UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including
area code:
Securities registered pursuant to Section 12(b) of the Act: None
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
| None | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act: Common Shares, Par Value $0.001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ]
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| [X] | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
The registrant has no active
market for its common shares. As of December 31, 2023, non-affiliates held 708,500 of the outstanding common shares with an aggregate
market value of $
The registrant had common shares outstanding as of March 22, 2024.
Documents Incorporated by Reference
None.
GUGGENHEIM CREDIT INCOME FUND
INDEX
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or this Report, including Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this Report, contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements generally are characterized by the use of terms such as “may,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe,” “expect,” “will,” “will be,” and “project” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: increased direct competition; changes in government regulations or accounting rules; changes in local, national and global economic and capital market conditions; our ability to obtain or maintain credit lines or credit facilities on satisfactory terms; changes in interest rates; availability of proceeds from our private offering of common shares; our ability to identify suitable investments and/or to close on identified investments; the performance of our investments; and the ability of borrowers related to our debt investments to make payments under their respective loans. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors which could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the U.S. Securities and Exchange Commission ("SEC"), including but not limited to those described in Part I. Item 1A. Risk Factors of this Report. Moreover, because we operate in a very competitive and rapidly changing environment, new risks are likely to emerge from time to time. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements as a prediction of future results, which apply only as of the date of this Report, unless noted otherwise. Except as may be required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements. The forward-looking statements should be read in light of the risk factors identified in Part I. Item 1A. Risk Factors of this Report. The forward-looking statements and projections contained in this Report are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.
All references to “Note” or “Notes” throughout this Report refer to the notes to the consolidated financial statements of the registrant in Part II. Item 8. Consolidated Financial Statements and Supplementary Data.
Unless otherwise noted, the terms “we,” “us,” “our,” and the “Master Fund” refer to Guggenheim Credit Income Fund. Other capitalized terms used in this Report have the same meaning as in the accompanying consolidated financial statements presented in Part II. Item 8. Consolidated Financial Statements and Supplementary Data, unless otherwise defined herein. Guggenheim Partners Investment Management, LLC is referred to as "Guggenheim" or the "Advisor" throughout this Report.
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PART I
Item 1. Business.
Overview
We are a specialty finance investment company focused on lending to middle market companies. We were formed on September 5, 2014 as a statutory trust under the laws of the State of Delaware and commenced investment operations on April 2, 2015. In addition, we have elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). We are externally managed by Guggenheim, which is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments, determining the securities and other assets that we will purchase, retain or sell, and monitoring our portfolio on an ongoing basis.
We serve as the master fund in a master/feeder fund structure in that one or more feeder funds (each, a “Feeder Fund”), each a separate closed-end management investment company that has adopted our investment objectives and strategies, invests substantially all of its equity capital in our common shares (“Shares” or "Common Shares"). Presently, our shareholders are the two initial shareholders and two Feeder Funds. See Part III. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
We conduct private offerings (each a “Private Offering”) of our Shares to the Feeder Funds in reliance on exemptions from the registration requirements of the Securities Act. While we expect to continuously offer our Shares and have an indefinite life, each Feeder Fund features a specific period for the offering of its Common Shares, and each Feeder Fund has a specified finite term.
Beginning with the taxable year ended December 31, 2015, we have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Plan of Liquidation
In accordance with the offering documents and the intention of Guggenheim Credit Income Fund 2016 T ("GCIF 2016T") and Guggenheim Credit Income Fund 2019 ("GCIF 2019") (together, the "Feeder Funds") to provide substantial shareholder liquidity, the Boards of Trustees of the Master Fund and the Feeder Funds approved respective Plans of Liquidation for each company on March 30, 2021 (each, a "Liquidation Plan"). In accordance with the Liquidation Plans, the Board has declared multiple liquidating distributions which are outlined in the table below. These distributions have been substantially composed of return of capital and have decreased the net asset value of the Master Fund and Feeder Funds. As such, the value on shareholder’s investment statements has decreased as liquidating distributions have been paid.
For the Master Fund, as of March 22, 2024, over 95% of the NAV has been declared to be paid to shareholders in the form of liquidating distributions.
The table below is intended to highlight some relevant metrics associated with the Plans of Liquidation ($ in thousands).
| Noted Information | GCIF (Master Fund) | GCIF 2016 T | GCIF 2019 | |||||||||
| Cumulative Liquidating Distributions declared per share through March 22, 2024 | $ | 7.23 | $ | 7.60 | $ | 20.86 | ||||||
| Number of Portfolio Companies at beginning of Year | 18 | — | — | |||||||||
| Number of Portfolio Companies at end of Year | 10 | — | — | |||||||||
| YTD Portfolio sales and repayments ($ in thousands) | $ | 27,684 | $ | — | $ | — | ||||||
| Cumulative Liquidating Distributions Declared through March 22, 2024 ($ in thousands) | $ | (185,046 | ) | $ | (123,859 | ) | $ | (36,219 | ) | |||
| Percentage of December 31, 2020 NAV Declared through March 22, 2024 | 95.60 | % | 95.20 | % | 92.00 | % | ||||||
| Net Assets at beginning of Year ($ in thousands) | $ | 61,273 | $ | 41,115 | $ | 12,926 | ||||||
| Net Assets at end of Year ($ in thousands) | $ | 27,777 | $ | 18,397 | $ | 6,097 | ||||||
| Net asset value per share at end of Year | $ | 1.09 | $ | 1.13 | $ | 3.51 | ||||||
In accordance with the Liquidation Plan, the Master Fund and the Feeder Funds will remain registered as a BDC and intend to maintain their qualifications as RICs under Subchapter M of the Code.
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Investment Objectives and Investment Strategy
Our investment objectives are to provide our shareholders with current income, capital preservation, and, to a lesser extent, long-term capital appreciation. There can be no assurances that any of these investment objectives will be achieved.
Prior to the Board's approval of the Liquidation Plan, our investment strategy was continuously focused on growing an investment portfolio that generates superior risk adjusted returns by carefully selecting investments through rigorous due diligence and actively managing and monitoring our investment portfolio. When evaluating an investment and the related portfolio company, we use the resources of Guggenheim to develop an investment thesis and a proprietary view of a potential portfolio company’s intrinsic value and its expected risks and rewards.
We primarily focused on the following investment types that may be available within the capital structure of portfolio companies:
| • | Senior Debt. Senior debt investments generally take a security interest in the available assets of the portfolio company, including equity interests in any of its subsidiaries. The senior debt classification includes senior secured first lien loans, senior secured second lien loans, senior secured bonds, and senior unsecured debt. In some circumstances, the secured lien could be subordinated to the claims of other creditors. While there is no specific collateral associated with senior unsecured debt, such positions are senior in payment priority over subordinated debt creditors. |
| • | Subordinated Debt. Subordinated debt investments are subordinated to senior debt and are generally unsecured. These investments are generally structured with interest-only payments throughout the life of the security with the principal due at maturity. |
| • | Equity Investments. Preferred and/or common equity investments may be acquired alongside senior and subordinated debt investment activities or through the exercising of warrants or options attached to debt investments. Income is generated primarily through regular or inconstant dividends and realized gains on dispositions of such investments. |
We intend to meet our investment objectives by investing primarily in large, privately-negotiated loans to private middle market U.S. companies. Specifically, we expect a typical borrower to have earnings before interest, taxes, depreciation, and amortization ("EBITDA") of $25 million to $100 million and annual revenue ranging from $50 million to $1 billion. We seek to invest in businesses that have a strong reason to exist and have demonstrated competitive and strategic advantages. These companies generally possess distinguishing business characteristics, such as a leading competitive position in a well-defined market niche, unique brands, sustainable profitability and cash flow, and experienced management. We anticipate that a majority of our investments will be classified as senior debt in a borrower’s capital structure and have repayment priority over other parts of a borrower’s capital structure (i.e., subordinated debt, preferred and common equity). By investing in a more senior attachment point of a borrower's capital structure, we expect to protect our principal with less risk, which we believe provides for a distinctive risk/return profile as compared to that of a typical middle market or private equity alternative investment.
In addition to privately-negotiated loans, we invest in more broadly syndicated assets, such as bank loans and corporate bonds. Our portfolio is more heavily weighted towards floating-rate investments, whose interest payment obligations may increase in a rising interest rate environment. We may also invest in fixed-rate investments, options, or other forms of equity participation, and, to a limited extent and not as a principal investment strategy, structured products such as collateralized loan obligations (“CLOs”) and collateralized debt obligations (“CDOs”). We seek to make investments which have favorable characteristics, including closing fees, prepayment premiums, lender-friendly control provisions, and lender-friendly covenants.
Our portfolio may include “covenant-lite” loans which generally refer to loans that do not have a complete set of financial maintenance covenants. Generally, “covenant-lite” loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower’s financial condition. Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared to investments in or exposure to loans with financial maintenance covenants.
Our portfolio includes investments in securities that are rated below investment grade (e.g., junk bonds) by rating agencies, or that would be rated below investment grade if they were rated and have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. These investments may also be illiquid and feature variances in opinions of fair value and market prices. A material amount of our debt investments in portfolio companies may contain interest rate reset provisions that may present challenges for the borrowers to continue paying periodic interest to us. In addition, a material amount of our debt investments may not pay down principal until the end of their lifetimes, which could result in a substantial loss to us if the portfolio companies are unable to refinance or repay their debts at maturity.
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Our investment strategy leverages the skills and depth of Guggenheim's research team and credit investment platform which features a relative value perspective across all corporate credit asset types. We believe these elements create a larger, proprietary opportunity set and increase the potential for the generation of a wide spectrum of value-risk investment ideas. We intend for our investment strategy to access investments with attractive combinations of reward and risk, better economics and stronger lender protections than those offered in traditional loan transactions. We also intend to deploy our direct loan origination investment platform and apply it to our portfolio company business relationships.
Our investment activity can and does vary substantially from period to period depending on many factors, including: the demand for capital from creditworthy privately-owned U.S. companies, the level of merger, acquisition and refinancing activity involving private companies, the availability of credit to finance merger and acquisition transactions, the general economic environment, the competitive investment environment for the types of investments we currently seek and intend to seek in the future, the amount of equity capital we raise from the sale of our Shares, and the amount of capital we may borrow.
We acquire our portfolio investments through the following investment access channels:
| • | Direct Originations: This channel consists of investments that are directly originated through Guggenheim's relationship network. Such investments are originated and/or structured by Guggenheim and are not generally available to the broader investment market. These investments may include both debt and equity investment components. |
| • | Syndicated Transactions: This channel primarily includes investments in broadly syndicated loans and high yield bonds, typically originated and arranged by investment intermediaries other than Guggenheim. These investments may be purchased at the original syndication or in the secondary through various trading markets. |
We may continue to borrow money from time to time within the borrowing limits stipulated by the 1940 Act, which generally allows us to incur leverage of up to 50% of our total assets, less liabilities and indebtedness not represented by senior securities. The use of borrowed funds and/or the proceeds of preferred stock offering to finance investments would have its own specific set of benefits and risks, and all of the costs of borrowing funds or issuing preferred stock are borne by our shareholders.
Investment Advisor and Investment Advisory Agreement and Administrative Services Agreement
About Our Advisor
Our investment advisor is Guggenheim, which is responsible for the overall management of our investment activities, and the day-to-day management of our investment portfolio. Under the overall supervision of our Board of Trustees, Guggenheim provides (i) investment advisory services under an investment advisory agreement with us (the “Investment Advisory Agreement”), and (ii) administrative services under an administrative services agreement with us (the “Administrative Services Agreement”). See “Investment Advisory Agreement and Administrative Services Agreement.” Since our inception through September 10, 2017, Guggenheim served as our investment sub-advisor alongside Carey Credit Advisors, LLC ("CCA") serving as our investment advisor. Guggenheim was appointed as the successor advisor subsequent to the resignation of CCA. See Note 1. Principal Business and Organization for a discussion of investment advisor changes in 2017.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim Partners") and includes Guggenheim, an SEC-registered investment adviser. Guggenheim Partners is a privately-held, global financial services firm with over 2,200 employees and more than $310 billion in assets under management* as of December 31, 2023. It produces customized solutions for its clients, which include institutions, governments and agencies, corporations, insurance companies, investment advisors, family offices and individual investors.
Guggenheim Investments manages $231+ billion** in assets across fixed income, equity and alternatives as of December 31, 2023. Its 250+ investment professionals perform research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled Guggenheim to deliver long-term results to its clients.
Within Guggenheim Investments is the Guggenheim Corporate Credit Team, which is responsible for all corporate credit strategies and asset management of $198 billion. A unified credit platform is utilized for all strategies and is organized by industry as opposed to asset class, which increases its ability to uncover relative value opportunities and to identify and source opportunities. The scale of the platform, combined with the expertise across a wide range of industries and in-house legal resources, allows Guggenheim to be a solution provider to the market and maintain an active pipeline of investment opportunities.
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Investment Advisory Agreement and Administrative Services Agreement
Under the terms of the Investment Advisory Agreement, Guggenheim is responsible for the following investment advisory activities:
| • | determining the composition and allocation of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such strategies; |
| • | identifying, evaluating, negotiating and structuring the investments we make; |
| • | performing due diligence on prospective portfolio companies; |
| • | executing, closing, servicing and monitoring the investments we make; |
| • | determining the securities and other assets that we will purchase, retain or sell; |
| • | arranging for our corporate debt financing, subject to oversight and approval of the Board of Trustees; and |
| • | providing us with such other investment advisory, research and related services as we may reasonably require for the investment of our capital. |
These investment advisory activities are carried out by Guggenheim's investment teams and are subject to the oversight of Guggenheim’s senior investment personnel. Each investment that we make requires the approval of Guggenheim's investment committee. Certain affiliated co-investment transactions may require the additional approval of our Independent Trustees Committee.
* Assets under management are as of December 31, 2023 and include consulting services for clients whose assets are valued at approximately $84.0 billion**
** Assets under management as of December 31, 2023 include leverage of $14.5 billion. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.
We pay management and incentive fees to Guggenheim for its services under the Investment Advisory Agreement. We believe that this fee structure benefits our shareholders by aligning the compensation of Guggenheim with our overall investment performance. The cost of management and incentive fees is ultimately borne by our shareholders.
Guggenheim's compensation arrangement was approved by our Board of Trustees, consistent with the exercise of the requisite standard of care applicable to trustees under Delaware law. Such compensation is payable, in most cases, regardless of the quality of the assets acquired, the services provided or whether we make distributions to our shareholders.
We also reimburse Guggenheim for the administrative expenses incurred pursuant to an Administrative Services Agreement. See Note 6. Related Party Agreements and Transactions for a summary of reimbursable expenses as related to administrative services. Such costs are allocated to us on the basis of assets, revenues, time records or other reasonable allocation methods. We do not reimburse Guggenheim for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Guggenheim.
Business Development Company Requirements
BDCs are closed-end funds that elect to be treated as business development companies under the 1940 Act. As such, BDCs are subject to certain provisions of the 1940 Act and the Exchange Act. BDCs are provided greater flexibility under the 1940 Act, as compared to other investment companies, in selecting their portfolio companies and portfolio diversification, issuing securities, leverage and compensating their investment advisors. BDCs may be internally or externally managed and may qualify to elect to be taxed as RICs for federal tax purposes. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act requires that a majority of a BDC's directors or trustees be persons other than interested persons, as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we, operating as a BDC, may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities. The 1940 Act defines a majority of the outstanding voting securities as the lesser of: (i) 67% or more of the voting securities present at a meeting if the holders of more than 50% of our outstanding voting securities are present or represented by proxy or (ii) 50% of our outstanding voting securities.
We are generally not permitted to issue and sell our Shares at a price below net asset value per share. We may, however, sell our Shares, or warrants, options or rights to acquire our Shares, at a price below the then-current net asset value of our Shares if (i) our Board of Trustees determines that such sale is in our best interests and the best interests of our shareholders and (ii) our shareholders approve such sale.
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We must offer managerial assistance to our eligible portfolio companies (“EPCs”). This managerial assistance may include monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of our EPCs and providing other organizational and financial guidance. Guggenheim makes available such managerial assistance, on our behalf, to our EPCs, whether or not they request this managerial assistance. We may receive fees for these services and will reimburse our Advisor for its allocated costs in providing such managerial assistance, subject to review and approval by our Board of Trustees.
We are generally not permitted to make any co-investments with Guggenheim or any of its affiliates, without an exemptive order from the SEC. We may, however, invest alongside Guggenheim and its affiliates' other clients in certain circumstances where doing so is consistent with applicable law and SEC's staff interpretations. For example, we may invest alongside such other client's accounts consistent with guidance promulgated by the SEC staff permitting us and such other client's accounts to purchase interests in a single class of privately placed securities provided certain conditions are met, including that Guggenheim, acting on our behalf or on behalf of other clients, does not negotiate any business terms other than price. We may also invest alongside Guggenheim's respective other clients as otherwise permissible under regulatory guidance, applicable regulations and Guggenheim's investment allocation policies. On June 28, 2016, the SEC issued its initial order of exemptive order which granted us exemptive relief permitting us, subject to the satisfaction of specific conditions and requirements, to co-invest in privately negotiated investment transactions with certain affiliates of Guggenheim. On January 30, 2018, the SEC issued its order of exemptive relief in connection with our second application for exemptive relief for certain co-investment transactions.
