDC. A list of the BDC's Access Persons who are officers and directors of
the BDC is attached as Appendix 1 to this Code of Ethics and will be updated
from time to time.
2. "Advisory person" means (a) any employee of the BDC or of any
company in a control relationship to the BDC, who, in connection with his
regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a "Covered Security" by the BDC, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (b) any natural person in a control relationship to the
BDC who obtains information concerning recommendations made to the BDC with
regard to the purchase or sale of "Covered Securities".
3. "Beneficial ownership" has the meaning set forth in Rule
16a-1(a)(2) of the Securities Exchange Act of 1934, as amended. The
determination of direct or indirect beneficial ownership shall apply to all
securities which an Access Person has or acquires."Advisor" means BlackRock
Kelso Capital Advisors LLC the investment advisor of the BDC.
4. "Advisor" means BlockRock Kelso Capital Advisors LLC the investment
advisor of the BDC.
5. "Advisor Code" means the Employee Investment Transaction Policy
adopted by the Advisor and approved by the Board.
6. "Control" has the meaning set forth in Section 2(a)(9) of the Act.
7. "Covered Security" has the meaning set forth in Section 2(a)(36) of
the Act, except that it shall not include: direct obligations of the Government
of the United States; bankers' acceptances, bank certificates of deposit,
commercial paper, and high-quality short-term debt instruments, including
repurchase agreements; and shares issued by registered open-end investment
companies. A high-quality short-term debt instrument is one with a maturity at
issuance of less than 366 days and that is rated in one of the two highest
rating categories by a nationally recognized statistical rating organization.
8. "Independent director" means a director of the BDC who is not an
"interested person" of the BDC within the meaning of Section 2(a)(19) of the
Act.
9. "Investment Committee Participant" means a member of the Investment
Committee of the Advisor who is not an Access Person of the BDC. A list of the
BDC's Investment Committee Participants is attached as Appendix 1 to this Code
of Ethics and will be updated from time to time.
10. "Investment Personnel" of the BDC means (a) any employee of the
BDC (or of any company in a control relationship to the BDC) who, in connection
with his or her regular functions or duties, makes or participates in making
recommendations regarding the purchase or sale of securities by the BDC and (b)
any natural person who controls the BDC and who obtains information concerning
recommendations made to the BDC regarding the purchase or sale of securities by
the BDC.
11. "IPO" means an offering of securities registered under the
Securities Act of 1933, the issuer or which, immediately before the
registration, was not subject to the reporting requirements of Sections 13 or
15(d) of the Securities Exchange Act.
12. "Limited Offering" means an offering exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2), 4(6) or Rule 504,
505 or 506 under the Securities Act of 1933.
13. "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered Security.
III. Restrictions Applicable to Directors, Officers and Employees of the
Advisor.
-------------------------------------------------------------------
1. All directors, officers and employees of the Advisor's investment
advisory companies shall be subject to the restrictions, limitations and
reporting responsibilities set forth in the Advisor Code, respectively, as if
fully set forth herein.
2. Persons subject to this Section III shall not be subject to the
restrictions, limitations and reporting responsibilities set forth in Sections
IV and V below.
IV. Prohibitions; Exemptions.
-------------------------
1. Prohibited Purchases and Sales.
A. No Access Person may purchase or sell, directly or indirectly, any
Covered Security in which that Access Person has, or by reason of the
transaction would acquire, any direct or indirect beneficial ownership and
which to the actual knowledge of that Access Person at the time of such
purchase or sale:
(1) is being considered for purchase or sale by the BDC; or
(2) is being purchased or sold by the BDC.
B. No Investment Committee Participant may purchase or sell, directly
or indirectly, any security or other instrument which, to the knowledge of that
Investment Committee Participant, at the time of such purchase or sale was, is
or is about to be brought before the Investment Committee for investment
consideration within six months prior to or following such purchase or sale.
