March 9, 2011
Via E-mail and EDGAR
Mr. John M. Ganley,
Securities and Exchange Commission,
100 F Street, N.E.,
Washington, D.C. 20549.
| Re: | OFS Capital, LLC |
| (Form N-2, File Nos. 333-166363 & 814-00813) |
Dear John:
Per our prior discussion, in the interest of expediting your review of the Registration Statement on Form N-2 filed by our client, OFS Capital, LLC (the “Company” or “OFS Capital”), with the Securities and Exchange Commission, as most recently amended on October 5, 2010 (the “Form N-2”), and as supplemented by the changed pages attached to our letter to you dated February 24, 2011, we set out below the Company’s response to certain comments you conveyed to me in our telephone conversation on March 8, 2011. We are also providing to the staff supplementally certain changed pages to the draft amendment to the Form N-2 attached hereto as Annex A, which changed pages reflect the comments you raised in our telephone conversation and certain other updates to the disclosure in the Form N-2. Except as otherwise noted in this letter, the information provided in response to your comments has been supplied by the Company, which is solely responsible for it. Except as otherwise noted, capitalized terms used herein and not otherwise defined herein have the meanings ascribed thereto in the Form N-2.
True Sale and Non-Consolidation Opinions
During our phone conversation, you asked that the Company include additional disclosure in the Form N-2 regarding the opinions delivered to the lenders to OFS Capital WM in connection with the closing of the OFS Capital WM Transaction relating to (1) substantive consolidation of the assets and liabilities of OFS Capital WM with those of the Company in the event of the Company’s bankruptcy (the “Non-Consolidation Opinion”) and (2) whether the transfer of assets by the Company to OFS Capital WM on September 28, 2010 would be respected as a “true sale” of those assets in the event of the bankruptcy of the Company (the “True Sale Opinion” and, collectively with the Non-Consolidation Opinion, the “Opinions”). This hereby confirms that, per that
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request, and as reflected in the changed pages attached hereto, the Company will include in the next amendment to its Form N-2 disclosure to the effect that the lenders received customary true sale and non-consolidation opinions in connection with the closing of the OFS Capital WM Transaction.
In addition, you asked that the Company address in this letter why it would not be necessary or appropriate to file the Opinions as exhibits to the Form N-2. By way of background, as described in the Form N-2, OFS Capital WM, a newly formed Delaware limited liability company and a special purpose entity, entered into a $180 million secured revolving credit facility (the “WM Credit Facility”) with Wells Fargo Bank, N.A. (“Wells Fargo”) and Madison Capital Funding LLC (“Madison Capital”), pursuant to which OFS Capital WM issued Class A and Class B notes to Wells Fargo and Madison Capital, respectively, as the lenders thereunder. The WM Credit Facility is secured by the eligible loan assets acquired by OFS Capital WM from the Company at the closing of the transaction and eligible loan assets thereafter acquired by OFS Capital WM during its reinvestment period. At the closing, the Company sold to OFS Capital WM approximately $96.9 million of loans in exchange for all the equity interests in OFS Capital WM and cash. The Company used the cash consideration, together with certain other cash sources, to repay in full the outstanding loan balance under its debt facility with Bank of America.
The Company respectfully submits that the delivery to the lenders of the Opinions in connection with the OFS Capital WM Transaction, and the Opinions themselves, are, most importantly, not material to a potential investor in OFS Capital and, in addition, are confidential, fact specific, reasoned legal opinions required by the lenders in the WM Credit Facility as a condition of closing, delivered on a restricted basis in a private placement and not intended to be publicly available.
In the first instance, the Company respectfully submits that such opinions are rendered primarily not for purposes of determining how to account for a given special purpose entity transaction, but for purposes of satisfying the lenders to the special purpose entity that their claims against the special purpose entity will not be interfered with or diminished by claims of the creditors of the parent company. This special purpose entity structure seeks to reduce the risk to the lenders to the special purpose entity by insulating them from credit and bankruptcy risks associated with the parent company. An important aspect of any such transaction involves the lenders to the special purpose entity (and not the parent company of the special purpose entity) becoming comfortable through their own exercise of due diligence that the transaction is structured so that, in the event of a bankruptcy of the parent business development company, (1) a bankruptcy court would consider the transfer of loans to the special purpose entity to be a true sale, and not a secured loan, and (2) it would not be a proper exercise by a bankruptcy court in the
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exercise of its equitable jurisdiction to order substantive consolidation of the assets and liabilities of the special purpose entity with the bankruptcy estate of the parent business development company. Lenders to special purpose entities require these opinions as a condition to the closing of the transaction. This type of structure, and the delivery of these types of opinions, are important not only to transactions (like the OFS Capital WM Transaction) where the special purpose entity is not consolidated but also to transactions where the resulting special purpose entity is consolidated.