Available Information
We will supply to any shareholder, upon written request and without charge, a copy of this Report as filed with the SEC. All of our filings can also be obtained for free on the SEC’s website at www.sec.gov. For more information, please visit www.guggenheiminvestments.com/credit-income-fund.
Item 1A. Risk Factors
Our business, results of operations, financial condition and ability to pay dividends could be materially adversely affected by various risks and uncertainties, including those enumerated below. These risk factors may have affected, and in the future could affect, our actual operating and financial results and could cause such results to differ materially from those in any forward-looking statements. You should not consider this list of risk factors to be exhaustive. New risk factors emerge periodically, and we cannot assure you that the factors described below list all risks that may become material to us at any later time.
Summary of Risk Factors
Investing in our common stock involves a high degree of risk. Some, but not all, of the risks and uncertainties that we face are related to:
| • | Our ability to achieve our investment objectives depends on the Advisor's ability to manage and support our investment process. |
| • | Because our business model depends to a significant extent upon relationships with corporations, financial institutions and investment firms, the inability of the Advisor to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business. |
| • | We may face increasing competition for investment opportunities, which could delay further deployment of our capital, reduce returns and result in losses. |
| • | The amount of any distributions we may make is uncertain. We may not be able to pay distributions or be able to sustain distributions at any particular level, and our distributions per share may not grow over time or may decline. We have not established any limit on the extent to which we may use borrowings, if any, or offering proceeds to fund distributions (which may reduce the amount of capital we ultimately invest in portfolio companies). |
| • | Our distributions may exceed our taxable earnings and profits. Therefore, portions of the distributions that we pay may represent a return of capital to you, which will lower your tax basis in your Shares, which may cause you to experience increases in capital gains in subsequent sales of your Shares, and reduce the amount of funds we have for investment in portfolio companies. |
| • | A significant portion of our investment portfolio will be recorded at fair value as determined in good faith in accordance with procedures established by our Board of Trustees and, as a result, there is and will be uncertainty as to the value of our portfolio investments. |
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| • | We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations. |
| • | Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy. |
| • | We are a non-diversified investment company within the meaning of the 1940 Act and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer. |
| • | Global capital markets could enter a period of severe disruption and instability. These conditions have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and could negatively impact our business, financial condition and results of operations. |
| • | Our investments in portfolio companies may be risky and we could lose all or part of our investment. |
| • | Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies. |
| • | There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims. |
| • | We generally will not control the business operations of our portfolio companies and, due to the illiquid nature of our holdings in our portfolio companies, may not be able to dispose of our interest in our portfolio companies. |
| • | Inflation has and may continue to adversely affect our business. |
| • | We will be exposed to risks associated with changes in interest rates. |
| • | To the extent OID and PIK interest income constitute a portion of our income, we will be exposed to risks associated with the deferred receipt of cash representing such income. |
| • | Defaults by our portfolio companies will harm our operating results. |
| • | The lack of liquidity in our investments may adversely affect our business. |
| • | We may not have the funds or ability to make additional investments in our portfolio companies or to fund our unfunded commitments. |
| • | To the extent that we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us. Borrowed money may also adversely affect the return on our assets, reduce cash available to service our debt or for distribution to our shareholders and result in losses. |
| • | The agreements governing our financing arrangements contain various covenants which, if not complied with, could accelerate repayment under the applicable arrangement, thereby materially and adversely affecting our liquidity, financial condition, results of operations and our ability to pay distributions to our shareholders. |
| • | The Advisor will experience conflicts of interest in connection with the management of our business affairs. |
| • | The Advisor has incentives to favor its other accounts and clients over us, which may result in conflicts of interest that could be harmful to us. |
| • | Our Advisor will face restrictions on its use of inside information about existing or potential investments that it acquires through its relationships with other advisory clients, and those restrictions may limit the freedom of our Advisor to enter into or exit from investments for us, which could have an adverse effect on our results of operations. |
| • | We may be obligated to pay our Advisor incentive fees even if we incur a net loss due to a decline in the value of our portfolio and even if our earned interest income is not payable in cash. |
| • | Our incentive fee may induce our Advisor to make speculative investments. |
| • | Our ability to enter into transactions with our affiliates will be restricted. |
| • | We may make investments that could give rise to a conflict of interest. |
| • | Failure to maintain our status as a BDC would reduce our operating flexibility. |
| • | If we cannot obtain debt financing or equity capital on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected. |
| • | Investing in our Shares involves a high degree of risk. |
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| • | We intend, but are not required, to offer to repurchase your Shares on a quarterly basis. As a result you will have limited opportunities to sell your Shares. |
| • | Our Shares are not listed on a securities exchange and our shareholders have limited liquidity. In addition, the timing of our repurchase offers pursuant to our share repurchase program may be at a time that is disadvantageous to our shareholders, and to the extent our shareholders are able to sell their Shares under the share repurchase program, our shareholders may not be able to recover the amount of their investment in our Shares. |
| • | We may be unable to invest a significant portion of our investment capital on acceptable terms in an acceptable timeframe. |
| • | The liquidation of Feeder Funds could cause us to sell assets at a time when it is not advantageous to do so and could reduce our ability to take advantage of future investment opportunities. |
| • | Liquidation Risk. |
| • | The net asset value of our Shares may fluctuate significantly. |
| • | We will be subject to corporate-level income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or if we make investments through taxable subsidiaries. |
| • | We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. |
RISKS RELATED TO OUR BUSINESS
Our ability to achieve our investment objectives depends on the Advisor's ability to manage and support our investment process. If the Advisor were to lose a significant number of its key professionals, or terminate the Investment Advisory Agreement, our ability to achieve our investment objectives could be significantly harmed.
We do not have employees. Additionally, we have no internal management capacity other than our appointed executive officers and are dependent upon the investment expertise, skill and network of business contacts of our Advisor to achieve our investment objectives. Our Advisor evaluates, negotiates, structures, executes, monitors and services our investments. Our success will depend to a significant extent on the continued service and coordination of our Advisor, including its key professionals. The departure of a significant number of key professionals from Guggenheim could have a material adverse effect on our ability to achieve our investment objectives.
Our ability to achieve our investment objectives also depends on the ability of our Advisor to identify, analyze, invest in, finance and monitor companies that meet our investment criteria. Our Advisor's capabilities in structuring the investment process, providing competent, attentive and efficient services to us, and facilitating access to financing on acceptable terms depend on the involvement of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve our investment objectives, our Advisor may need to retain, hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. Our Advisor may not be able to find qualified investment professionals in a timely manner or at all. Any failure to do so could have a material adverse effect on our business, financial condition and results of operations.
In addition, the Investment Advisory Agreement has termination provisions that allow the agreement to be terminated by us upon 60 days’ notice if the Master Fund’s Board of Trustees or holders of a majority of the Master Fund’s outstanding common shares so direct. The Investment Advisory Agreement may be terminated at any time, without penalty, by Guggenheim upon 120 days’ notice to the Master Fund. The termination of the Investment Advisory Agreement may adversely affect the quality of our investment opportunities and it may be difficult for the Master Fund to replace Guggenheim.
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Because our business model depends to a significant extent upon relationships with corporations, financial institutions and investment firms, the inability of the Advisor to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
We expect that Guggenheim will depend on its relationships with corporations, financial institutions and investment firms, and we rely indirectly to a significant extent upon these relationships to provide us with potential investment opportunities. If Guggenheim fails to maintain its existing relationships, or develop new relationships or sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom Guggenheim has relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.
We may face increasing competition for investment opportunities, which could delay further deployment of our capital, reduce returns and result in losses.
We may compete for investments with other BDCs and investment funds (including registered investment companies, private equity funds and private credit funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, continue to increase their investment focus in our target market of privately-owned U.S. companies. Moreover, we have experienced, and may continue to experience, increased competition from banks and investment vehicles who may continue to lend to the middle market, including lending activity in our target market of privately-owned U.S. companies. Additionally, the Federal Reserve and other bank regulators may periodically provide incentives to U.S. commercial banks to originate more loans in the middle market for private companies. As a result of these new entrants and regulatory incentives, competition for investment opportunities in privately-owned U.S. companies may intensify. Many of our 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 capital 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 than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do.
We may lose investment opportunities if we do not match our competitors’ pricing, terms and investment structure criteria. If we are forced to match these competitors’ investment terms criteria, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source of income, asset diversification and distribution requirements we must satisfy to maintain our regulated investment company ("RIC" or "RICs") status under Subchapter M of the Code. The competitive pressures we face, and the manner in which we react or adjust to these competitive pressures, may have a material adverse effect on our business, financial condition, results of operations, effective yield on investments, investment returns, leverage ratio and cash flows. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time. Also, we may not be able to identify and make investments that are consistent with our investment objectives.
The amount of any distributions we may make is uncertain. We may not be able to pay distributions or be able to sustain distributions at any particular level, and our distributions per share may not grow over time or may decline. We have not established any limit on the extent to which we may use borrowings, if any, or offering proceeds to fund distributions (which may reduce the amount of capital we ultimately invest in portfolio companies).
We expect to pay distributions out of assets legally available for distribution based on our investment performance. However, we cannot assure you that we will achieve investment results that will allow us to make a consistent targeted level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact of the risks described in this Report. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC can limit our ability to pay distributions. Distributions from offering proceeds or from borrowings could also reduce the amount of capital we ultimately invest in interests of portfolio companies. We cannot assure you that we will pay distributions to our shareholders in the future.
Our distributions may exceed our taxable earnings and profits. Therefore, portions of the distributions that we pay may represent a return of capital to you, which will lower your tax basis in your Shares, which may cause you to experience increases in capital gains in subsequent sales of your Shares, and reduce the amount of funds we have for investment in portfolio companies.
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In the event that we encounter delays in locating suitable investment opportunities, we may pay our distributions from offering proceeds or from borrowings in anticipation of future cash flow, which may constitute a return of your capital and will lower your tax basis in your Shares, which may cause you to experience increases in capital gains in subsequent sales of your Shares. Distributions from offering proceeds or from borrowings also could reduce the amount of capital we ultimately have available to invest in interests of portfolio companies.
A significant portion of our investment portfolio will be recorded at fair value as determined in good faith in accordance with procedures established by our Board of Trustees and, as a result, there is and will be uncertainty as to the value of our portfolio investments.
As a BDC, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined in accordance with procedures established by our Board of Trustees. There is not a public market or active secondary market for many of the securities of the privately-held companies in which we intend to invest. The majority of our investments may not be publicly traded or actively traded on a secondary market but, instead, may be traded on a privately-negotiated, over-the-counter secondary market for institutional investors, if at all. As a result, we will value a significant portion of these securities at fair value as determined in good faith in accordance with procedures established by our Board of Trustees.
The determination of fair value, and thus the amount of unrealized gains or losses we may recognize in any year, is to a degree subjective, and our Advisor has a conflict of interest in making recommendations of fair value. We will value these securities at fair value as determined in good faith in accordance with procedures established by our Board of Trustees and based on input from our Advisor and our Audit Committee. Our Board of Trustees may utilize the services of independent third-party valuation firms to aid it in determining the fair value of any securities and generally expects to do so with respect to Level 3 assets on a quarterly basis . The types of factors that may be considered in determining the fair values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly-traded companies, discounted cash flow, current market interest rates and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate significantly over short periods of time due to changes in current market conditions. The determinations of fair value in accordance with procedures established by our Board of Trustees may differ materially from the values that would have been used if an active market and market quotations existed for these investments. Our net asset value could be adversely affected if the determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such investments.
We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations.
Our business is dependent on our third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. There could be:
| • | sudden electrical or telecommunications outages; |
| • | natural disasters such as earthquakes, tornadoes and hurricanes; |
| • | disease pandemics; |
| • | events arising from local or larger scale political or social matters, including terrorist acts; and |
| • | cyber-attacks. |
These events, in turn, could have a material adverse effect on our operating results and negatively affect the net asset value of our Shares and our ability to pay dividends to our shareholders.
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Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, results of operations or financial condition.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen information, misappropriation of assets, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships. Any such attack could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We face risks posed to our information systems, both internal and those provided to us by third-party service providers. We, Guggenheim and its affiliates have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, may be ineffective and do not guarantee that a cyber incident will not occur or that our financial results, operations or confidential information will not be negatively impacted by such an incident.
Third parties with which we do business (including those that provide services to us) may also be sources or targets of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes.
Any unrealized losses we experience on our portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith in accordance with procedures established by our Board of Trustees. Decreases in the market values or fair values of our investments relative to amortized cost will be recorded as unrealized depreciation. Any unrealized losses in our loan portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods. In addition, decreases in the market value or fair value of our investments will reduce our net asset value.
Our Board of Trustees may change our operating policies and strategies without prior notice or shareholder approval, the effects of which may be adverse to our shareholders.
Our Board of Trustees has the authority to modify or waive our current operating policies, investment criteria and strategies without prior notice and without shareholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and the value of our Shares. However, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose all or part of your investment. Moreover, we will have significant flexibility in investing our capital and we may invest our capital in ways that our investors may not agree with.
Certain investment analysis and decisions by the Advisor may be undertaken with limited information.
Given the nature of our investments, the same level of information that would exist for a publicly-traded company may not be available to the Advisor. Therefore, at times, the Advisor may be forced to make investment decisions with limited information regarding factors that may adversely affect an investment.
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Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
We and our portfolio companies are subject to regulation at the local, state and federal levels. Changes to the laws and regulations governing our permitted investments may require a change to our investment strategy. Most recently, the current federal administration has called for significant changes in U.S. trade, healthcare, individual and corporate taxation, immigration, foreign and government regulatory policies. In this regard, there is significant uncertainty with respect to legislation, regulation and government policies at the federal level, as well as at the state and local government levels. Such changes could differ materially from our strategies and plans as set forth in this Report and may shift our investment focus from the areas of expertise of Guggenheim. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable and default rates on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. These occurrences could have a material adverse effect on our results of operations, the value of your investment in us and our ability to pay distributions to you and our other shareholders.
RISKS RELATED TO OUR INVESTMENTS
We are a non-diversified investment company within the meaning of the 1940 Act and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. To the extent that we hold large positions in the securities of a small number of issuers, or within a particular industry, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the issuer’s financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. However, we will be subject to the diversification requirements applicable to RICs under Subchapter M of the Code.
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Global capital markets could enter a period of severe disruption and instability. These conditions have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and could negatively impact our business, financial condition and results of operations.
Market and macro-economic disruptions may, in the future, affect the U.S. capital markets, which could adversely affect our business and that of our portfolio companies. These market disruptions may also affect the broader financial and credit markets and may reduce the availability of debt and equity capital for the market as a whole and to financial firms, in particular. At various times, these macro-disruptions have resulted in, and may in the future result in, a lack of liquidity in parts of the debt capital markets, significant write-offs in the financial services sector and the repricing of credit risk. These conditions may reoccur for a prolonged period of time again or materially worsen in the future, including as a result of further downgrades to the U.S. government’s sovereign credit rating or the perceived credit worthiness of the United States or other large global economies. Unfavorable macro-economic conditions, including future recessions, also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume of loans we originate and/or fund, adversely affect the value of our portfolio investments or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows. There has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies, treaties and tariffs. The current U.S. presidential administration, along with the U.S. Congress, has created significant uncertainty about the future relationship between the United States and other countries with respect to trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. The spread of an epidemic or pandemic and efforts to contain it may result in severe disruptions to financial markets, supply chains, availability of raw materials, goods, and services. As with other serious economic disruptions, governmental authorities and regulators are responding to this crisis with significant fiscal and monetary policy changes, including by providing direct capital infusions into companies, introducing new monetary programs and considerably lowering interest rates, which, in some cases resulted in negative interest rates. These actions, including their possible unexpected or sudden reversal or potential ineffectiveness, could further increase volatility in securities and other financial markets, reduce market liquidity, heighten investor uncertainty and adversely affect the value of our investments and our overall performance. In addition, uncertainty arising from the United Kingdom's decision to leave the European Union ("Brexit") could lead to further market disruptions and currency volatility, potentially weakening consumer, corporate and financial confidence and resulting in lower economic growth for companies that rely significantly on Europe for their business activities and revenues. Any of these factors could depress economic activity and restrict our portfolio companies' access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.
Our investments in portfolio companies may be risky and we could lose all or part of our investment.