2. Exemptions From Certain Prohibitions.
A. The prohibited purchase and sale transactions described in
paragraph IV.1 above do not apply to the following personal securities
transactions:
(1) purchases or sales effected in any account over which the Access
Person or the Investment Committee Participant has no direct or indirect
influence or control;
(2) purchases or sales which are non-volitional on the part of either
the Access Person, the Investment Committee Participant or the BDC;
(3) purchases which are part of an automatic dividend reinvestment
plan (other than pursuant to a cash purchase plan option);
(4) purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent the rights
were acquired from that issuer, and sales of the rights so acquired; or
(5) any purchase or sale which the Compliance Officer of the Advisor
(as defined in the Advisor Code) approves on the grounds that its potential
harm to the BDC is remote.
3. Prohibited Recommendations.
An Access Person or Investment Committee Participant may not recommend
the purchase or sale of any Covered Security to or for the BDC without having
disclosed his or her interest, if any, in such security or the issuer thereof,
including without limitation:
A. any direct or indirect beneficial ownership of any Covered Security
of such issuer, including any Covered Security received in a private securities
transaction;
B. any contemplated purchase or sale by such person of a Covered
Security;
C. any position with such issuer or its affiliates; or
D. any present or proposed business relationship between such issuer
or its affiliates and such person or any party in which such person has a
significant interest.
4. Pre-approval of Investments in Initial Public Offerings or Limited
Offerings.
A. No Investment Personnel shall purchase any security (including, but
not limited to, any Covered Security) issued in an initial public offering
("IPO") or a Limited Offering unless an officer of the BDC approves the
transaction in advance. The Secretary shall maintain a written record of any
decisions to permit these transactions, along with the reasons supporting the
decision.
V. Reporting.
----------
1. Initial Holdings Reports.
No later than ten (10) days after a person becomes an Access Person,
he or she must report to the BDC the following information:
(i) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect beneficial
ownership when the person became an Access Person;
(ii) the name of any broker, dealer or bank with whom the Access
Person maintained an account in which any securities were held for the direct
or indirect benefit of the Access Person as of the date the person became an
Access Person; and
(iii) the date that the report is submitted by the Access Person.
2. Quarterly Reporting.
A. Every Access Person shall either report to the BDC the information
described in paragraphs B and C below with respect to transactions in any
Covered Security in which the Access Person has, or by reason of the
transaction acquires, any direct or indirect beneficial ownership in the
security or, in the alternative, make the representation in paragraph D below.
B. Every report shall be made not later than 10 days after the end of the
calendar quarter in which the transaction to which the report relates was
effected and shall contain the following information:
(1) the date of the transaction, the title, the interest rate and
maturity date (if applicable), the number of shares and the principal amount of
each Covered Security involved;
(2) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(3) the price at which the transaction was effected;
(4) the name of the broker, dealer or bank with or through whom the
transaction was effected;
(5) the date that the report is submitted by the Access Person; and
(6) a description of any factors potentially relevant to an analysis
of whether the Access Person may have a conflict of interest with respect to
the transaction, including the existence of any substantial economic
relationship between the transaction and securities held or to be acquired by
the BDC.
C. With respect to any account established by the Access Person in
which any securities were held during the quarter for the direct or indirect
benefit of the Access Person, no later than 10 days after the end of a calendar
quarter, an Access Person shall provide a report to the BDC containing the
following information:
(1) the name of the broker, dealer or bank with whom the Access Person
established the account;
(2) the date the account was established; and
(3) the date that the report is submitted by the Access Person.
D. If no transactions were conducted by an Access Person during a
calendar quarter that are subject to the reporting requirements described
above, such Access Person shall, not later than 10 days after the end of that
calendar quarter, provide a written representation to that effect to the BDC.
3. Annual Reporting.
A. Every Access Person shall report to the BDC the information
described in paragraph B below with respect to transactions in any Covered
Security in which the Access Person has, or by reason of the transaction
acquires, any direct or indirect beneficial ownership in the security.
B. Annually, within 30 days of the end of each calendar year, the
following information (which information must be current as of a date no more
than 30 days before the report is submitted):
(1) The title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect beneficial
ownership;
(2) The name of any broker, dealer or bank with whom the Access Person
maintains an account in which any securities are held for the direct or
indirect benefit of the Access Person; and
(3) The date that the report is submitted by the Access Person.
