[Federal Register Volume 61, Number 239 (Wednesday, December 11, 1996)]
[Notices]
[Pages 65252-65254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31396]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22372; 812-10374]
Sirrom Capital Corporation; Notice of Application
December 5, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``Act'').
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APPLICANT: Sirrom Capital Corporation.
RELEVANT ACT SECTIONS: Exemption requested under sections 6(c) from
sections 12(d)(1) 18(a), 19(b), and 61(a) of the Act.
SUMMARY OF APPLICATION: Applicant requests an order to permit it to
form a wholly-owned subsidiary that would operate as a special purpose
bankruptcy remote subsidiary and borrow funds under a new credit
facility.
FILING DATE: The application was filed on October 1, 1996, and amended
on December 5, 1996.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on December 30,
1996, and should be accompanied by proof of service on applicant, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicant, 500 Church Street, Suite 200, Nashville, Tennessee
37219.
FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Counsel, at (202) 942-0583, or Mary Kay
Frech, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicant's Representations
1. Applicant is a closed-end, internally managed investment company
that has elected to be treated as a business development company
(``BDC'') pursuant to section 54 of the Act. As a BDC, applicant
furnishes capital to small businesses through loans to, and investments
in, small companies.\1\ Applicant typically makes its loans in the form
of secured debt with a relatively high fixed interest rate and with
warrants to purchase equity securities of the borrower. In the past,
applicant has funded its loan originations with financing from the SBA
and a syndicate of commercial banks. Applicants already has borrowed a
significant portion of the debt
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financing available to it from these sources, however, and needs to
establish an alternative source of financing.
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\1\ applicant also makes loans to small, privately-owned
companies through Sirrom Investments, Inc. (``Investments''), a
wholly-owned, closed-end investment company that is licensed as a
small business investment company (``SBIC'') by the Small Business
Administration (``SBA''). Applicant previously obtained an order
with respect to the establishment of Investments and certain of its
activities (the ``SBIC Order''). Investment Company Act Release Nos.
22016 (June 13, 1996) (notice) and 22057 (July 9, 1996) (order).
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2. Applicant has signed a commitment letter with ING Capital
Markets (``ING'') to establish a credit facility in the amount of $100
million. To provide ING with collateral that would be clearly and
legally separate from that pledged to other lenders, applicant intends
to form a special purpose, bankruptcy remote subsidiary (``Newco'').
Newco will be a Delaware corporation and a registered closed-end
investment company. Applicant will transfer to Newco at least $20
million in loans as a capital contribution. In consideration of such
transfer, Newco will issue to applicant 1,000 shares of its common
stock, comprising all of its issued and outstanding shares. Newco's
activities will be limited to: (a) Purchasing secured loans to small
businesses and related warrants from applicant; (b) owning and holding
such loans and warrants; (c) funding the purchases of such loans and
warrants by borrowing from financial institutions; and (d) activities
ancillary to such activities. The directors and officers of Newco will
be identical to those of applicant, except that Newco will have no more
than two directors who are not directors or affiliated persons of
applicant. Applicant states that this arrangement is necessary to
permit Newco to obtain the opinions required to secure an investment
grade rating from one or more nationally recognized rating agencies for
the commercial paper to be issued by ING.
3. Newco would borrow funds under the ING credit facility, and
would use such funds to purchase new loans and related warrants from
applicant. Newco would pledge these loans and warrants to an indenture
trustee as collateral to secure the funds loaned by ING. ING in turn
would fund borrowings under the credit facility by issuing commercial
paper secured by the pool of loans and warrants owned by Newco. Newco
would pay a spread to ING over the rate paid on the commercial paper
issued, along with other fees to originate and administer the credit
facility.
4. The following kinds of inter-company transactions may arise in
the future between applicant and Newco: (a) Applicant may make
additional investments in Newco either as contributions to capital,
purchases of additional stock, or loans; (b) from time to time Newco
will pay dividends and make other distributions to applicant with
respect to its investment in the stock of Newco, including capital
gains dividends; (c) applicant and Newco may from time to time hold
loans made to the same borrower; (d) Newco will purchase portions of
applicant's portfolio investments in accordance with the terms of the
credit facility; and (e) applicant may repurchase all or a portion of
portfolio investments held by Newco at such time as they are released
from the pool of collateral established under the credit facility.
Applicant's Legal Analysis
1. Section 12(d)(1). Section 12(d)(1)(A) of the Act prohibits any
registered investment company from purchasing or otherwise acquiring
the securities of another investment company, except as permitted by
that section. In addition, section 12(d)(1)(C) prohibits any investment
company from purchasing or otherwise acquiring any security issued by a
registered closed-end investment company if the acquiring company (and
any affiliated investment companies) would own more than 10% of the
voting stock of the closed-end investment company.
2. Because applicant will acquire all of the capital stock of
Newco, may make loans or advances to it, and may guarantee its
indebtedness (which also could be considered as the acquisition of its
debt securities), applicant requests an exemption from section
12(d)(1). Applicant asserts that its acquisition of Newco's securities
will not compromise the objectives of section 12 or harm the public
interest because it has agreed that it will exercise its rights as the
shareholder of Newco on matters requiring shareholder approval only as
directed by its shareholders. Accordingly, applicant believes that the
relationship of its shareholders to Newco's activities will be no
different than if it were to carry out such activities directly.