We intend to pursue a strategy focused on investing primarily in the debt of privately-owned U.S. companies, with a focus on originated transactions sourced through the networks of our Advisor. The following are risks associated with our investments:
| • | Senior Secured Loans, Senior Unsecured Loans and Second Lien Loans. Senior loans hold the most senior position in the capital structure of a business entity, and are typically secured with specific collateral. When we invest in senior secured term loans and second lien loans, we generally seek to take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries. We expect this security interest to help mitigate the risk that we will not be repaid. However, there is a risk that the collateral securing our loans may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise, and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. Also, in some circumstances, with respect to our second lien loans, our security interest could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies. |
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Senior unsecured loans are structured as loans that are not subordinate in right of payment to any other debt incurred by the borrower under such loan, but are not secured with any collateral that could help ensure repayment of the loan. In the event of non-payment by a borrower of a senior unsecured loan, the lender may be unable to collect the unpaid balance because there is no specific collateral on which the lender can foreclose. In particular, if there are also any outstanding secured loans, the lender of such loans may be able to foreclose on the collateral securing such loans, and such proceeds may be applied towards the repayment of such secured loans before any remaining proceeds may be applied towards repayment of senior unsecured loans. Consequently, senior unsecured loans may be subject to a greater risk of non-payment in the event of default than secured loans, particularly during periods of deteriorating economic conditions.
| • | Subordinated Debt. Our subordinated, or mezzanine, debt investments will rank junior in priority of payment to senior loans and will generally be unsecured. These characteristics may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These investments may involve additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject us and our shareholders to non-cash income, including payment-in-kind ("PIK") interest, which represents contractual interest added to the loan balance and due at the end of the loan term, and original issue discount ("OID"). Loans structured with these features may represent a higher level of credit risk than loans that require interest to be paid in cash at regular intervals during the term of the loan. Since we generally will not receive any principal repayments prior to the maturity of some of our subordinated debt investments, such investments will have greater risk than amortizing loans. |
| • | Structured Products. We may also invest, to a limited extent, in structured products, which may include CDOs, CLOs, structured notes, and credit-linked notes. These investment entities may be structured as trusts or other types of pooled investment vehicles. They may also involve the deposit with or purchase by an entity of the underlying investments and the issuance by that entity of one or more classes of securities backed by, or representing interests in, the underlying investments or referencing an indicator related to such investments. CDOs and CLOs are types of asset-backed securities issued by special purpose vehicles created to reapportion the risk and return characteristics of a pool of assets. The underlying pool for a CLO, for example, may include domestic and foreign senior loans, senior unsecured loans and subordinate corporate loans. Generally, these are not qualified as eligible portfolio companies ("EPCs"). Investments in the equity tranche or any similarly situated tranche of a structured product involve a greater degree of risk than investments in other tranches, and such investments will be the first to bear losses incurred by a structured product. |
| • | Equity Investments. We expect to make selected equity investments in the common or preferred stock of a company. In addition, when we invest in senior and subordinated debt, we may acquire warrants or options to purchase equity securities or benefit from other types of equity participation. Our goal is ultimately to dispose of these equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. |
| • | Investments in Private Investment Funds. We may invest in private investment funds, including hedge funds, private equity funds, limited liability companies and other business entities. In valuing our investments in private investment funds, we rely primarily on information provided by managers of such funds. Valuations of illiquid securities, such as interests in certain private investment funds, involve various judgments and consideration of factors that may be subjective. There is a risk that inaccurate valuations provided by managers of private investment funds could adversely affect the value of our Shares. We may not be able to withdraw our investment in certain private investment funds promptly after we have made a decision to do so, which may result in a loss to us and adversely affect our investment returns. |
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| • | Derivatives. We may invest in derivative investments, which have risks, including: the imperfect correlation between the value of such instruments and the underlying assets of the Master Fund, which creates the possibility that the loss on such instruments may be greater than the gain in the value of the underlying assets in our portfolio; the loss of principal; the possible default of the other party to the transaction and illiquidity of the derivative investments. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding, or may not recover at all. In addition, in the event of the insolvency of a counterparty to a derivative transaction, the derivative contract would typically be terminated at its fair value. If we are owed this fair value in the termination of the derivative contract and its claim is unsecured, we will be treated as a general creditor of such counterparty and will not have any claim with respect to the underlying security. Certain of the derivative investments in which we may invest may, in certain circumstances, give rise to a form of financial leverage, which may magnify the risk of owning such instruments. The ability to successfully use derivative investments depends on the ability of the Advisor to predict pertinent market movements, which cannot be assured. In addition, amounts paid by us as premiums and cash or other assets held in margin accounts with respect to our derivative investments would not be available to us for other investment purposes, which may result in lost opportunities for gain. |
Most debt securities in which we intend to invest will not be rated by any rating agency and, if they were rated, would be rated as below investment grade quality. Debt securities rated below investment grade quality (e.g., junk bonds) are generally regarded as having predominantly speculative characteristics and may carry a greater risk with respect to a borrower’s capacity to pay interest and repay principal.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We intend to pursue a strategy focused on investing primarily in the debt of privately-owned U.S. companies with a focus on originated transactions sourced through the networks of our Advisor. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
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Subordinated liens on collateral securing debt investments that we will make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay both the first priority creditors and us in full.
Certain debt investments that we will make in portfolio companies will be secured on a second priority basis by the same collateral securing senior debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the debt. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt instruments secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the debt obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.
We may also make unsecured debt investments in portfolio companies, meaning that such investments will not benefit from any interest in collateral of such companies. Liens on such portfolio companies’ collateral, if any, will secure the portfolio companies’ obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured debt agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured debt obligations after payment in full of all secured debt obligations. If such proceeds were not sufficient to repay the outstanding secured debt obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the debt investments we make in our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more inter-creditor agreements that we enter into with the holders of senior debt. Under such an inter-creditor agreement, at any time that obligations having the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral, the ability to control the conduct of such proceedings, the approval of amendments to collateral documents, releases of liens on the collateral and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
Although we intend to generally structure certain of our investments as senior debt, if one of our portfolio companies were to file for bankruptcy proceedings, depending on the facts and circumstances, including the extent to which we provided managerial assistance to that portfolio company or a representative of us or the Advisor sat on the board of trustees of such portfolio company, a bankruptcy court might re-characterize our debt investment and subordinate all or a portion of our claim to that of other creditors.
In addition, a number of U.S. judicial decisions have upheld judgments obtained by borrowers against lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has violated a duty (whether implied or contractual) of good faith, commercial reasonableness and fair dealing, or a similar duty owed to the borrower, or has assumed an excessive degree of control over the borrower, resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. Because of the nature of our investments in portfolio companies (including that, as a BDC, we may be required to provide managerial assistance to those portfolio companies), we may be subject to allegations of lender liability.
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We generally will not control the business operations of our portfolio companies and, due to the illiquid nature of our holdings in our portfolio companies, may not be able to dispose of our interest in our portfolio companies.
We do not expect to control most of our portfolio companies, although we may have board representation or board observation rights, and our debt agreements may impose certain restrictive covenants on our borrowers. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity for our investments in private companies, we may not be able to readily dispose of our portfolio company holdings or to sell our holdings at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.
We will be exposed to risks associated with changes in interest rates.
We are subject to financial market risks, including changes in interest rates. Because we may borrow money to finance a portion of our investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our net investment income.
In addition, interest rates have recently been at or near historic lows. In the event of a significant rising interest rate environment, our portfolio companies with adjustable-rate loans could see their interest payments increase and there may be a significant increase in the number of our portfolio companies who are unable or unwilling to pay interest and repay their loans. Our investment portfolio of adjustable-rate loans may also decline in value in response to rising interest rates if the adjustable interest rates do not rise as much, or as quickly, as market interest rates in general. Similarly, during periods of rising interest rates, our investments with fixed interest will likely decline in value.
In periods of market volatility, the market values of fixed income securities, and portfolio companies with adjustable-rate loans, may be more sensitive to changes in interest rates. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent such activities are not prohibited by the 1940 Act. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.
General interest rate fluctuations may have a substantial negative impact on our investments, our incentive fee, the value of our Shares and our rate of return on invested capital. During periods of declining interest rates, borrowers or issuers may exercise their option to prepay principal earlier than scheduled. For fixed-rate securities, such payments often occur during periods of declining interest rates, forcing the Master Fund to reinvest in lower yielding securities, resulting in a possible decline in the Master Fund’s income and distributions to shareholders.
Inflation has and may continue to adversely affect our business.
Certain of our portfolio companies are in industries that have been impacted by inflation. Recent inflationary pressures have increased the costs of labor, energy and raw materials and have adversely affected consumer spending, economic growth and our portfolio companies’ operations. If such portfolio companies are unable to pass any increases in their costs of operations along to their customers, it could adversely affect their operating results and impact their ability to pay interest and principal on our loans, particularly if interest rates rise in response to inflation. In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future realized or unrealized losses and therefore reduce our net assets resulting from operations. Additionally, the Federal Reserve has raised, and has indicated its intent to continue raising, certain benchmark interest rates in an effort to combat inflation.
An increase or decrease in commodity supply or demand may adversely affect our business.
While we intend to be diversified across industry sectors, a decrease in the production of natural gas, natural gas liquids, crude oil, coal or other energy commodities, a decrease in the volume of such commodities available for transportation, mining, processing, storage or distribution, or a sustained decline in demand for such commodities may adversely impact the financial performance or prospects of energy or other commodity-focused companies in which we may invest. Energy and other commodity-focused companies are subject to supply and demand fluctuations in the markets they serve which will be impacted by a wide range of factors, including fluctuating commodity prices, weather, increased conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion of natural gas, natural gas liquids, crude oil or coal production, rising interest rates, declines in domestic or foreign production of natural gas, natural gas liquids and crude oil, accidents or catastrophic events and economic conditions, among others.
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An increase or decrease in commodity pricing may adversely affect our business.
The return on our prospective investments in energy and other commodity-sensitive companies will be dependent on the margins received by those companies for the exploration, development, production, gathering, transportation, processing, storing, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power. These margins may fluctuate widely in response to a variety of factors including global and domestic economic conditions, weather conditions, natural disasters, the supply and price of imported energy commodities, the production and storage levels of energy commodities in certain regions or in the world, political instability, terrorist activities, transportation facilities, energy conservation, domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation systems. Volatility of commodity prices may also make it more difficult for energy companies in which we may invest to raise capital to the extent the market perceives that their performance may be directly or indirectly tied to commodity prices.
We may continue to be subject to certain contingent liabilities arising from the sale or other disposition of our investments.
A significant portion of our investments involve private securities. In connection with the sale or other disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the portfolio company, typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations are determined to be inaccurate with respect to potential liabilities. These arrangements may constitute contingent liabilities that ultimately could result in funding obligations that we must satisfy through our return of distributions previously made to us on such investment. If this occurs, we could incur losses associated with the payments of amounts in satisfaction of such liabilities. Consequently, the value of our Shares may decline and our future distributions to shareholders may be reduced, although in no event would shareholders be required to return distributions previously paid by us to them on account of such liabilities.
International investments create additional risks.
We expect to make investments in portfolio companies that are domiciled outside of the United States. We anticipate that up to 30% of our investments may be in these types of assets. Our investments in foreign portfolio companies will be deemed “non-qualifying assets,” which means, as required by the 1940 Act, they may not constitute more than 30% of our total assets at the time of our acquisition of any asset, after giving effect to the acquisition. Notwithstanding the limitation on our ownership of foreign portfolio companies, such investments may subject us to many of the same risks as our domestic investments, as well as certain additional risks, including the following:
| • | foreign governmental laws, rules and policies, including those restricting the ownership of assets in the foreign country or the repatriation of profits from the foreign country to the United States; |
| • | foreign currency devaluations that reduce the value of and returns on our foreign investments; |
| • | adverse changes in the availability, cost and terms of investments due to the varying economic policies of a foreign country in which we invest; |
| • | adverse changes in tax rates, the tax treatment of transaction structures and other changes in operating expenses of a particular foreign country in which we invest; |
| • | the assessment of foreign-country taxes (including withholding taxes, transfer taxes and value added taxes, any or all of which could be significant) on income or gains from our investments in the foreign country; |
| • | adverse changes in foreign-country laws, including those relating to taxation, bankruptcy and ownership of assets; |
| • | changes that adversely affect the social, political and/or economic stability of a foreign country in which we invest; |
| • | high inflation in the foreign countries in which we invest, which could increase the costs to us of investing in those countries; |
| • | deflationary periods in the foreign countries in which we invest, which could reduce demand for our assets in those countries and diminish the value of such investments and the related investment returns to us; and |
| • | legal and logistical barriers in the foreign countries in which we invest that materially and adversely limit our ability to enforce our contractual rights with respect to those investments. |
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In addition, we may make investments in countries whose governments or economies may prove unstable. Certain of the countries in which we may invest may have political, economic and legal systems that are unpredictable, unreliable or otherwise inadequate with respect to the implementation, interpretation and enforcement of laws protecting asset ownership and economic interests. In some of the countries in which we may invest, there may be a risk of nationalization, expropriation or confiscatory taxation, which may have an adverse effect on our portfolio companies in those countries and the rates of return we are able to achieve on such investments. We may also lose the total value of any investment that is nationalized, expropriated or confiscated. The financial results and investment opportunities available to us, particularly in developing countries and emerging markets, may be materially and adversely affected by any or all of these political, economic and legal risks.
To the extent OID and PIK interest income constitute a portion of our income, we will be exposed to risks associated with the deferred receipt of cash representing such income.
Our investments may include OID and PIK instruments. To the extent OID and PIK interest income constitute a portion of our income, we will be exposed to risks associated with such income being required to be included in an accounting income and taxable income prior to receipt of cash, including the following:
| • | OID instruments may have unreliable valuations because the accretion of OID as interest income requires judgments about its collectability. |
| • | OID instruments may create heightened credit risks because the inducement to the borrower to accept higher interest rates in exchange for the deferral of cash payments typically represents, to some extent, speculation on the part of the borrower. |
| • | For accounting purposes, cash distributions to shareholders that include a component of accreted OID income do not come from paid-in capital, although they may be paid from the offering proceeds. Thus, although a distribution of accreted OID income may come from the cash invested by the shareholders, the 1940 Act does not require that shareholders be given notice of this fact. |
| • | The presence of accreted OID income and PIK interest income create the risk of non-refundable cash payments to the Advisor in the form of subordinated incentive fees on income based on non-cash accreted OID income and PIK interest income accruals that may never be realized. |
| • | In the case of PIK “toggle” debt (debt for which the issuer may defer an interest payment by agreeing to pay an increased coupon in the future, provided that all deferred payments must be made by the instrument’s maturity), the PIK interest election has the simultaneous effects of increasing the investment income, thus increasing the potential for realizing incentive fees. |
| • | The required recognition of OID and PIK interest for U.S. federal income tax purposes may have a negative impact on liquidity, as such amount represent non-cash income that may require cash distributions to shareholders in order to maintain our ability to be subject to tax as a RIC. |
Our investments in private investment funds, including hedge funds, private equity funds, limited liability companies and other business entities, subject us indirectly to the underlying risks of such private investment funds and additional fees and expenses.
Our investments in private investment funds, including hedge funds, private equity funds, limited liability companies and other business entities, expose us to the risks associated with the businesses of such funds or entities. These private investment funds are not registered investment companies and, thus, are not subject to protections afforded by the 1940 Act covering, among other areas, liquidity requirements, governance by an independent board, affiliated transaction restrictions, leverage limitations, public disclosure requirements and custody requirements.
We rely primarily on information provided by managers of private investment funds in valuing our investments in such funds. There is a risk that inaccurate valuations provided by managers of private investment funds could adversely affect the value of our Shares. In addition, there can be no assurance that a manager of a private investment fund will provide advance notice of any material change in such private investment fund’s investment program or policies, therefore our investment portfolio may be subject to additional risks, which may not be promptly identified by our Advisor.
Investments in the securities of private investment funds may also involve duplication of investment advisory fees and certain other expenses. By investing in private investment funds indirectly through us, you bear a pro rata portion of our investment advisory fees and other expenses, and also indirectly bear a pro rata portion of the investment advisory fees, performance-based allocations and other expenses borne by us as an investor in the private investment funds.
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In addition, certain private investment funds may not provide us with the liquidity we require and would thus subject us to liquidity risk. Further, even if an investment in a private investment fund is deemed liquid at the time of investment, the private investment fund may, in the future, alter the nature of its investments and cease to be a liquid investment fund, subjecting us to liquidity risk.
We may acquire various structured financial instruments for purposes of “hedging” or reducing our risks, which may be costly and ineffective and could reduce our cash available for distribution to our shareholders.
We may seek to hedge against interest rate and currency exchange rate fluctuations and credit risk by using structured financial instruments such as futures, options, swaps and forward contracts, subject to the requirements of the 1940 Act. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available to pay distributions to our shareholders.
Defaults by our portfolio companies will harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its debt financing and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.
An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies.
We intend to invest primarily in privately-held companies. Investments in private companies pose certain incremental risks as compared to investments in public companies, including that they:
| • | have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress; |
| • | 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 and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment; |
| • | may 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 changing market conditions, as well as general economic downturns; |
| • | 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 our portfolio company and, in turn, on us; and |
| • | 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. In addition, our executive officers, trustees and members of the Advisor's management may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies. |
Finally, little public information generally exists about private companies and these companies may not have third-party credit ratings or audited financial statements. We must therefore rely on the ability of our Advisor to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. Additionally, these companies and their financial information will not generally be subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision and we may lose money on our investments.
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The lack of liquidity in our investments may adversely affect our business.
We may acquire a significant percentage of our portfolio company investments from privately-held companies in directly negotiated transactions. The securities of private companies are not publicly traded or actively traded on the secondary market and are, instead, traded on a privately-negotiated, over-the-counter secondary market for institutional investors, if at all. These over-the-counter secondary markets may be inactive during an economic downturn or a credit crisis. In addition, the securities in these companies will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. We typically would be unable to exit these investments unless and until the portfolio company has a liquidity event such as a sale, refinancing or initial public offering.
The illiquidity of our investments may make it difficult or impossible 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 have previously recorded our investments, which could have a material adverse effect on our business, financial condition and results of operations.
Moreover, securities purchased by us that are liquid at the time of purchase may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions or investor perceptions.
We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, Guggenheim, or any of its affiliates have material nonpublic information regarding such portfolio company, or where the sale would be an impermissible joint transaction. The reduced liquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
Dislocations in certain parts of markets are resulting in reduced liquidity for certain investments. It is uncertain when financial markets will improve. Liquidity of financial markets may also be affected by government intervention.