C. An Investment Committee Participant is not required to make a
report pursuant to paragraph 1, 2 or 3 above solely by reason of being an
Investment Committee Participant but shall be required to annually certify that
such Investment Committee Participant has not purchased or sold, directly or
indirectly, any security or other instrument the purchase of which is
prohibited by Section IV.1.B above or, if permission was granted pursuant to
Section IV.2 above, the details of any purchase or sale. Such certification
shall be included in the certification form discussed in Section V.5 below.
4. Exceptions to Reporting Requirements.
A. An Access Person is not required to make a report otherwise
required under paragraphs 1, 2 or 3 above with respect to any transaction
effected for any account over which the Access Person does not have any direct
or indirect influence or control; provided, (however, that if the Access Person
is relying upon the provisions of this paragraph 4(A) to avoid making such a
report, the Access Person shall, not later than 10 days after the end of each
calendar quarter, identify any such account in writing and certify in writing
that he or she had no direct or indirect influence over any such account.
B. An independent director of the BDC who would be required to make a
report pursuant to paragraphs 1, 2 or 3 above solely by reason of being a
director of the BDC is not required to make an initial holdings report under
paragraph 1 above and an annual report under paragraph 3 above, and is only
required to make a quarterly report under paragraph 2 above if the independent
director, at the time of the transaction, knew or, in the ordinary course of
fulfilling the independent director's official duties as a director of the BDC,
should have known that (a) the BDC has engaged in a transaction in the same
security within the last 15 days or is engaging or going to engage in a
transaction in the same security within the next 15 days, or (b) the BDC or the
Advisor has within the last 15 days considered a transaction in the same
security or is considering a transaction in the same security or within the
next 15 days is going to consider a transaction in the same security.
5. Annual Certification.
A. All Access Persons and Investment Committee Participants are
required to certify that they have read and understand this Code of Ethics and
recognize that they are subject to the provisions hereof and will comply with
the policy and procedures stated herein. Further, all Access Persons and
Investment Committee Participants are required to certify annually that they
have complied with the requirements of this Code of Ethics and that they have
reported all personal securities transactions required to be disclosed or
reported pursuant to the requirements of such policies. A copy of the
certification form to be used by Access Persons and Investment Committee
Participants in complying with this paragraph A is attached to this Code of
Ethics as Appendix 2-A and 2-B, respectively.
B. The BDC and the Advisor shall prepare an annual report to the Board
of Directors of the BDC to be presented at the first regular meeting of the
Board after March 31 of each year and which shall:
(1) Summarize existing procedures concerning personal investing,
including pre-clearance policies and the monitoring of personal investment
activity after pre-clearance has been granted, and any changes in the
procedures during the past year;
(2) describe any issues arising under the Code of Ethics or procedures
since the last report to the Board including, but not limited to, information
about any material violations of the Code of Ethics or procedures and the
sanctions imposed during the past year;
(3) identify any recommended changes in existing restrictions or
procedures based upon experience under this Code of Ethics, evolving industry
practice or developments in applicable laws and regulations;
(4) contain such other information, observations and recommendations
as deemed relevant by the BDC or the Advisor; and
(5) certify that the BDC and the Advisor have adopted Codes of Ethics
with procedures reasonably necessary to prevent Access Persons from violating
the provisions of Rule 17j-1(b) or this Code.
6. Notification of Reporting Obligation and Review of Reports.
The officers of the BDC are authorized to identify all Access Persons.
Each Access Person shall receive a copy of this Code of Ethics and be notified
of his or her reporting obligations. All reports shall be promptly submitted
upon completion to the BDC's Secretary who shall review such reports.
7. Miscellaneous.
A. Any report under this Code of Ethics may contain a statement that
the report shall not be construed as an admission by the person making the
report that the person has any direct or indirect beneficial ownership in the
securities to which the report relates.
VI. Confidentiality.
----------------
No Access Person shall reveal to any other person (except in the
normal course of his or her duties on behalf of the BDC) any information
regarding securities transactions by the BDC or consideration by the BDC or the
Advisor of any such securities transaction.
All information obtained from any Access Person hereunder shall be
kept in strict confidence, except that reports of securities transactions
hereunder will be made available to the Securities and Exchange Commission or
any other regulatory or self-regulatory organization to the extent required by
law or regulation.