Just by way of example, and as discussed with you on the phone, the structure of the OFS Capital WM Transaction, and therefore the legal reasons for lenders’ requiring such opinions, are substantially identical in all material respects to the securitization structure employed by Golub Capital BDC, Inc. (“Golub”). In its Registration Statement on Form N-2, as most recently amended on February 14, 2011, Golub describes a securitization transaction (the “Golub Securitization Transaction”) completed in July 2010, pursuant to which Golub Capital BDC 2010-1 LLC, an indirect subsidiary of Golub (the “Securitization Issuer”), issued $300 million in Class A and Class B notes in a private placement, which notes are secured by loans transferred to the Securitization Issuer by Golub Capital BDC 2010-1 Holdings LLC, another direct subsidiary of Golub (“Holdings”) on a non-recourse basis. In partial consideration for the loans transferred to the Securitization Issuer, Holdings retained all of the Class B notes and certain subordinated notes issued by the Securitization Issuer, and retained all of the membership interests in the Securitization Issuer. In connection with the closing of the transaction, all outstanding obligations under an existing credit facility were repaid. Although Golub and OFS Capital have reached different conclusions with respect to the treatment of their respective transactions for accounting purposes, fundamental to both the OFS Capital WM Transaction and the Golub Securitization Transaction is that the transaction be structured in such a way that the lenders have comfort that, in the bankruptcy of the parent business development company, (1) a bankruptcy court would consider the transfer of loans to the special purpose entity to be a true sale, and not a secured loan, and (2) it would not be a proper exercise by a bankruptcy court in the exercise of its equitable jurisdiction to order substantive consolidation of the assets and liabilities of the special purpose entity with the bankruptcy estate of the parent business development company.
In our view, it would be highly unusual and potentially misleading for opinions of this nature to be filed as exhibits to a registration statement. First and foremost, the Opinions are not designed to provide, and do not provide, any assurance to an investor in OFS Capital as to the status or strength of the claims of OFS Capital (and, accordingly, the indirect claims of an equity holder in OFS Capital) as against the claims of the lenders to the special purpose entity. As noted above, the Opinions address for the benefit of the lenders to the special purpose entity the likely perspective of, or remedies
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to be employed by, a bankruptcy court in the event of a bankruptcy of the parent business development company in circumstances in which the equity interests in the parent business development company have likely been wiped out. The Opinions do not address how a bankruptcy court might act, or the remedies it might employ, in the event of a bankruptcy of the special purpose entity or, for that matter, any consequences to the parent business development company or its equity investors that might result from a default by the special purpose entity. In the Company’s view, it would not be prudent or advisable, by publicly filing the Opinions, to suggest to a potential investor in OFS Capital that the potential investor should draw any comfort from the fact that the Opinions were required by and delivered to the lenders to OFS Capital WM. In addition to the potentially misleading inference to be drawn from filing the Opinions, the Company respectfully notes that each of the Opinions itself sets out in great detail highly technical, complex legal analysis required to reach a reasoned conclusion regarding the bankruptcy court’s characterization of the OFS Capital Transaction, and is given based on detailed assumptions and subject to the qualifications outlined therein. As a result, while legal practitioners and other participants in this area would be familiar with the form and content of the Opinions, in the Company’s view, such Opinions would not be meaningful to an investor.
In addition, as stated in the FOIA confidential treatment letter addressed to you dated December 9, 2010 (the “FOIA Letter”), the Opinions are confidential, fact specific legal opinions delivered to the addressees thereof in a private placement as required by the lenders in the WM Credit Facility and are not intended to be available publicly. Each Opinion states that it is rendered for the benefit of the addressees thereof and the permitted successors and assigns of the lenders and may not be used, circulated, quoted or relied upon by any other person without the opinion provider’s prior written consent except that any person permitted to rely on the opinion may deliver a copy of the opinion to the following persons (who shall not be permitted to rely thereon): (1) to such person’s accountants and other professional advisors in connection with the OFS Capital WM transaction, (2) to any governmental authority exercising regulatory or supervisory jurisdiction over such person and (3) pursuant to lawful process. As you know, delivery of confidential information to the staff for purposes of the SEC’s review of a registration statement is quite different than public disclosure of the confidential information. Both the Company and the opinion provider have requested confidential treatment of the Opinions pursuant to the FOIA letter.
For the reasons outlined above, the Company respectfully submits that it is not necessary or appropriate to file the Opinions as exhibits to its Form N-2.
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Additional Updates to the Disclosure
Attached as Annex A to this letter are changed pages, marked against the most recent amendment to the Company’s Form N-2, which reflect the Company’s revisions to its disclosure as proposed to be included in the next amendment to its Form N-2. In addition to the revisions described above in relation to the Opinions, and other updates generally, these changes clarify in accordance with our discussion on March 8, 2011, among other things, (1) that the Company’s investment objective is to provide its stockholders with current income and capital appreciation through “primarily debt investments and, to a lesser extent, equity investments,” (2) that the incentive fee paid to the Company’s investment manager will be determined on a consolidated basis and, as such, will apply to the operation of the SBIC subsidiary as well, and (3) that investors will incur the fees and expenses of acquired funds, including both the SBIC subsidiary and OFS Capital WM, indirectly through the Company’s 100% ownership interest in these entities. We have not sought to include each instance of these updates, but would propose to make conforming changes to other parts of the Form N-2 consistent with the changed pages submitted.
If you have any questions or comments regarding the above, please feel free to call me on (310) 712-6603.
| Very truly yours, | ||
| /s/ Patrick S. Brown | ||
| Patrick S. Brown | ||
| cc: | Glenn R. Pittson |
| (OFS Capital, LLC) |
| Jonathan H. Talcott |
| (Nelson Mullins Riley & Scarborough LLP) |
Annex A