We may not have the funds or ability to make additional investments in our portfolio companies or to fund our unfunded commitments.
After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant or other right to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, we prefer other opportunities, we are limited in our ability to do so by compliance with BDC requirements, or we desire to maintain our RIC status. Our ability to make follow-on investments may also be limited by Guggenheim's allocation policies. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation, or may reduce the expected return on the investment. During periods of market disruption, portfolio companies may be more likely to seek to draw on unfunded commitments we have made, and the risk of being unable to fund such commitments is heightened during such periods.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments, net of prepayment fees, could negatively impact our return on equity.
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To the extent that we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us. Borrowed money may also adversely affect the return on our assets, reduce cash available to service our debt or for distribution to our shareholders and result in losses.
The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. If we use leverage to partially finance our investments, through borrowing from banks and other lenders, you will experience increased risks of investing in our Shares. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would if we had not borrowed and employed leverage. Similarly, any decrease in our income would cause net income to decline more sharply than it would have if we had not borrowed and employed leverage. Such a decline could negatively affect our ability to make distributions to our shareholders. In addition, our shareholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the management or incentive fees payable to the Advisor.
The amount of leverage that we employ will depend on our assessment of market and other factors at the time of any proposed borrowing. There can be no assurance that leveraged financing will be available to us on favorable terms or at all. However, to the extent that we use leverage to finance our assets, our financing costs will reduce cash available for distributions to shareholders. Moreover, we may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations. In such an event, we may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses.
As a BDC, we are required to maintain a minimum coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, subject to any then-current asset coverage requirements. We cannot incur additional debt and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so, if any then-current asset coverage requirements are not met. This could have a material adverse effect on our operations and we may not be able to make distributions.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, our non-performing assets may increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of any collateral securing our senior secured first or second lien loans. A severe recession may further decrease the value of such collateral and result in losses of value in our portfolio and a decrease in our revenues, net income, assets and net worth. Unfavorable economic conditions could also increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us on terms we deem acceptable. These events could prevent us from increasing investments and harm our operating results.
A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Any such unfavorable economic conditions, including rising interest rates, may also increase our funding costs, limit our access to capital markets or negatively impact our ability to obtain financing, particularly from the debt markets. In addition, any future financial market uncertainty could lead to financial market disruptions and could further impact our ability to obtain financing. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results and financial condition.
The Advisor's decision to securitize loans may impact the Feeder Funds.
A decision by our Advisor to securitize loans may affect the Feeder Funds in the following ways: (i) the securitization vehicle may be required to have separate financial statements, (ii) the securitized loans and/or the investment in the securitization vehicle would be included in the Master Fund's 30% "bucket" of Qualifying Assets (i.e. not a Qualified Asset) and (iii) securitization involves added fees and costs.
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RISKS RELATED TO OUR ADVISOR AND ITS AFFILIATES
The Advisor and its affiliates, including our officers and some of our Trustees, may face conflicts of interest caused by compensation arrangements with us and our affiliates, which could result in increased risk-taking by us.
The Advisor and its affiliates will receive substantial fees from us in return for its services, including certain incentive fees based on the amount of appreciation of our investments. These fees could influence the advice provided to us. Generally, the more equity we sell in public offerings and the greater the risk assumed by us with respect to our investments, the greater the potential for growth in our assets and profits (and, correlatively, the fees payable by us to the Advisor). These compensation arrangements could affect our Advisor's or its affiliates’ judgment with respect to public offerings of equity and investments made by us, which allow the Advisor to earn increased investment advisory fees.
The time and resources that individuals associated with the Advisor devote to us may be diverted, and we may face additional competition due to the fact that Guggenheim is not prohibited from raising money for or managing another entity that makes the same types of investments that we target.
The Advisor currently manages other investment entities and is not prohibited from raising money for and managing future investment entities that make the same types of investments as those we target. As a result, the time and resources that our Advisor devotes to us may be diverted, and during times of intense activity in other programs, it may devote less time and resources to our business than is necessary or appropriate. In addition, we may compete with any such investment entity for the same investors and investment opportunities.
The Advisor will experience conflicts of interest in connection with the management of our business affairs.
Our Advisor will experience conflicts of interest in connection with the management of our business affairs, including those relating to the allocation of investment opportunities by the Advisor and its affiliates; compensation to the Advisor; services that may be provided by the Advisor and its affiliates to issuers in which we invest; investments by us and other clients of the Advisor, subject to the limitations of the 1940 Act; the formation of additional investment funds by the Advisor; differing recommendations given by the Advisor to us versus other clients; the Advisor's use of information gained from issuers in our portfolio for investments by other clients, subject to applicable law; and restrictions on the Advisor's use of “inside information” with respect to potential investments by us.
The Advisor may face conflicts of interest with respect to services performed for issuers in which we invest.
The Advisor and its affiliates may provide a broad range of financial services to companies in which we invest, in compliance with applicable law, and will generally be paid fees for such services. In addition, affiliates of the Advisor may act as underwriters or placement agents in connection with an offering of securities by one of the companies in our portfolio. Any compensation received by the Advisor for providing these services will not be shared with us and may be received before we realize a return on our investment. The Advisor may face conflicts of interest with respect to services performed for these companies, on the one hand, and investments recommended to us, on the other hand.
The Advisor has incentives to favor its other accounts and clients over us, which may result in conflicts of interest that could be harmful to us.
Because our Advisor manages assets for other investment companies, pooled investment vehicles and/or other accounts (including institutional clients, pension plans and certain high net worth individuals), certain conflicts of interest are present. For instance, the Advisor may receive fees from certain accounts that are higher than the fees received by the Advisor from us, or receive a more favorable performance-based fee on certain accounts. In those instances, a portfolio manager for the Advisor has an incentive to favor the higher fee and/or higher performance-based fee accounts over us. In addition, a conflict of interest exists to the extent the Advisor has proprietary investments in certain accounts, where its portfolio managers or other employees have personal investments in certain accounts, or when certain accounts are investment options in the Advisor’s employee benefit plans. The Advisor has an incentive to favor these accounts over us. Our Board of Trustees will be responsible for monitoring these conflicts.
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The Advisor is not restricted from entering into other investment advisory relationships; the Advisor’s actions on behalf of its other accounts and clients may be adverse to us and our investments.
The Advisor manages assets for accounts other than us, including private funds (for purposes of this section, “Advisor Funds”). Actions taken by the Advisor on behalf of its Advisor Funds may be adverse to us and our investments, which could harm our performance. For example, we may invest in the same credit obligations as other Advisor Funds, and, to the extent permitted under the 1940 Act, our investments may include different obligations of the same issuer. Decisions made with respect to the securities held by one Advisor Fund may cause (or have the potential to cause) harm to the different class of securities of the issuer held by other Advisor Funds (including us). As a further example, the Advisor may manage accounts that engage in short sales of (or otherwise take short positions in) securities or other instruments of the type in which we invest, which could harm our performance for the benefit of the accounts taking short positions, if such short positions cause the market value of the securities to fall.
Our Advisor will face restrictions on its use of inside information about existing or potential investments that it acquires through its relationships with other advisory clients, and those restrictions may limit the freedom of our Advisor to enter into or exit from investments for us, which could have an adverse effect on our results of operations.
In the course of performing its duties, the members, officers, directors, employees, principals or affiliates of our Advisor may come into possession of material, non-public information. The possession of such information may be detrimental to us, limiting the ability of our Advisor to buy or sell a security or otherwise to participate in an investment opportunity for us. In certain circumstances, employees of our Advisor may serve as board members or in other capacities for portfolio or potential portfolio companies, which could restrict our ability to trade in the securities of such companies. For example, if personnel of the Advisor come into possession of material non-public information with respect to our investments, such personnel will be restricted by Guggenheim’s information-sharing policies and procedures, or by law or contract from sharing such information with our management team, even where the disclosure of such information would be in our best interests or would otherwise influence decisions taken by the members of the management team with respect to that investment. This conflict and these procedures and practices may limit the freedom of our Advisor to enter into or exit from potentially profitable investments for us, which could have an adverse effect on our results of operations. Accordingly, there can be no assurance that we will be able to fully leverage the resources and industry expertise of our Advisor's other businesses. Additionally, there may be circumstances in which one or more individuals associated with the Advisor will be precluded from providing services to us because of certain confidential information available to those individuals or to other parts of the Advisor.
We may be obligated to pay our Advisor incentive fees even if we incur a net loss due to a decline in the value of our portfolio and even if our earned interest income is not payable in cash.
The Investment Advisory Agreement entitles Guggenheim to receive an incentive fee based on our pre-incentive fee net investment income regardless of any capital losses. In such case, we may be required to pay Guggenheim an incentive fee for a fiscal quarter even if there is a decline in the value of our portfolio or if we incur a net loss for that quarter.
Any incentive fee payable by us that relates to our pre-incentive fee net investment income may be computed and paid on income that may include interest that has been accrued but not yet received or interest in the form of securities received rather than cash (i.e., PIK income). If a portfolio company defaults on a loan that is structured to provide accrued interest income, it is possible that accrued interest income previously included in the calculation of the incentive fee will become uncollectible. Our Advisor is not obligated to reimburse us for any part of the incentive fee it received that was based on accrued interest income that we never received as a result of a subsequent default, and such circumstances would result in our paying a subordinated incentive fee on income we never receive. PIK income will be counted toward the incentive fee that we are obligated to pay our Advisor, even though we do not receive the income in the form of cash.
The quarterly incentive fee on income that we pay is recognized and paid without regard to: (i) the trend of pre-incentive fee net investment income on adjusted capital over multiple quarters in arrears, which may in fact be consistently less than the preference return, or (ii) the net income or net loss in the current calendar quarter, the current year or any combination of prior periods.
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For federal income tax purposes, we may be required to recognize taxable income in some circumstances in which we do not receive a corresponding payment in cash and to make distributions with respect to such income to maintain our status as a RIC. Under such circumstances, we may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified to the extent that we are required to pay a subordinated incentive fee on income with respect to such accrued income. As a result, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
Our incentive fee may induce our Advisor to make speculative investments.
The incentive fee payable by us to Guggenheim may create an incentive for our Advisor to make investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangements. The way in which the incentive fee is determined may encourage our Advisor to use leverage to increase the leveraged return on our investment portfolio.
In addition, the fact that our base management fee is payable based upon our gross assets (which includes any borrowings for investment purposes) may encourage our Advisor to use leverage to make additional investments. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during cyclical economic downturns. Under certain circumstances, the use of substantial leverage may increase the likelihood of our default on our borrowings, which would disfavor holders of our Shares.
Our ability to enter into transactions with our affiliates will be restricted.
We will be prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of a majority of the Independent Trustees and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we will generally be prohibited from buying or selling any securities from or to such affiliate on a principal basis, absent the prior approval of our Board of Trustees and, in some cases, the SEC. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which in certain circumstances could include investments in the same portfolio company (whether at the same or different times to the extent the transaction is considered a joint transaction), without prior approval of our Board of Trustees and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers, trustees or their affiliates. The SEC has interpreted the BDC regulations governing transactions with affiliates to prohibit certain joint transactions involving entities that share a common investment adviser. As a result of these restrictions, we may be prohibited from buying or selling any security from or to any portfolio company that is controlled by a fund managed by the Advisor or its affiliates without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.
We received an exemptive order from the SEC that permits us to, among other things, co-invest in privately-negotiated transactions alongside other funds, including funds managed by Guggenheim and certain of its affiliates. Our exemptive order is subject to certain terms and conditions. Accordingly, when we co-invest in privately-negotiated transactions with other accounts or other entities managed by Guggenheim, those transactions will be subject to the various conditions contained in the SEC exemptive order pertaining to co-investment transactions. However, if we co-invest in transactions with other accounts or other entities managed by Guggenheim which are not subject to the various conditions contained in our exemptive order, then those transactions will be subject to the limited circumstances currently permitted by applicable SEC staff guidance and interpretations. We have adopted Guggenheim’s allocation policy, which is designed to fairly and equitably distribute investment opportunities among funds or pools of capital managed by Guggenheim. Such allocation policy provides that once an investment has been approved and is deemed to be in our best interest, we will receive a pro rata share of the investment. The adoption of this allocation policy will ensure that we will be presented with all investment opportunities that fit within our investment strategy and that we will have the ability to invest in those opportunities alongside other Guggenheim clients on equal terms.
In situations when co-investment with affiliates’ other clients is not permitted under the 1940 Act and related rules, existing or future staff guidance or the terms and conditions of exemptive relief granted to us by the SEC (as discussed above), our Advisor will need to decide which client or clients will proceed with the investment. Generally, we will not have an entitlement to make a co-investment in these circumstances and, to the extent that another client elects to proceed with the investment, we will not be permitted to participate. Moreover, except in certain circumstances, we will be unable to invest in any issuer in which an affiliate's other client holds a controlling interest.
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We may make investments that could give rise to a conflict of interest.
We do not expect to invest in, or hold securities of, companies that are controlled by our affiliates’ other clients. However, an affiliate’s other clients may invest in, and gain control over, one of our portfolio companies. If an affiliate’s other client, or clients, gains control over one of our portfolio companies, it may create conflicts of interest and may subject us to certain restrictions under the 1940 Act. As a result of these conflicts and restrictions, our Advisor may be unable to implement our investment strategies as effectively as it could have in the absence of such conflicts or restrictions. For example, as a result of a conflict or restriction, our Advisor may be unable to engage in certain transactions that it would otherwise pursue. In order to avoid these conflicts and restrictions, our Advisor may choose to exit these investments prematurely and, as a result, we would forego any positive returns associated with such investments. In addition, to the extent that an affiliate’s other clients hold a different class of securities than us as a result of such transactions, our interests may not be aligned.
The recommendations given to us by the Advisor may differ from those rendered to its other clients.
The Advisor and its affiliates may give advice and recommend securities to other clients that may differ from advice given to, or securities recommended or bought for, us even though such other clients’ investment objectives may be similar to ours.
Our Advisor's liability is limited under the Investment Advisory Agreement, and we are required to indemnify our Advisor against certain liabilities, which may lead our Advisor to act in a riskier manner on our behalf than it would when acting for its own account.
Our Advisor has not assumed any responsibility to us other than to render the services described in the Investment Advisory Agreement, and its assets will not be available to satisfy our debts and obligations. The Advisor will not be responsible for any action of our Board of Trustees in declining to follow our Advisor's advice or recommendations. Pursuant to the Investment Advisory Agreement, our Advisor and its directors, officers, shareholders, members, agents, employees, controlling persons and any other person or entity affiliated with, or acting on behalf of, the Advisor will not be liable to us for their acts under the Investment Advisory Agreement (absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties). We have also agreed to indemnify, defend and protect our Advisor and its directors, officers, shareholders, members, agents, employees, controlling persons and any other person or entity affiliated with, or acting on behalf of, the Advisor with respect to all damages, liabilities, costs and expenses resulting from acts of our Advisor (not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties). These protections may lead our Advisor to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Our Advisor is party to a settlement agreement with the SEC and is subject to remedial sanctions and a cease-and-desist order.
In August 2015, our Advisor settled all matters relating to an investigation by the SEC, including matters relating to a failure to disclose a potential conflict of interest in connection with a $50 million loan that a senior executive received from an advisory client and inadvertently billing management fees of $6.5 million to non-managed assets of one client. Our Advisor neither admitted nor denied the findings contained in the SEC order. In connection with implementing the settlement agreement, remedial sanctions and a cease-and-desist order have been entered against our Advisor. Additionally, the SEC censured our Advisor and ordered it to pay a $20 million civil penalty. This settlement does not impose any restrictions on our Advisor’s future business activities.
RISKS GENERALLY RELATED TO BUSINESS DEVELOPMENT COMPANIES
The requirement that we invest a sufficient portion of our assets in qualifying assets could preclude us from investing in accordance with our current business strategy; conversely, the failure to invest a sufficient portion of our assets in qualifying assets could result in our failure to maintain our status as a BDC.
As a BDC, the 1940 Act prohibits us from acquiring any assets other than certain qualifying assets, unless at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets. Conversely, if we fail to invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and result of operations. Similarly, these rules could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments.
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Failure to maintain our status as a BDC would reduce our operating flexibility.
If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions and correspondingly decrease our operating flexibility.
Regulations governing our operation as a BDC and RIC will affect our ability to raise capital and the way in which we raise additional capital or borrow for investment purposes, which may have a negative effect on our growth. As a BDC, the necessity of raising additional capital may expose us to risks, including risks associated with leverage.
As a result of our need to satisfy the annual distribution requirement in order to be subject to tax as a RIC, we may need to access the capital markets periodically to raise cash to fund new investments in portfolio companies. We may issue "senior securities," including borrowing money from banks or other financial institutions, only in amounts such that our asset coverage is at least equal to any then-current asset coverage requirements under the 1940 Act. Recent legislation has reduced the asset coverage requirements for BDCs, subject to certain approvals and conditions. If the Master Fund obtains the necessary approvals and meet the applicable conditions, we may incur increased leverage and be subject to additional risk. If we issue senior securities, we will be exposed to risks associated with leverage, including an increased risk of loss. Our ability to issue different types of securities is also limited. Compliance with these distribution 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.
We may borrow for investment purposes. If the value of our assets declines, we may be unable to satisfy the asset coverage test, which would prohibit us from paying distributions and could prevent us from being subject to tax as a RIC, which would generally result in a corporate-level tax on any income and net gains. If we cannot satisfy the asset coverage test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common shareholders.