3. Sections 18(a) and 61(a). Section 18(a) of the Act prohibits a
closed-end investment company from issuing any class of senior security
unless the company complies with the asset coverage requirements set
forth in the section. ``Asset coverage'' is defined in section 18(h) as
the ratio that the value of the total assets of an issuer, less all
liabilities not represented by senior securities, bears to the
aggregate amount of senior securities of such issuer. Section 61
applies section 18, with certain modifications, to a BDC.
4. Applicant is a BDC, and Newco is a closed-end investment
company. Both will be subject to the asset coverage requirements of
section 18(a) on an individual basis, although these requirements are
modified by section 61(a) with respect to applicant as a BDC. Applicant
also is subject to the asset coverage requirements of section 18(a) on
a consolidated basis because it may be an indirect issuer of senior
securities with respect to any indebtedness of Newco. Accordingly,
applicant would be required to treat as its own all assets held
directly by itself and Newco (with the value of its investment in Newco
eliminated). Applicant also would be required to treat as its own any
liabilities of Newco (with intercompany receivables and liabilities
eliminated), including liabilities of Newco in respect of senior
securities.
5. Applicant seeks an exemption from sections 18(a) and 61(a) to
permit the issuance of senior securities as described in the
application. Applicant submits that, absent an exemption from the
consolidated asset coverage requirements of sections 18(a) as modified
by section 61(a), its ability to obtain financing would be restricted.
Applicant believes that such an exemption is in the public interest
because Newco's activities will in all material respects have the same
economic effect with respect to applicant's shareholders as if
applicant had engaged in them directly.
6. Section 19(b). Section 19(b) of the Act prohibits any investment
company from distributing long-term capital gains more than once every
12 months. Because the warrants held as collateral for funds borrowed
under the credit facility may be released from the collateral pool upon
repayment of the small business loan related thereto, Newco would be
free to transfer any such warrant to applicant or sell it to a third
party, thereby potentially realizing a long-term capital gain.
Applicant asserts that it and Newco effectively will be one company,
and that no purpose would be served by limiting distributions from
Newco to one per year. Applicant also submits that more frequent
distributions would permit it to more efficiently manage its internal
cash flow, resulting in administrative cost savings and, thus, a
benefit to its shareholders. Accordingly, applicant seeks an exemption
from section 19(b).
7. Section 6(c). Section 6(c) permits the SEC to exempt any person
or transaction from any provision of the Act, if such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
of the Act. The relationship of applicant's shareholders to the
activities to be carried out by Newco will be no different than if such
activities were carried out by applicant because (a) Newco will be a
wholly-owned subsidiary of applicant, and (b) applicant has agreed that
it will exercise its rights as the shareholder of Newco
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on matters required by the Act to be approved by shareholders only as
directed by its shareholders. Accordingly, applicant believes that the
requested exemptions meet the section 6(c) standards.
Applicant's Conditions
Applicant agrees that any exemptive relief granted will be subject
to the following conditions:
1. Applicant at all times will own and hold, beneficially and of
record, all of the outstanding voting capital stock of Newco.
2. Applicant will not cause or permit Newco to change any of its
fundamental investment policies, or take any other action referred to
in section 13(a) of the Act, unless such action shall have been
authorized by applicant after approval of such action by a vote of a
majority of applicant's outstanding voting securities.
3. No person shall serve or act as investment adviser to Newco
under circumstances subject to section 15 of the Act unless applicant's
directors and shareholders shall have taken the action with respect
thereto also required to be taken by Newco's directors and
shareholders.
4. Newco shall have two directors who are not directors of
applicant as long as a majority of its board of directors consists of
directors who are also directors of applicant. Notwithstanding the
foregoing, the board of directors of Newco will be elected by applicant
as the sole shareholder of Newco, and such board will be composed of
the same persons that serve as directors of applicant except to the
extent noted above.
5. Applicant will not itself issue, and will not cause or permit
Newco to issue, any senior security or sell any senior security of
which applicant or Newco is the issuer except as hereinafter set forth:
(a) applicant and Newco may issue and sell to banks, insurance
companies, and other financial institutions their secured or unsecured
promissory notes or other evidences of indebtedness in consideration of
any loan, or any extension or renewal thereof made by private
arrangement, provided the following conditions are met: (i) such notes
or evidences of indebtedness are not intended to be publicly
distributed, (ii) such notes or evidences of indebtedness are not
convertible into, exchangeable for, or accompanied by any options to
acquire any equity security (except that, with respect to applicant,
the restrictions in this clause (ii) shall not be applicable except to
the extent they are applicable generally to BDCs), and (iii)
immediately after the issuance or sale of any such notes or evidence of
indebtedness by either applicant or Newco, applicant and Newco, on a
consolidated basis, and applicant individually, shall have the asset
coverage that would be required by section 18(a) if applicant and Newco
each had elected to become a BDC pursuant to section 54 of the Act; and
(b) in addition, Newco may borrow from applicant. None of the
borrowings set forth in clause (b) above shall be deemed senior
securities for purposes of any order issued pursuant to the
application.
6. Applicant will file with the SEC the financial statements
required by the federal securities laws on a consolidated basis as to
applicant and Newco. Applicant will provide to its shareholders
financial statements on a consolidated basis as to applicant and Newco,
except when unconsolidated financial statements are required under
generally accepted accounting principles.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31396 Filed 12-10-96; 8:45 am]
BILLING CODE 8010-01-M