VII. Sanctions.
----------
Upon discovering a violation of this Code of Ethics, the Board of
Directors of the BDC may impose any sanctions it deems appropriate, including a
letter of censure, the suspension or termination of any director, officer or
employee of the BDC, or the recommendation to the employer of the violator of
the suspension or termination of the employment of the violator.
Dated: May 2005
Revised: March 2006
Appendix 1
----------
The following are "Access Persons" for purposes of the foregoing Code
of Ethics:
Name Title
- ---- -----
Directors
James R. Maher Chairman of the Board and Chief
Executive Officer
Jerrold B. Harris Director
William E. Mayer Director
France de Saint Phalle Director
Maureen K. Usifer Director
Officers
Frank D. Gordon Chief Financial Officer
and Treasurer
Vincent B. Tritto Chief Compliance Officer
and Secretary
Michael B. Lazar Chief Operating Officer and
Managing Director
The following are "Investment Committee Participants" for purposes of
the foregoing Code of Ethics:
Sacha Bacro
Ralph Schlosstein
Keith Anderson
Jeff Gary
Laurence Fink
Mark Williams
Robert Kapito
Michael Goldberg
Frank Nickell
George Matelich
All employees of the BDC Adviser.
Appendix 2
----------
CERTIFICATION FORM
This is to certify that I have read and understand the Code of Ethics
of BlackRock Kelso Capital Corporation dated March 2006, and that I recognize
that I am subject to the provisions thereof and will comply with the policy and
procedures stated therein.
This is to further certify that I have complied with the requirements
of such Code of Ethics and that I have reported all personal securities
transactions required to be disclosed or reported pursuant to the requirements
of such Code of Ethics.
Please sign your name here: ________________________________________
Please print your name here: _______________________________________
Please date here: _________________________________________________
Please sign two copies of this Certification Form, return one copy to
Vincent Tritto, Chief Compliance Officer, BlackRock Kelso Capital Advisors LLC,
40 East 52nd Street, New York, NY 10022, and retain the other copy, together
with a copy of the Code of Ethics, for your records.
Appendix 2-B
------------
CERTIFICATION FORM OF INVESTMENT COMMITTEE PARTICIPANTS
This is to certify that I have read and understand the Code of Ethics
of BlackRock Kelso Capital Corporation dated [March 2006], and that I recognize
that I am subject to the provisions thereof and will comply with the policy and
procedures stated therein.
This is to further certify that I have complied with the requirements
of such Code of Ethics, including Sections IV.1.B., IV.3., and V.4. of such
Code of Ethics.
Please sign your name here: ________________________________________
Please print your name here: _______________________________________
Please date here: __________________________________________________
Please sign two copies of this Certification Form, return one copy to
Vincent Tritto, Chief Compliance Officer, BlackRock Kelso Capital Advisors LLC,
40 East 52nd Street, New York, NY 10022, and retain the other copy, together
with a copy of the Code of Ethics, for your records.
EXHIBIT 31.1
CEO CERTIFICATION
I, James R. Maher, Chairman of the Board and Chief Executive Officer of
BlackRock Kelso Capital Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of BlackRock Kelso
Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of and for the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Not applicable (until the first fiscal year ending after July 15,
2007); and
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 29, 2006 By: /s/ James R. Maher
--------------------------
James R. Maher
Chairman of the Board and
Chief Executive Officer
EXHIBIT 31.2
CFO CERTIFICATION
-----------------
I, Frank D. Gordon, Chief Financial Officer and Treasurer of BlackRock Kelso
Capital Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of BlackRock Kelso
Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of and for the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Not applicable (until the first fiscal year ending after July 15,
2007); and
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 29, 2006 By: /s/ Frank D. Gordon
--------------------------
Frank D. Gordon
Chief Financial Officer and
Treasurer
EXHIBIT 32.1
CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of BlackRock Kelso Capital
Corporation (the "Company") for the annual period ended December 31, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), James R. Maher, as Chief Executive Officer of the Company, and Frank
D. Gordon, as Chief Financial Officer of the Company, each hereby certifies,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ James R. Maher
- -------------------------------
Name: James R. Maher
Title: Chief Executive Officer
Date: March 29, 2006
/s/ Frank D. Gordon
- -------------------------------
Name: Frank D. Gordon
Title: Chief Financial Officer
Date: March 29, 2006