If we cannot obtain debt financing or equity capital on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected.
The net proceeds from the sale of Shares will be used for our investment opportunities, and, if necessary, the payment of operating expenses and the payment of various fees and expenses, such as management fees, incentive fees and other fees and distributions. Any working capital reserves we maintain may not be sufficient for investment purposes, and we may require additional debt financing or equity capital to operate. Pursuant to tax rules that apply to us, we will be required to distribute dividends for U.S. federal income tax purposes each taxable year generally of an amount at least equal to 90% of the sum of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our shareholders in order to maintain our ability to be subject to tax as a RIC. Accordingly, in the event that we need additional capital in the future for investments or for any other reason, we may need to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain such additional capital. These sources of funding may not be available to us due to unfavorable economic conditions, which could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Consequently, if we cannot obtain further debt or equity financing on acceptable terms, our ability to acquire additional investments and to expand our operations will be adversely affected. As a result, we would be less able to achieve portfolio diversification and our investment objectives, which may negatively impact our results of operations and reduce our ability to make distributions to our shareholders.
RISKS RELATED TO AN INVESTMENT IN OUR SHARES
Investing in our Shares involves a high degree of risk.
The investments we make in accordance with our investment objectives may result in a higher amount of risk than alternative investment options and includes volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive and, therefore, an investment in our Shares may not be suitable for someone with lower risk tolerance.
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Our Shares are not listed on a securities exchange and our shareholders have limited liquidity. In addition, the timing of our repurchase offers pursuant to our share repurchase program may be at a time that is disadvantageous to our shareholders, and to the extent our shareholders are able to sell their Shares under the share repurchase program, our shareholders may not be able to recover the amount of their investment in our Shares.
Our Shares are illiquid investments for which there is not and will likely not be a secondary market. Liquidity for your Shares will be limited to participation in our share repurchase program, which we have no obligation to maintain. When we make quarterly repurchase offers pursuant to the share repurchase program, we will offer to repurchase Shares at a price that is estimated to be equal to our net asset value per share as of the expiration date of the tender offer, which may be lower than the price you paid for our Shares. As a result, to the extent you paid a price that includes the related sales load and to the extent you have the ability to sell your Shares pursuant to our share repurchase program, the price at which you may sell Shares may be lower than the amount you paid in connection with the purchase of our Shares.
We may be unable to invest a significant portion of our investment capital on acceptable terms in an acceptable timeframe.
Delays in investing our capital may impair our performance. We cannot assure you that we will be able to identify investments that meet our investment objectives or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of our offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.
Before making investments, we may invest available capital primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and/or other high-quality debt instruments maturing in one year or less from the time of investment. This will produce returns that are significantly lower than the returns we expect to achieve when our portfolio is fully invested in securities meeting our investment objectives. As a result, any distributions that we pay while our portfolio is not fully invested in securities meeting our investment objectives may be lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objectives.
Your interest in us may be diluted if we issue additional Shares, which could reduce the overall value of an investment in us.
You do not have preemptive rights to any Shares we issue in the future. Our Declaration of Trust authorizes us to issue up to 1,000,000,000 Shares. Pursuant to our Declaration of Trust, a majority of our entire Board of Trustees may amend our Declaration of Trust to increase our authorized Shares without shareholder approval. Our Board of Trustees may elect to sell additional Shares in the future. To the extent we issue additional equity interests at or below net asset value, your percentage ownership interest in us may be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, you may also experience dilution in the book value and fair value of your Shares.
Under the 1940 Act, we generally are prohibited from issuing or selling our Shares at a price below net asset value per share, which may be a disadvantage as compared with certain public companies. We may, however, sell our Shares or warrants, options or rights to acquire our Shares, at a price below the current net asset value of our Shares if our Board of Trustees and Independent Trustees determine that such sale is in our best interests and the best interests of our shareholders, and our shareholders, including a majority of those shareholders that are not affiliated with us, approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Trustees, closely approximates the fair value of such securities. If we raise additional funds by issuing Shares or senior securities convertible into, or exchangeable for, our Shares, then the percentage ownership of our shareholders at that time will decrease and you will experience dilution.
The liquidation of Feeder Funds could cause us to sell assets at a time when it is not advantageous to do so and could reduce our ability to take advantage of future investment opportunities.
We will periodically be required to dispose of our assets to fund the liquidation of the finite life Feeder Funds. Any given liquidating Feeder Fund may hold a significant number of Shares and we may accordingly be required to liquidate a substantial portion of our portfolio. In connection with this, we may be forced to sell assets at a time when it is not advantageous to do so and the remaining shareholders (i.e., the non-liquidating Feeder Funds) may incur higher expenses due to the loss of economies of scale. Raising sufficient cash to fund such liquidations could also reduce our ability to take advantage of future investment opportunities and may reduce our liquidity.
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If a Liquidity Event were to be in the form of listing of the Master Fund’s shares on a national securities exchange, the price at which the shares of the Master Fund trade from time to time may be below the Master Fund’s then current Net Asset value.
One of the options that our Board of Trustees may recommend to pursue a Liquidity Event may be a listing of the Master Fund’s shares on a national securities exchange. Such a listing would require the approval of the shareholders of the Feeder Funds voting together as a single class, and, if approved, would result in the liquidation and dissolution of each feeder fund, at which point all shareholders of each feeder fund would become direct shareholders of the Master Fund. We cannot assure you that a trading market will develop for the Master Fund’s shares after the listing or, if one develops, that such trading market will be sustained. In addition, we cannot predict the prices at which the shares of the Master Fund will trade, whether at, above or below NAV. Shares of publicly traded BDCs often trade at a discount to the initial offering price due to initial front end load cost and other related offering expenses. Also, shares of publicly traded BDCs frequently trade at a discount to NAV, and the shares of the Master Fund may also be discounted in the market. This characteristic of publicly traded BDCs is separate and distinct from the risk that our NAV per share may decline and may be greater for investors expecting to sell shares after the Master Fund listing occurs. In addition, if shares of the Master Fund trade below its then current NAV, the Master Fund will generally not be able to sell additional shares of common stock to the public without, among other things, the requisite shareholder approval.
Liquidation Risk.
The Master Fund and the Feeder Funds are in the process of liquidation and dissolution. They are dependent on the Advisor’s expertise in the private credit market and its ability to liquidate the Master Fund’s portfolio in an orderly fashion to maximize value for shareholders and provide shareholders with liquidity. Although the Advisor is conducting an orderly disposal of the Master Fund’s investments, it is possible that, due to a market or political disruption during the liquidation of the Master Fund and the Feeder Funds, the Master Fund may receive depressed prices for its securities below what the Advisor believes it would receive in the absence of any disruption. The reduction in the Master Fund's and the Feeder Fund’s net assets that result from the liquidation may result in increased expense ratios, as certain fixed expenses would be spread across a smaller asset base, and the Master Fund and the Feeder Funds may bear costs and expenses relating to the liquidation, including increased legal fees and costs of insurance.
Preferred stock could be issued with rights and preferences that would adversely affect holders of our Shares.
Under the terms of our Declaration of Trust, our Board of Trustees is authorized to issue preferred stock in one or more series without shareholder approval, which could potentially adversely affect the interests of existing shareholders. The issuance of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect our common stock by making an investment in the Shares less attractive. In addition, the dividends on any preferred stock we issue must be cumulative. Payment of dividends and repayment of the liquidation preference of preferred stock must take preference over any distributions or other payments to our common shareholders, and holders of preferred stock are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference (other than convertible preferred stock that converts into Shares). In addition, under the 1940 Act, participating preferred stock constitutes a "senior security" for purposes of any then-current asset coverage test.
Certain provisions of our Declaration of Trust and actions of the Board of Trustees could deter takeover attempts and have an adverse impact on the value of our Shares.
Our Declaration of Trust, as well as certain statutory and regulatory requirements, contains certain provisions that may have the effect of discouraging a third party from attempting to acquire us. Our Board of Trustees may, without shareholder action, authorize the issuance of shares in one or more classes or series, including shares of preferred stock; and our Board of Trustees may, without shareholder action, amend our Declaration of Trust to increase the number of our shares, of any class or series, that we will have authority to issue. These anti-takeover provisions may inhibit a change of control in circumstances that could give the holders of our Shares the opportunity to realize a premium over the value of our Shares.
The net asset value of our Shares may fluctuate significantly.
The net asset value and liquidity, if any, of the market for our Shares may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
| • | changes in the value of our portfolio of investments and derivative instruments; |
| • | changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs; |
| • | loss of RIC or BDC status; |
| • | distributions that exceed our net investment income and net income as reported according to GAAP; |
| • | changes in earnings or variations in operating results; |
| • | changes in accounting guidelines governing valuation of our investments; |
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| • | any shortfall in revenue or net income, or any increase in losses from levels expected by investors; |
| • | departure of our Advisor or certain of its key personnel; |
| • | general economic trends and other external factors; and |
| • | loss of a major funding source. |
FEDERAL INCOME TAX RISKS
We will be subject to corporate-level income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or if we make investments through taxable subsidiaries.
To maintain RIC tax treatment under the Code, we must meet the following minimum annual distribution, income source, and asset diversification requirements.
The minimum annual distribution requirement for a RIC will be satisfied if we distribute dividends for U.S. federal income tax purposes to our shareholders each taxable year an amount generally at least equal to 90% of the sum of our net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. In addition, a RIC may, in certain cases, satisfy the 90% distribution requirement by distributing dividends relating to a taxable year after the close of such taxable year under the “spillover dividend” provisions of Subchapter M of the Code. Upon satisfying this requirement, we would be taxed on any retained income and/or gains, including any short-term capital gains or long-term capital gains. We must also satisfy an additional annual distribution requirement in respect of each calendar year in order to avoid the imposition of a 4% excise tax on the amount of any under-distribution. Because we may use debt financing, we are subject to (i) an asset coverage ratio requirement under the 1940 Act and may, in the future, be subject to (ii) certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirements. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment, or could be required to retain a portion of our income or gains, and thus become subject to corporate-level income or excise tax.
The income source requirement will be satisfied if we obtain at least 90% of our gross income each taxable year from dividends, interest, gains from the sale of stock or securities or other income derived from the business of investing in stock or securities.
The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year, which may be more difficult to achieve as we liquidate our portfolio. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents (including receivables), U.S. government securities, securities of other RICs and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled (as determined under applicable Code rules) by us and that are engaged in the same or similar or related trades or businesses, or of certain “qualified publicly-traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.
If we fail to qualify for or maintain RIC tax treatment for any reason and are subject to corporate-level 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, the net asset value of our Shares and the total return, if any, earned from an investment in our Shares.
We may invest in certain debt and equity investments through taxable subsidiaries and the net taxable income of these taxable subsidiaries will be subject to federal and state corporate income taxes.
We may invest in certain debt instruments and equity securities through taxable subsidiaries, and the taxable income of these taxable subsidiaries will be subject to federal and state corporate income taxes. We may invest in certain foreign debt instruments and equity securities which could be subject to foreign taxes (such as income tax, withholding and value added taxes).
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We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, since we will likely hold debt instruments that are treated under applicable tax rules as having OID (such as debt instruments with PIK interest provisions, secondary market purchase of debt securities at discount to par, interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), each taxable year we must include a portion of the OID that accrues over the life of the obligation in our taxable income, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in our taxable income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of a loan or are paid in non-cash compensation such as warrants or stock. Furthermore, we may invest in non-U.S. corporations (or other non-U.S. entities treated as corporations for U.S. federal income tax purposes) that could be treated under the Code and U.S. Treasury regulations as “passive foreign investment companies” and/or “controlled foreign corporations.” The rules relating to investment in these types of non-U.S. entities are designed to ensure that U.S. taxpayers are either, in effect, subject to tax currently (or on an accelerated basis with respect to corporate level events) or taxed at increased tax rates at distribution or disposition. In certain circumstances this could require us to recognize income where we do not receive a corresponding payment in cash.
We anticipate that a portion of our income may constitute OID or other income required to be included in taxable income prior to receipt of cash. Further, we may elect to amortize market discount with respect to debt securities acquired in the secondary market and include such amounts in our taxable income in the current taxable year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expense for tax purposes. Because any OID or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we may be required to make a distribution to our shareholders in order to satisfy the annual distribution requirement, even if we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital, make a partial share distribution or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, and choose not to make a qualifying share distribution, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. The resulting corporate-level taxes could substantially reduce our net assets, the amount of income available for distribution, as well as the amount of our distributions and, as such, could have a material adverse effect on us, the net asset value of our Shares and the total return, if any, earned from an investment in our Shares.
Portfolio investments held by us may present special tax issues.
Investments in below-investment grade debt instruments and certain equity securities may present special tax issues for us. U.S. federal income tax rules are not entirely clear about issues such as when a taxpayer may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless debt in equity securities, how payments received on obligations in default should be allocated between principal and interest income, as well as whether exchanges of debt instruments in a bankruptcy or workout context are taxable. Such matters could cause us to recognize taxable income for U.S. federal income tax purposes, even in the absence of cash or economic gain, and require us to make taxable distributions to our shareholders in connection with maintaining our RIC tax status or precluding the imposition of either U.S. federal corporate income or excise taxation. Additionally, because such taxable income may not be matched by corresponding cash received by us, we may be required to borrow money or dispose of other investments to be able to make distributions to our shareholders.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
The Advisor and its Information Security Team, on behalf of the Fund, have established a comprehensive risk management program, which includes processes to identify, assess, and manage cybersecurity risks, including material risks from cybersecurity threats, and to put in place appropriate controls to mitigate these risks and reduce the potential impact to the Fund and its shareholders. The Fund does not currently have any employees and relies upon the Advisor and its Information Security team for the Fund’s day-to-day operations and to establish strategies, policies, and standards for the security of, and operations in, cyberspace.
The Fund depends on and engages various third parties, including suppliers, vendors, and service providers, to operate its business. Through its vendor management program, and on behalf of the Fund, the Advisor oversees and identifies risks from cybersecurity threats associated with the use of third-party service providers. This vendor oversight program includes periodic reviews of the cybersecurity controls of third-party service providers, the frequency of such reviews is generally based on the nature of the the Advisor’s information processed by the vendor and the vendor’s criticality to business operations.
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On behalf of the Fund, the Advisor engages third-party consultants to assess, identify, and/or manage material risks from cybersecurity threats. For example, the Advisor engages third-party consultants to perform audits of its cybersecurity measures and risk management processes, including those applicable to the Fund. The Advisor has also hired qualified independent assessors to review applicable security controls in accordance with the AICPA’s System and Organization Controls assurance programs. Additionally, the Advisor utilizes third-party consultants with specific areas of cybersecurity expertise to review and report on various aspects of its cybersecurity program, including those applicable to the Fund. The results of these consulting engagements are shared with the Fund’s Board of Trustees as part of periodic reports.
The Advisor’s Information Security team has a threat intelligence program which monitors for emerging cyber threats. Taking information gathered from public and private sources, including industry groups such as the U.S. Cybersecurity and Infrastructure Security Agency and the Financial Services Information Sharing and Analysis Center, the organization analyzes such information and incorporates tactics, techniques, and procedures into the program’s security monitoring and detection tools and processes.
The potential impact of risks from cybersecurity threats on the Fund are assessed on an ongoing basis, and how such risks could materially affect the Fund’s business strategy, operational results, and financial condition are regularly evaluated. During the reporting period, the Fund did not identify any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect the Fund, including its day-to-day operations, financial condition, and business strategies. The Advisor’s Enterprise Information Security Team participates in regular testing of applicable incident response processes to ensure appropriate escalation, mitigation, communication and reporting processes are in place. These processes are led by the crisis management team as outlined within the crisis management plan.
The Board provides strategic oversight regarding cybersecurity risks and threats. The Board receives and reviews periodic reports from senior executives in the Advisor’s Information Security Team and the Fund’s management, including the Advisor’s Chief Information Security Officer (“CISO”) and members of the CISO’s staff. These reports contain information about risks from cybersecurity threats, including the results of recent independent reviews of the cybersecurity program, summaries of recent cybersecurity threat intelligence assessments, progress on key initiatives and strategies, and updates on recent regulatory activities, including new regulations and examinations.
The Fund’s management, including the CCO of the Fund, is responsible for assessing and managing material risks from cybersecurity threats. In connection with the Fund’s reliance on the Advisor and the Firms information security team, the CCO relies on the cybersecurity expertise of the Advisor’s CISO and members of the CISO’s staff to assist in assessing and managing the Fund’s material risks from cybersecurity threats. The CISO has over 8 years of experience as a technology and information security leader. The CISO has served as the Advisor’s CISO since 2023. Prior to this role, the CISO was the Deputy CISO for 3 years. The CCO has been responsible for this oversight function as CCO to the Fund for 6 years, and has worked in the financial services industry for over 30 years, during which the CCO has gained expertise in assessing and managing risks applicable to the company.
Management of the Fund is informed about and monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents impacting the Fund, including through the receipt of notifications from service providers and reliance on communications with risk management, legal, information technology, and/or compliance personnel of the Advisor. The Board is also made aware of material cybersecurity incidents which impacted the Fund.
Item 2. Properties.
We do not own any real estate or other physical properties materially important to our operation. We believe that the Advisor's office facilities are suitable and adequate for our business.
Item 3. Legal Proceedings.
As of March 22, 2024, neither we, nor our subsidiary, were subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiary.
From time to time, we, our subsidiary, or Guggenheim may be a party to certain legal proceedings in the ordinary course of, or incidental to the normal course of, our business, including legal proceedings related to the enforcement of our rights under contracts with our portfolio companies. While legal proceedings, lawsuits, claims and regulatory proceedings are subject to many uncertainties and their ultimate outcomes are not predictable with assurance, the results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations.
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Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Information
There is currently no established public trading market for our Shares.
Holders
In December 2014, CCA and an affiliate of Guggenheim each invested, or caused to be invested, $25.0 million in shares of the Master Fund (the "Seed Capital Investments"). The Shares issued by us to the providers of our Seed Capital Investments and the Shares issued by us in a series of Private Offerings possess identical characteristics, rights, priorities and preferences. No Shares have been authorized for issuance under any equity compensation plan. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. As of March 22, 2024, we had four record holders of our Shares consisting of the two initial shareholders that provided Seed Capital Investments and two Feeder Funds.
Unregistered Sale of Equity Securities
None.
Registrant's Purchases of Equity Securities
The Master Fund's Board may amend, suspend or terminate the share repurchase program upon 30 days' notice. In accordance with the Liquidation Plan, the Master Fund’s share repurchase program has been suspended effective March 30, 2021.
Distributions
Distributions to our shareholders are governed by our declaration of trust and the timing and amount of our periodic distributions are determined by our Board of Trustees. Any distributions to our shareholders are declared out of assets legally available for distribution.
For the year ended December 31, 2023, we declared distributions totaling $1.36 per Common Share. See Note 10. Distributions for the history of distributions declared for the years ended December 31, 2023, December 31, 2022 and December 31, 2021.
Because we intend to maintain our qualification as a RIC, we intend to distribute at least 90% of our annual taxable income to our shareholders. To the extent our taxable earnings fall below the total amount of our paid distributions for any given fiscal year, a portion of those paid distributions may be deemed to be a tax return of capital to our shareholders. For the year ended December 31, 2023, the distributions that we paid to our shareholders were estimated to be covered by taxable income and a return of capital for federal income tax purposes . See Note 11. Taxable/Distributable Income.
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Item 6. Selected Financial Data.
The following selected financial data as of and for the years ended December 31, 2023, December 31, 2022, December 31, 2021, December 31, 2020 and December 31, 2019 is derived from our consolidated financial statements. The following selected financial data should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Consolidated Financial Statements and Supplementary Data included elsewhere in this Report:
| (in thousands, except per share amounts) | As of and for the Years Ended December 31, | |||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||
| Consolidated Statements of Operations data: | ||||||||||||||||||||
| Total investment income | $ | 3,635 | $ | 8,958 | $ | 17,222 | $ | 27,957 | $ | 36,107 | ||||||||||
| Operating expenses | ||||||||||||||||||||
| Total expenses before incentive fee waiver and reimbursement of advisor transition costs | 2,138 | 3,811 | 9,273 | 14,397 | 18,041 | |||||||||||||||
| Total expenses | 2,138 | 3,811 | 9,273 | 14,397 | 18,041 | |||||||||||||||
| Net investment income | 1,497 | 5,147 | 7,949 | 13,560 | 18,066 | |||||||||||||||
| Net realized and unrealized gains (losses) | (183 | ) | (6,200 | ) | 13,747 | (6,116 | ) | (9,766 | ) | |||||||||||
| Net increase (decrease) in net assets resulting from operations | $ | 1,314 | $ | (1,053 | ) | $ | 21,696 | $ | 7,444 | $ | 8,300 | |||||||||
| Per share data: | ||||||||||||||||||||
| Net Asset Value per Common Share | $ | 1.09 | $ | 2.39 | $ | 6.15 | $ | 7.56 | $ | 7.78 | ||||||||||
| Net investment income per Common Share outstanding - basic and diluted | $ | 0.06 | $ | 0.20 | $ | 0.31 | $ | 0.50 | $ | 0.63 | ||||||||||
| Earnings (loss) per Common Share - basic and diluted | $ | 0.05 | $ | (0.04 | ) | $ | 0.84 | $ | 0.27 | $ | 0.29 | |||||||||
| Distributions per Common Share | $ | 1.36 | $ | 3.71 | $ | 2.26 | $ | 0.49 | $ | 0.60 | ||||||||||
| Other data: | ||||||||||||||||||||
| Total investment return (1) | 3.57 | % | (1.82 | )% | 11.55 | % | 4.12 | % | 3.55 | % | ||||||||||
| Number of portfolio companies at year end | 10 | 18 | 34 | 75 | 86 | |||||||||||||||
| Purchases of investments | $ | 10,791 | $ | 4,321 | $ | 5,469 | $ | 61,683 | $ | 78,035 | ||||||||||
| Investment sales and paydown activity for the year | $ | 27,684 | $ | 81,685 | $ | 188,145 | $ | 139,621 | $ | 73,391 | ||||||||||
| Consolidated Statements of Assets and Liabilities data: | ||||||||||||||||||||
| Total assets | $ | 28,261 | $ | 62,145 | $ | 159,243 | $ | 329,927 | $ | 384,100 | ||||||||||
| Credit facility payable, net of financing costs | $ | — | $ | — | $ | — | $ | 129,243 | $ | 170,862 | ||||||||||
| Net assets | $ | 27,777 | $ | 61,273 | $ | 157,280 | $ | 198,725 | $ | 211,197 | ||||||||||
| (1) | Total investment return is a measure of total return for shareholders, assuming the purchase of the Master Fund’s Common Shares at the beginning of the period and the reinvestment of all distributions declared during the period. More specifically, total investment return is based on (i) the purchase of Common Shares at net asset value on the first day of the period, (ii) the sale of Common Shares at the net asset value per share on the last day of the period, of (A) all purchased Common Shares plus (B) any fractional Common Shares issued in connection with the reinvestment of distributions and (iii) distributions payable relating to the ownership of Common Shares, if any, on the last day of the period. The total investment return calculation assumes that cash distributions are reinvested concurrent with the issuance of Common Shares at the most recent transaction price on or prior to each distribution payment date. Since there is no public market for the Master Fund’s Common Shares, the terminal sales price per Common Share is assumed to be equal to net asset value per Common Share on the last day of the period. The Master Fund’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(amounts in thousands, except share and per share data, percentages and as otherwise indicated; for example, with the word “million” or otherwise)
The information contained in this Item 7 should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this Report. Capitalized terms used in this Item 7 have the same meaning as in the accompanying consolidated financial statements presented in Item 8. Consolidated Financial Statements and Supplementary Data, unless otherwise defined herein.
Financial and Operating Highlights
The following tables present financial and operating highlights (i) as of December 31, 2023 and December 31, 2022 and (ii) for the years ended December 31, 2023, December 31, 2022 and December 31, 2021:
| As of | ||||||||
| December 31, 2023 | December 31, 2022 | |||||||
| Total assets | $ | 28,261 | $ | 62,145 | ||||
| Adjusted total assets (total assets net of payable for investments purchased) | $ | 28,261 | $ | 62,145 | ||||
| Investments in portfolio companies, at fair value | $ | 23,926 | $ | 40,641 | ||||
| Net assets | $ | 27,777 | $ | 61,273 | ||||
| Net asset value per Common Share | $ | 1.09 | $ | 2.39 | ||||
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Average net assets | $ | 41,432 | $ | 115,491 | $ | 183,380 | ||||||
| Average borrowings | $ | — | $ | — | $ | 73,562 | ||||||
| Cost of investments purchased | $ | 10,791 | $ | 4,321 | $ | 5,469 | ||||||
| Sales of investments | $ | 23,738 | $ | 47,738 | $ | 68,946 | ||||||
| Principal payments | $ | 3,946 | $ | 33,947 | $ | 119,199 | ||||||
| Net investment income | $ | 1,497 | $ | 5,147 | $ | 7,949 | ||||||
| Net realized (losses) | $ | (772 | ) | $ | (178 | ) | $ | (1,907 | ) | |||
| Net change in unrealized appreciation (depreciation) | $ | 589 | $ | (6,022 | ) | $ | 15,654 | |||||
| Net increase (decrease) in net assets resulting from operations | $ | 1,314 | $ | (1,053 | ) | $ | 21,696 | |||||
| Total distributions to shareholders | $ | 34,810 | $ | 94,954 | $ | 57,863 | ||||||
| Net investment income per Common Share - basic and diluted | $ | 0.06 | $ | 0.20 | $ | 0.31 | ||||||
| Earnings (loss) per Common Share - basic and diluted | $ | 0.05 | $ | (0.04 | ) | $ | 0.84 | |||||
| Distributions per Common Share | $ | 1.36 | $ | 3.71 | $ | 2.26 | ||||||
Portfolio and Investment Activity for the Years Ended December 31, 2023 and December 31, 2022
The following table presents our new investment commitments for the years ended December 31, 2023 and December 31, 2022:
| For the Years Ended December 31, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Investment activity segmented by access channel: | Amount | Percentage | Amount | Percentage | ||||||||||||
| Direct originations | $ | 5,399 | 100.0 | % | $ | 2,366 | 100.0 | % | ||||||||
| Total investment commitments entered during the year | $ | 5,399 | 100.0 | % | $ | 2,366 | 100.0 | % | ||||||||
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The following table presents our portfolio company activity for the years ended December 31, 2023 and December 31, 2022:
| For the Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Portfolio companies at beginning of year | 18 | 34 | ||||||
| Number of exited portfolio companies | (8 | ) | (16 | ) | ||||
| Portfolio companies at year end | 10 | 18 | ||||||
| Number of debt investments at year end | 19 | 30 | ||||||
| Number of equity/other investments at year end | 7 | 3 | ||||||
The following table presents a roll-forward of all investment purchase, sale and repayment activity and changes in fair value, within our investment portfolio throughout for the year ended December 31, 2023:
| Balance as of January 1, 2023 | Purchases | Sales and Repayments | Other Changes in Fair Value (1) | Balance as of December 31, 2023 | ||||||||||||||||
| Senior secured loans - first lien | $ | 39,028 | $ | 6,077 | $ | (18,342 | ) | $ | (3,433 | ) | $ | 23,330 | ||||||||
| Senior secured loans - second lien | 1,126 | 64 | (8,964 | ) | 7,774 | — | ||||||||||||||
| Senior secured bonds | 102 | — | (62 | ) | (19 | ) | 21 | |||||||||||||
| Total senior debt | $ | 40,256 | $ | 6,141 | $ | (27,368 | ) | $ | 4,322 | $ | 23,351 | |||||||||
| Equity and other | 385 | 4,650 | (317 | ) | (4,143 | ) | 575 | |||||||||||||
| Total | $ | 40,641 | $ | 10,791 | $ | (27,685 | ) | $ | 179 | $ | 23,926 | |||||||||
| (1) | Other changes in fair value includes changes resulting from realized and unrealized gains and losses, amortization/accretion, increases from PIK income and restructurings. |
The following table presents selected information regarding our investment portfolio as of December 31, 2023 and December 31, 2022:
| As of | |||||
| December 31, 2023 | December 31, 2022 | ||||
| Weighted average purchase price of debt investments (1) | 86.5 | % | 89.6 | % | |
| Weighted average duration of debt investments (2) | 0.03 | years | 0.03 | years | |
| Debt investments on non-accrual status as a percentage of amortized cost of total debt investments | 5.5 | % | 3.1 | % | |
| Debt investments on non-accrual status as a percentage of fair value of total debt investments | 0.1 | % | 0.3 | % | |
| Number of debt investments on non-accrual status | 1 | 1 | |||
| Floating interest rate debt investments: | |||||
| Percent of debt portfolio (3) | 99.9 | % | 99.7 | % | |
| Percent of floating rate debt investments with interest rate floors (3) | 93.9 | % | 99.8 | % | |
| Weighted average interest rate floor | 1.0 | % | 4.4 | % | |
| Weighted average coupon spread to base interest rate | 578 | bps | 566 | bps | |
| 3-month SOFR | 536 | bps | 362 | bps | |
| Fixed interest rate debt investments: | |||||
| Percent of debt portfolio (3) | 0.1 | % | 0.3 | % | |
| Weighted average years to maturity | 2.1 | years | 0.8 | years | |
| Weighted average effective yields | |||||
| Senior secured loans - first lien (4) | 14.0 | % | 11.5 | % | |
| Senior secured loans - second lien (4) | — | % | 16.8 | % | |
| Total debt investments (4) | 13.3 | % | 11.7 | % | |
| Total investments (5) | 11.3 | % | 11.7 | % | |
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| (1) | Percent is calculated as a percentage of the par value of debt investments. |
| (2) | Duration is a measure of a debt investment's price sensitivity to 100 basis points ("bps") change in interest rates. It represents an inverse relationship between price and the change in interest rates. For example, if a bond has a duration of 5.0 years and interest rates increase by 100 bps, then the bond price is expected to decrease by 5%. Weighted average duration is calculated using weights based on amortized cost. |
| (3) | Percent is calculated as a percentage of the fair value of total debt investments. |
| (4) | Weighted average effective yield by investment type is calculated as the effective yield of each investment and weighted by its amortized cost as compared to the aggregate amortized cost of all investments of that investment type. Effective yield is the return earned on an investment net of any discount, premium or issuance costs. The total debt portfolio yield is calculated before considering the impact of leverage or any operating expenses. |
| (5) | The total investment portfolio yield is calculated before considering the impact of leverage or any operating expenses, and includes all income generating investments, non-income generating investments and investments on non-accrual status. |
All of our floating interest rate debt investments have base interest rate reset frequencies of twelve months or less, with the majority resetting at least quarterly. SOFR ranged between 5.34% for the 1 Month SOFR to 5.36% for the 3 Month SOFR on December 31, 2023. Base interest rate resets for floating interest rate debt investments will only result in increases in interest income when the base interest rate exceeds the associated interest rate floor (e.g., 1.0%).
The following table presents the maturity schedule of our debt investments, excluding unfunded commitments, based on their principal amount as of December 31, 2023 and December 31, 2022:
| December 31, 2023 | December 31, 2022 | ||||||||||||||||
| Maturity Year | Principal Amount | Percentage of Portfolio | Principal Amount | Percentage of Portfolio | |||||||||||||
| 2023 | $ | 4,291 | 14.2 | % | $ | 8,386 | 15.7 | % | |||||||||
| 2024 | 331 | 1.1 | 1,853 | 3.5 | |||||||||||||
| 2025 | 4,937 | 16.3 | 21,025 | 39.5 | |||||||||||||
| 2026 | 20,724 | 68.4 | 21,985 | 41.3 | |||||||||||||
| Total | $ | 30,283 | 100.0 | % | $ | 53,249 | 100.0 | % | |||||||||
Results of Operations
Operating results for the years ended December 31, 2023, December 31, 2022 and December 31, 2021 were as follows:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Total investment income | $ | 3,635 | $ | 8,958 | $ | 17,222 | ||||||
| Total expenses | 2,138 | 3,811 | 9,273 | |||||||||
| Net investment income | 1,497 | 5,147 | 7,949 | |||||||||
| Net realized losses | (772 | ) | (178 | ) | (1,907 | ) | ||||||
| Net change in unrealized appreciation (depreciation) | 589 | (6,022 | ) | 15,654 | ||||||||
| Net increase (decrease) in net assets resulting from operations | $ | 1,314 | $ | (1,053 | ) | $ | 21,696 | |||||
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Investment Income
Interest and dividend income consisted of the following components for the years ended December 31, 2023, December 31, 2022 and December 31, 2021:
| For the Years Ended December 31, | Variances | |||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 vs 2022 | 2022 vs 2021 | ||||||||||||||||
| Interest income on debt securities: | ||||||||||||||||||||
| Cash interest | $ | 3,206 | $ | 7,718 | $ | 15,557 | $ | (4,512 | ) | $ | (7,839 | ) | ||||||||
| PIK interest | 262 | 132 | 340 | 130 | (208 | ) | ||||||||||||||
| Net accretion/amortization of discounts/premiums | 143 | 357 | 904 | (214 | ) | (547 | ) | |||||||||||||
| Total interest on debt securities | 3,611 | 8,207 | 16,801 | (4,596 | ) | (8,594 | ) | |||||||||||||
| PIK dividend | — | 179 | 169 | (179 | ) | 10 | ||||||||||||||
| Fee income | 21 | — | — | 21 | — | |||||||||||||||
| Total interest and dividend income | $ | 3,632 | $ | 8,386 | $ | 16,970 | $ | (4,754 | ) | $ | (8,584 | ) | ||||||||
| Average Investments at cost | $ | 35,387 | $ | 84,497 | $ | 193,681 | $ | (49,110 | ) | $ | (109,184 | ) | ||||||||
| Average Income Generating Investments at cost (1) | $ | 29,726 | $ | 82,664 | $ | 186,328 | (52,938 | ) | (103,664 | ) | ||||||||||
| Income return (2) | 12.2 | % | 10.1 | % | 9.1 | % | ||||||||||||||
| (1) | Income Generating Investments pertains to investments with stated interest rate or preferred returns and includes investments on non-accrual. |
| (2) | Income return is calculated using the total interest and dividend income over the average income generating investments at cost for the period presented. |
The decrease in interest and dividend income was mainly driven by the decrease in the size of our income generating investments. As of December 31, 2023, December 31, 2022, and December 31, 2021, yield on debt investments at cost was 11.3%, 11.7% and 7.9%, respectively. PIK dividend pertains to dividends on preferred stock investments.
Our fee income is comprised of the following fee classifications and is considered non-recurring income for the years ended December 31, 2023, December 31, 2022 and December 31, 2021:
| For the Years Ended December 31, | Variances | |||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 vs 2022 | 2022 vs 2021 | ||||||||||||||||
| Administrative agency fees | $ | 7 | $ | 10 | $ | 25 | $ | (3 | ) | $ | (15 | ) | ||||||||
| Amendment fees and other | 14 | 562 | 227 | (548 | ) | 335 | ||||||||||||||
| Total fee income | $ | 21 | $ | 572 | $ | 252 | $ | (551 | ) | $ | 320 | |||||||||
Operating Expenses
Our operating expenses can be categorized into fixed operating expenses, variable operating expenses and performance-dependent expenses. Fixed operating expenses are generally static period over period. Variable expenses are calculated based on fund metrics such as total assets, net assets or total borrowings. Performance-dependent expenses fluctuate independent of our size.
| 39 |
The table below shows a breakdown of our operating expenses for the years ended December 31, 2023, December 31, 2022 and December 31, 2021:
| For the Years Ended December 31, | Variances | |||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 vs 2022 | 2022 vs 2021 | ||||||||||||||||
| Fixed operating expenses: | ||||||||||||||||||||
| Related party reimbursements (1) | 364 | 436 | $ | 352 | $ | (72 | ) | $ | 84 | |||||||||||
| Trustees fees | 280 | 293 | 285 | (13 | ) | 8 | ||||||||||||||
| Professional services fees (2) | 374 | 595 | 740 | (221 | ) | (145 | ) | |||||||||||||
| Other expenses | 302 | 255 | 237 | 47 | 18 | |||||||||||||||
| Total fixed operating expenses | 1,320 | 1,579 | 1,614 | (259 | ) | (35 | ) | |||||||||||||
| Variable operating expenses: | ||||||||||||||||||||
| Interest expense (3) | — | — | 2,880 | — | (2,880 | ) | ||||||||||||||
| Administrative services (3) | 65 | 139 | 166 | (74 | ) | (27 | ) | |||||||||||||
| Management fee | 726 | 2,047 | 4,526 | (1,321 | ) | (2,479 | ) | |||||||||||||
| Custody services | 27 | 46 | 87 | (19 | ) | (41 | ) | |||||||||||||
| Total variable operating expenses | 818 | 2,232 | 7,659 | (1,414 | ) | (5,427 | ) | |||||||||||||
| Total expenses before incentive fee waiver and advisor transition costs reimbursement | $ | 2,138 | $ | 3,811 | $ | 9,273 | $ | (1,673 | ) | $ | (5,462 | ) | ||||||||
| (1) | Related party reimbursements decreased due to an decrease in resource allocation to Master Fund. |
| (2) | Professional services fees includes the expenses for third party service providers such as internal and independent auditors, tax return preparer and tax consultant, third-party investment valuers, and fund legal counsel. |
| (3) | Administrative services fees include the expenses for third party service providers such as fund accountant, fund sub-administrator, and independent pricing vendors. |
The decrease in total expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to the decrease in professional service fees and management fees. The decrease in total expenses for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily due to the decrease in interest expense associated with the Hamilton Credit Facility resulting from a decrease in average borrowings. For the years ended December 31, 2023, December 31, 2022 and December 31, 2021, total borrowing costs were —%, —% and 3.86%, respectively. For the years ended December 31, 2023, December 31, 2022 and December 31, 2021, average borrowings for the period were $—, $— and $73,562, respectively.
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Net Realized Gains (Losses)
For the year ended December 31, 2023, we had dispositions and principal repayments of $27.7 million, resulting in net realized losses of $(0.9) million. For the year ended December 31, 2023, we had realized gains from our foreign currency forward contracts of $101 thousand primarily due to the movement of the U.S. dollar against the British pound.
For the year ended December 31, 2022, we had dispositions and principal repayments of $81.7 million, resulting in net realized losses of $(0.3) million. For the year ended December 31, 2022, we had realized gains from our foreign currency forward contracts of $14 thousand primarily due the movement of the U.S. dollar against the British pound. For the year ended December 31, 2021, we had disposition and principal repayments of $188.1 million, resulting in net realized losses of $(1.6) million. For the year ended December 31, 2021, we had realized losses from our foreign currency forward contracts of $(0.3) million primarily due to the movement of the U.S. dollar against the British pound.
For the years ended December 31, 2023, December 31, 2022 and December 31, 2021, the components of total realized gains (losses) were comprised of the following:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Investments | $ | (888 | ) | $ | (335 | ) | $ | (1,618 | ) | |||
| Foreign currency forward contracts | 101 | 14 | (287 | ) | ||||||||
| Foreign currency transactions | 15 | 143 | (2 | ) | ||||||||
| Net realized (losses) | $ | (772 | ) | $ | (178 | ) | $ | (1,907 | ) | |||
Changes in Unrealized Appreciation (Depreciation)
For the years ended December 31, 2023, December 31, 2022 and December 31, 2021, the components of total net change in unrealized appreciation (depreciation) were comprised of the following:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Investments | $ | 662 | $ | (6,373 | ) | $ | 15,167 | |||||
| Foreign currency forward contracts | (73 | ) | 353 | 488 | ||||||||
| Foreign currency transactions | — | (2 | ) | (1 | ) | |||||||
| Net change in unrealized appreciation (depreciation) | $ | 589 | $ | (6,022 | ) | $ | 15,654 | |||||
For the years ended December 31, 2023, December 31, 2022 and December 31, 2021, the components of total net change in unrealized appreciation and depreciation on (i) all investments and (ii) investments classified as Level 3 in the valuation hierarchy were comprised of the following:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Unrealized appreciation on all investments (1) | $ | 7,557 | $ | 6,095 | $ | 23,713 | ||||||
| Unrealized depreciation on all investments (1) | (6,895 | ) | (12,468 | ) | (8,546 | ) | ||||||
| Total net change in unrealized appreciation (depreciation) on all investments | $ | 662 | $ | (6,373 | ) | $ | 15,167 | |||||
| Unrealized appreciation on Level 3 investments only (1) | $ | 571 | $ | 2,962 | $ | 14,066 | ||||||
| Unrealized depreciation on Level 3 investments only (1) | (5,622 | ) | (5,950 | ) | (3,900 | ) | ||||||
| Total net change in unrealized appreciation (depreciation) on Level 3 investments only | $ | (5,051 | ) | $ | (2,988 | ) | $ | 10,166 | ||||
| (1) | Amounts are net of any reclassification of realized gains or losses on investments. |
Annual Investment Returns and Total Returns Since Commencement
Our initial investors, who each invested at $9.00 per share, have seen a cumulative 43.36% increase in the value of their investment, or an annualized return of 4.06%, assuming reinvestment of distributions.
| 41 |
The table below presents returns for our shareholders for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, and the period from commencement to December 31, 2023. Our performance changes over time and currently may be different than that shown below. Past performance is no guarantee of future results. The returns for shareholders of the affiliated Feeder Funds are different from the returns for our direct shareholders.
| Total Investment Return-Net Asset Value(1) | ||||||||||||||||||||||
| For the Years Ended December 31, | Since Commencement | |||||||||||||||||||||
| Company | Date Operations Commenced (2) | 2023 | 2022 | 2021 | Cumulative | Annualized | ||||||||||||||||
| Guggenheim Credit Income Fund | 12/19/2014 | 3.57 | % | (1.82 | )% | 11.55 | % | 43.36 | % | 4.06 | % | |||||||||||
| (1) | Total investment return is based on (i) the purchase of Common Shares at net asset value on the first day of the period, (ii) the sale of Common Shares at the net asset value per share on the last day of the period, of (A) all purchased Common Shares plus (B) any fractional Common Shares issued in connection with the reinvestment of distributions and (iii) distributions payable relating to the ownership of Common Shares, if any, on the last day of the period. The total investment return calculation assumes that cash distributions are reinvested concurrent with the issuance of Common Shares at the most recent transaction price on or prior to each distribution payment date. Since there is no public market for our Common Shares, then the terminal sales price per common share is assumed to be equal to net asset value per common share on the last day of the period. |
| (2) | Commencement of operations represents the date that we sold our initial Common Shares. |
Off-Balance Sheet Arrangements
Unfunded Commitments
Unfunded commitments to provide funds to portfolio companies are not recorded on our consolidated statements of assets and liabilities. Our unfunded commitments may be significant from time to time. Unfunded commitments may expire without being drawn upon and the total commitment amount does not necessarily represent future cash requirements. As of December 31, 2023, we had two unfunded commitments totaling $0.3 million as compared to six unfunded commitments totaling $0.6 million as of December 31, 2022. See Note 8. Commitments and Contingencies for specific identification of the unfunded commitments. We believe we maintain sufficient liquidity in the form of cash, receivables and borrowing capacity to fund these unfunded commitments should the need arise. See Financial Condition, Liquidity and Capital Resources.
Financial Condition, Liquidity and Capital Resources
Our primary sources of cash and cash equivalents may include: (i) the sale of our Shares to affiliated feeder funds, (ii) borrowings under various financing arrangements, (iii) cash flows from interest, dividends and transaction fees earned from investment in portfolio companies and (iv) principal repayments and sale proceeds from our investments.
Our primary uses of cash and cash equivalents may include: (i) investments in portfolio companies, (ii) payments of operating expenses, (iii) interest payments on, and repayment of, borrowings, (iv) cash distributions to our shareholders and (v) periodic repurchases of our Shares pursuant to our share repurchase program.
Liquidity
Operating liquidity is our ability to meet our short term liquidity needs. The following table presents our operating liquidity position as of December 31, 2023 and December 31, 2022:
| As of | ||||||||
| December 31, 2023 | December 31, 2022 | |||||||
| Cash and cash equivalents | $ | 3,688 | $ | 8,956 | ||||
| Principal receivable | 51 | 11,499 | ||||||
| Unfunded investment commitments | (270 | ) | (625 | ) | ||||
| Other net working capital (1) | (169 | ) | (118 | ) | ||||
| Total operational liquidity | $ | 3,300 | $ | 19,712 | ||||
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| (1) | Other net working capital is the sum of collateral deposits/payable for foreign currency forward contracts, interest and dividend income receivable and receivable from related parties less accrued management fee, payable to related parties, distributions payable, and accounts payable, accrued expenses and other liabilities. |
Capital Resources
We may from time to time enter into additional credit facilities and borrowing arrangements to increase the amount of our borrowings as our equity capital foundation increases. Accordingly, we cannot predict with certainty what terms any such financing would have or the costs we would incur in connection with any such financing arrangements. We are currently required to maintain a minimum asset coverage ratio (total assets-to-senior securities) of 200% under the 1940 Act.
The table below summarizes certain financing obligations and Feeder Fund liquidity targets that are expected to have an impact on our liquidity and cash flow in specified future interval periods:
| December 31, 2023 | ||||||||||||||||||||
| Total | < 1 year | 1-3 years | 3-5 years | > 5 years | ||||||||||||||||
| Liquidation of Feeder Funds' Investments: | ||||||||||||||||||||
| GCIF 2016T (1) | $ | 18,517 | $ | 18,517 | $ | — | $ | — | $ | — | ||||||||||
| GCIF 2019 (1) | 5,477 | 5,477 | — | — | ||||||||||||||||
| Total Liquidation of Feeder Funds' Investments | $ | 23,994 | $ | 23,994 | $ | — | $ | — | $ | — | ||||||||||
| (1) | The Feeder Fund investment liquidity amounts are based on the net asset value of each Feeder Fund's ownership interest in the Master Fund as of December 31, 2023. In accordance with the Liquidation Plans, the Board has declared multiple liquidating distributions. These distributions have been substantially composed of return of capital and have decreased the net asset value of the Master Fund and Feeder Funds. As such, the value on shareholder’s investment statements has decreased as liquidating distributions have been paid. |
As of December 31, 2023, GCIF 2016T owned 66.7% of our outstanding Common Shares and GCIF 2019 owned 19.7% of our outstanding Common Shares. The two initial investors accounted for the remaining 13.6% of our outstanding Common Shares.
Critical Accounting Policies
Valuation of Investments
Our investments consist primarily of investments in senior and subordinated debt of private middle market U.S. companies and are presented in our consolidated financial statements at fair value. See Note 3. Investments for more information on our investments. As described more fully in Note 2. Significant Accounting Policies and Note 5. Fair Value of Financial Instruments, a valuation hierarchy based on the level of independent, objective evidence available regarding value is used to measure the fair value of our investments. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to our portfolio investments for which market quotations are not readily available, our Board of Trustees is responsible for determining in good faith the fair value of our portfolio investments in accordance with, and through the consistent application of, the valuation policy and procedures approved by our Board of Trustees, based on, among other things, the input of Guggenheim and any independent third-party valuation firms.
We utilize valuation techniques that use unobservable inputs and assumptions in determining the fair value of our investments classified as Level 3 within the valuation hierarchy. For senior debt and subordinated debt classified as Level 3 fair value investments, we initially value the investment at its initial transaction price and subsequently value the investment using (i) market data for similar instruments (e.g., recent transactions or indicative broker quotes) and/or (ii) valuation models. Valuation models are based on EBITDA multiples to determine enterprise value and debt multiple ratios where the key inputs are based on relative value analysis of similar credit investments issued by similar portfolio companies. The valuation techniques used by us for other types of assets that are classified as Level 3 investments are described in Note 2. Significant Accounting Policies. The unobservable inputs and assumptions may differ by asset and in the application of our valuation methodologies. The reported fair value estimates could vary materially if we had chosen to incorporate different unobservable inputs and assumptions.
| 43 |
We and our Board of Trustees conduct our fair value determination process on a quarterly basis and any other time when a material decision regarding the fair value of our portfolio investments is required, including in connection with ensuring our compliance with the 1940 Act's requirements regarding the price at which we issue our Shares. A determination of fair value involves subjective judgments and estimates. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of these portfolio investments may differ materially from the values that would have been determined had a readily available market value existed for such investments. Further, such investments are generally less liquid than exchange-traded securities. If we were required to liquidate a portfolio investment that does not have a readily available market value in a forced or liquidation sale, we could realize significantly less than the fair value recorded by us.
The table below presents information on investments classified as Level 3 according to the valuation hierarchy within the investment portfolio on December 31, 2023 and December 31, 2022:
| As of | ||||||||
| December 31, 2023 | December 31, 2022 | |||||||
| Investments classified as Level 3 fair value | $ | 20,630 | $ | 25,636 | ||||
| Total investments at fair value | $ | 23,926 | $ | 40,641 | ||||
| Total assets | $ | 28,261 | $ | 62,145 | ||||
| Percentage of investment portfolio classified as Level 3 fair value | 86.2 | % | 63.1 | % | ||||
| Percentage of total assets classified as Level 3 fair value | 73.0 | % | 41.3 | % | ||||
The ranges of unobservable inputs used in the fair value measurement of our investments classified as Level 3 fair valued as of December 31, 2023 and December 31, 2022 are presented in Note 5. Fair Value of Financial Instruments, as well as the directional impact to the investments' valuation from an increase or decrease in the associated unobservable inputs.
In addition to impacting the estimated fair value recorded for our investments on our consolidated statements of assets and liabilities, had we used different key unobservable inputs to determine the estimated fair value of our investments, amounts recorded in our consolidated statements of operations, including the net change in unrealized appreciation and depreciation on investments, management and performance-based incentive fees would also be impacted. The table below outlines the impact on our results of a 5% increase in the fair value of our Level 3 investments for the periods ended December 31, 2023 and December 31, 2022:
| December 31, 2023 | December 31, 2022 | |||||||
| Fair Value of Level 3 Investments at Year End | $ | 20,630 | $ | 25,636 | ||||
| Fair Value Assuming a 5% Increase in Value | 21,662 | 26,918 | ||||||
| Increase in unrealized appreciation | 1,032 | 1,282 | ||||||
| (Increase) in management fees (1) | (18 | ) | (22 | ) | ||||
| (Increase) in performance based incentive fee (2) | (206 | ) | (256 | ) | ||||
| Increase in net assets resulting from operations | $ | 808 | $ | 1,004 | ||||
| Weighted average Common Shares outstanding (basic and diluted) | 25,594,125 | 25,594,125 | ||||||
| Common Shares outstanding at the end of the Year | 25,594,125 | 25,594,125 | ||||||
| Increase in earnings per Common Share | $ | 0.03 | $ | 0.04 | ||||
| Increase in net asset value per Common Share | $ | 0.03 | $ | 0.04 | ||||
| (1) | Increases in management fees for the periods ended December 31, 2023 and December 31, 2022 represent only 12 months' worth of the change to the Master Fund's management fees. |
| (2) | Increase in performance-based incentive fee is calculated as 20% of the increase in unrealized appreciation. |
Investment Advisory Fees
See Note 2. Significant Accounting Policies.
Recent Accounting Standards
See Note 2. Significant Accounting Policies.
| 44 |
Contractual Obligations
We have entered into certain agreements under which we have material future commitments.
The Master Fund is a party to an Investment Advisory Agreement with Guggenheim, pursuant to which the Master Fund agreed to pay Guggenheim an investment advisory fee. See Note 6. Related Party Agreements and Transactions for a more detailed description of the Investment Advisory Agreement. If the Investment Advisory Agreement is terminated, our costs may increase under any replacement investment advisory agreement that we subsequently enter into. We would also likely incur expenses in identifying and evaluating candidates to provide the services we expect to receive under any successor investment advisory agreement and administrative services agreement. Any successor investment advisory agreement would also be subject to approval by our shareholders.
In 2015, Hamilton, a wholly-owned, special purpose financing subsidiary of the Master Fund, initially entered into the Hamilton Credit Facility with JPMorgan Chase Bank, National Association, as administrative agent, each of the lenders from time to time party thereto, and U.S. Bank National Association, as collateral agent, collateral administrator and securities intermediary. On June 29, 2018, the Hamilton Credit facility was amended to extend the term from December 17, 2019 to December 29, 2022 and to extend the draw-down term from December 17, 2018 to December 29, 2021 among other things. On November 29, 2021, Hamilton repaid in full all outstanding amounts due in connection with, and terminated all commitments under, the Hamilton Credit Facility. See Note 7. Borrowings.
Related Party Transactions
We have entered into agreements with Guggenheim whereby we agreed to pay certain fees to, and reimburse certain expenses, of Guggenheim for investment advisory services and investment-related and administrative costs incurred on our behalf. See Note 6. Related Party Agreements and Transactions for a discussion of related party transactions, investment advisory fees and reimbursement of administrative services expenses.
Organization and Offering Expenses and Reimbursement Arrangements with Guggenheim
See Note 6. Related Party Agreements and Transactions.
Reimbursement for Guggenheim Administrative Services Expenses
Guggenheim has provided administrative services to the Master Fund since September 11, 2017. We will reimburse Guggenheim, for their expenses in connection with the provision of administrative services to us. However, such reimbursement will be made at an amount equal to the lower of their actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. Also, such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable allocation methods. We do not reimburse Guggenheim for rent, depreciation, utilities, capital equipment or other administrative items allocated to controlling persons of Guggenheim.
Co-Investment Transactions Exemptive Relief
The Master Fund was granted an SEC exemptive order which grants the Master Fund exemptive relief permitting the Master Fund, subject to the satisfaction of specific conditions and requirements, to co-invest in privately negotiated investment transactions with certain affiliates of Guggenheim.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are subject to financial market risks, including changes in interest rates. As of December 31, 2023, 99.9% of our debt investments (97.5% of our total investments), or $23.3 million measured at fair value, are subject to floating interest rates. A rise in the general level of interest rates can be expected to lead to (i) higher interest income from our floating rate debt investments and (ii) value declines for fixed interest rate investments we may hold. Since a majority of our investments consist of floating rate investments, an increase in interest rates could also make it more difficult for borrowers to repay their loans, and a rise in interest rates may also make it easier for Guggenheim to meet or exceed the quarterly threshold for performance-based incentive fees as described in Note 6. Related Party Agreements and Transactions.
| 45 |
The following table presents the approximate annualized increase (decrease) in (i) interest income from our investment portfolio, (ii) interest expense associated with our floating rate credit facility and (iii) the net increase or decrease of interest-related income and expense, directly resulting from hypothetical changes in base interest rates (e.g., SOFR), assuming no changes in the composition of our investment portfolio and capital structure as of December 31, 2023.
Basis Points (bps) Increase | Annualized Interest Income Increase (Decrease) | Annualized Net Increase (Decrease) | Net Increase (Decrease) per Share | |||||||||
| -50 bps | $ | (4 | ) | $ | (4 | ) | $ | — | ||||
| +50 bps | 74 | 74 | — | |||||||||
| +100 bps | 155 | 155 | 0.01 | |||||||||
| +150 bps | 236 | 236 | 0.01 | |||||||||
| +200 bps | 316 | 316 | 0.01 | |||||||||
We regularly measure our exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates.
| 46 |
Item 8. Consolidated Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of Guggenheim Credit Income Fund
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of assets and liabilities of Guggenheim Credit Income Fund and its subsidiary (the “Master Fund”), including the consolidated schedules of investments, as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Master Fund at December 31, 2023 and 2022, and the results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Master Fund’s management. Our responsibility is to express an opinion on the Master Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Master Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Master Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Master Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2023 and 2022, by correspondence with the custodian and others. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
A member firm of Ernst & Young Global Limited
| 47 |
| Valuation of investments using significant unobservable inputs and assumptions | |
| Description of the Matter |
At December 31, 2023, the fair value of the Master Fund’s investments categorized as Level 3 investments within the fair value hierarchy (Level 3 investments) totaled $20.6 million. The Master Fund reports changes in fair value of investments as net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations. As further described in Notes 2 and 5 to the consolidated financial statements, management of the Master Fund under the oversight of the Board of Trustees determines the fair value of the Master Fund’s Level 3 investments using valuation techniques such as market or income approach based models, recent transactions or by obtaining indicative broker quotes. These valuation techniques require the use of significant unobservable inputs and assumptions, as disclosed in Note 5, which may include yield rates, discount rates, market multiples of comparable companies, recovery rates, recent transactions or indicative broker quotes. Auditing the fair value of the Master Fund’s Level 3 investments is complex, as the unobservable inputs and assumptions used by management are highly judgmental and could have a significant effect on the fair value measurements of such investments. |
| How We Addressed the Matter in Our Audit |
Our audit procedures included, among others, evaluating the Master Fund’s valuation techniques, testing the significant unobservable inputs and assumptions used by management in determining the fair value of the Master Fund’s Level 3 investments, and testing the mathematical accuracy of the Master Fund’s valuation calculations. For a sample of the Master Fund’s Level 3 investments, with the support of our valuation specialists, we independently developed fair value estimates and compared them to the Master Fund’s estimates. We developed our independent fair value estimates by using borrower financial information, which we compared to agreements or underlying source documents provided to the Master Fund by the borrowers, and available market information from third-party sources, such as market spreads and discount rates, and market multiples. We reviewed the information considered by management relating to valuation including recent transactions and indicative broker quotes. We searched for and evaluated information that corroborated or contradicted the Master Fund's valuations or significant inputs into valuations. We also evaluated recent transactions and subsequent event transactions and considered whether they corroborated or contradicted the Master Fund’s year-end valuations. |
/s/
We have served as the auditor of one or more investment companies in the Guggenheim Credit Income Funds business development company group since 2018.
March 22, 2024
A member firm of Ernst & Young Global Limited
| 48 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except share and per share data)
| December 31, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Investments at fair value (amortized cost of $ | $ | $ | ||||||
| Cash and cash equivalents | ||||||||
| Interest and dividend income receivable | ||||||||
| Principal receivable | ||||||||
| Receivable from related parties | ||||||||
| Unrealized appreciation of foreign currency forward contracts | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Accrued management fee | $ | $ | ||||||
| Payable to related parties | ||||||||
| Accrued professional services fees | ||||||||
| Accounts payable, accrued expenses and other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8. Commitments and Contingencies) | ||||||||
| Net Assets | $ | $ | ||||||
| Components of Net Assets: | ||||||||
| Common shares, $ par value, shares authorized, and shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | $ | $ | ||||||
| Paid-in-capital in excess of par value | ||||||||
| Accumulated loss, net of distributions | ( | ) | ( | ) | ||||
| Net assets | $ | $ | ||||||
| Net asset value per Common Share (NAV) | $ | $ | ||||||
See Notes to Consolidated Financial Statements.
| 49 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Investment Income | ||||||||||||
| Interest income | $ | $ | $ | |||||||||
| PIK interest income | ||||||||||||
| Dividend income | ||||||||||||
| Fee income | ||||||||||||
| Total investment income | ||||||||||||
| Operating Expenses | ||||||||||||
| Interest expense and other financing costs | ||||||||||||
| Management fee | ||||||||||||
| Administrative services | ||||||||||||
| Custody services | ||||||||||||
| Trustees fees | ||||||||||||
| Related party reimbursements | ||||||||||||
| Professional services fees | ||||||||||||
| Other expenses | ||||||||||||
| Total expenses | ||||||||||||
| Net investment income | ||||||||||||
| Realized and unrealized gains (losses): | ||||||||||||
| Net realized gains (losses) on: | ||||||||||||
| Investments | ( | ) | ( | ) | ( | ) | ||||||
| Foreign currency forward contracts | ( | ) | ||||||||||
| Foreign currency transactions | ( | ) | ||||||||||
| Net realized losses | ( | ) | ( | ) | ( | ) | ||||||
| Net change in unrealized appreciation (depreciation) on: | ||||||||||||
| Investments | ( | ) | ||||||||||
| Foreign currency forward contracts | ( | ) | ||||||||||
| Foreign currency transactions | ( | ) | ( | ) | ||||||||
| Net change in unrealized appreciation (depreciation) | ( | ) | ||||||||||
| Net realized and unrealized gains (losses) | ( | ) | ( | ) | ||||||||
| Net increase (decrease) in net assets resulting from operations | $ | $ | ( | ) | $ | |||||||
| Per Common Share information: | ||||||||||||
| Net investment income per Common Share outstanding - basic and diluted | $ | $ | $ | |||||||||
| Earnings (loss) per Common Share outstanding - basic and diluted | $ | $ | ) | $ | ||||||||
| Weighted average Common Shares outstanding - basic and diluted | ||||||||||||
| Distribution per Common Share outstanding | $ | $ | $ | |||||||||
See Notes to Consolidated Financial Statements.
| 50 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands, except share and per share data)
| Common Shares | Paid-in-Capital in Excess of Par | Accumulated Earnings (Loss), net | ||||||||||||||||||
| Shares | Amount | Value | of Distributions | Total | ||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Operations: | ||||||||||||||||||||
| Net investment income | — | |||||||||||||||||||
| Net realized losses | — | ( | ) | ( | ) | |||||||||||||||
| Net change in unrealized appreciation | — | |||||||||||||||||||
| Net increase in net assets resulting from operations | — | |||||||||||||||||||
| Shareholder distributions: | ||||||||||||||||||||
| Distributions from earnings | — | ( | ) | ( | ) | |||||||||||||||
| Distributions representing a return of capital | — | ( | ) | ( | ) | |||||||||||||||
| Net decrease in net assets resulting from shareholder distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||
| Capital share transactions: | ||||||||||||||||||||
| Repurchase of Common Shares | ( | ) | (1) | ( | ) | ( | ) | |||||||||||||
| Net decrease in net assets resulting from capital share transactions | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net increase (decrease) for the year | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Operations: | ||||||||||||||||||||
| Net investment income | — | |||||||||||||||||||
| Net realized losses | — | ( | ) | ( | ) | |||||||||||||||
| Net change in unrealized appreciation | — | ( | ) | ( | ) | |||||||||||||||
| Net decrease in net assets resulting from operations | — | ( | ) | ( | ) | |||||||||||||||
| Shareholder distributions: | ||||||||||||||||||||
| Distributions from earnings | — | ( | ) | ( | ) | |||||||||||||||
| Distributions representing a return of capital | — | ( | ) | ( | ) | |||||||||||||||
| Net decrease in net assets resulting from shareholder distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||
| Reclassifications of permanent book-to-tax differences | — | ( | ) | |||||||||||||||||
| Net decrease for the year | — | ( | ) | ( | ) | ( | ) | |||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Operations: | ||||||||||||||||||||
| Net investment income | — | |||||||||||||||||||
| Net realized losses | — | ( | ) | ( | ) | |||||||||||||||
| Net change in unrealized appreciation | — | |||||||||||||||||||
| Net increase in net assets resulting from operations | — | |||||||||||||||||||
| Shareholder distributions: | ||||||||||||||||||||
| Distributions from earnings | — | ( | ) | ( | ) | |||||||||||||||
| Distributions representing a return of capital | — | ( | ) | ( | ) | |||||||||||||||
| Net decrease in net assets resulting from shareholder distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||
| Reclassifications of permanent book-to-tax differences | — | ( | ) | |||||||||||||||||
| Net decrease for the year | — | ( | ) | ( | ) | ( | ) | |||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| (1) |
See Notes to Consolidated Financial Statements.
| 51 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Operating activities | ||||||||||||
| Net increase (decrease) in net assets resulting from operations | $ | $ | ( | ) | $ | |||||||
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities: | ||||||||||||
| Capitalized paid-in-kind income | ( | ) | ( | ) | ( | ) | ||||||
| Amortization of premium/accretion of discount, net | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from sales of investments | ||||||||||||
| Proceeds from paydowns on investments | ||||||||||||
| Net receipt of settlement of derivatives | ||||||||||||
| Net payment of settlement of derivatives | ( | ) | ( | ) | ( | ) | ||||||
| Net realized gains (losses) on derivatives | ( | ) | ( | ) | ||||||||
| Purchases of investments | ( | ) | ( | ) | ( | ) | ||||||
| Net realized losses on investments | ||||||||||||
| Net change in unrealized (appreciation) depreciation on investments | ( | ) | ( | ) | ||||||||
| Net change in unrealized (appreciation) depreciation on foreign currency forward contracts | ( | ) | ( | ) | ||||||||
| Amortization of deferred financing costs | ||||||||||||
| (Increase) decrease in operating assets: | ||||||||||||
| Interest and dividend income receivable | ||||||||||||
| Principal receivable | ( | ) | ( | ) | ||||||||
| Receivable from related parties | ||||||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||||||
| Increase (decrease) in operating liabilities: | ||||||||||||
| Accrued management fee | ( | ) | ( | ) | ||||||||
| Payable to related parties | ( | ) | ( | ) | ||||||||
| Accrued professional services fees | ( | ) | ||||||||||
| Accounts payable, accrued expenses and other liabilities | ( | ) | ( | ) | ||||||||
| Net cash provided by operating activities | ||||||||||||
| Financing activities | ||||||||||||
| Repurchase of Common Shares | ( | ) | ||||||||||
| Credit facility repayments | ( | ) | ||||||||||
| Distributions paid | ( | ) | ( | ) | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ( | ) | ||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ( | ) | ||||||
| Cash, cash equivalents and restricted cash, beginning of year | ||||||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash | ||||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | $ | |||||||||
| Supplemental disclosure of cash flow information and non-cash financing activities: | ||||||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
See Notes to Consolidated Financial Statements.
| 52 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED SCHEDULE OF INVESTMENTS
| December 31, 2023 (in thousands) | ||||||||||||||||||||||||||
| Portfolio Company (1) (2) (3) | Footnotes | Investment | Spread Above Reference Rate (4) | Interest Rate (4) (5) | Maturity Date | Principal / Par Amount / Shares (6) | Amortized Cost (7) (8) | Fair Value | % of Net Assets | |||||||||||||||||
| INVESTMENTS | ||||||||||||||||||||||||||
| Debt investments - 84.0% | ||||||||||||||||||||||||||
| Automotive | ||||||||||||||||||||||||||
| Accuride Corporation | (10) | $ | $ | $ | % | |||||||||||||||||||||
| Total Automotive | % | |||||||||||||||||||||||||
| Chemicals, Plastics & Rubber | ||||||||||||||||||||||||||
| Drew Marine Group Inc. | (11) | % | ||||||||||||||||||||||||
| Total Chemicals, Plastics & Rubber | % | |||||||||||||||||||||||||
| Consumer Goods: Non-Durable | ||||||||||||||||||||||||||
| Galls LLC | (10)(11) | % | ||||||||||||||||||||||||
| Galls LLC (Delayed Draw B) | (10)(11) | % | ||||||||||||||||||||||||
| Galls LLC (Revolver) | (9)(11) | % | ||||||||||||||||||||||||
| Total Consumer Goods: Non-Durable | % | |||||||||||||||||||||||||
| Energy: Oil & Gas | ||||||||||||||||||||||||||
| Basic Energy Services Inc | (12) | N/A | N/A | % | ||||||||||||||||||||||
| Permian Production Partners | (10) | % | ||||||||||||||||||||||||
| Total Energy: Oil & Gas | % | |||||||||||||||||||||||||
| Metals & Mining | ||||||||||||||||||||||||||
| Polyvision Corp. | (10)(11) | % | ||||||||||||||||||||||||
| Polyvision Corp. | (10)(11) | % | ||||||||||||||||||||||||
| Polyvision Corp. (Delayed Draw) | (10)(11) | % | ||||||||||||||||||||||||
| Polyvision Corp. (Revolver) | (10)(11) | % | ||||||||||||||||||||||||
| Total Metals & Mining | % | |||||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||||
| Save-a-Lot | (11) | % | ||||||||||||||||||||||||
| Save-a-Lot | (11) | % | ||||||||||||||||||||||||
| Save-a-Lot | (10)(11) | % | ||||||||||||||||||||||||
| Total Retail | % | |||||||||||||||||||||||||
| Services: Business | ||||||||||||||||||||||||||
| Hersha Hospitality Management | (11) | % | ||||||||||||||||||||||||
| PSI Services LLC (Revolver) | (9)(11) | % | ||||||||||||||||||||||||
| PSI Services LLC (Delayed Draw) | (11) | % | ||||||||||||||||||||||||
| 53 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED SCHEDULE OF INVESTMENTS
| December 31, 2023 (in thousands) | ||||||||||||||||||||||||||
| Portfolio Company (1) (2) (3) | Footnotes | Investment | Spread Above Reference Rate (4) | Interest Rate (4) (5) | Maturity Date | Principal / Par Amount / Shares (6) | Amortized Cost (7) (8) | Fair Value | % of Net Assets | |||||||||||||||||
| PSI Services LLC (Delayed Draw) | (11) | % | ||||||||||||||||||||||||
| PSI Services LLC | (11) | % | ||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| Total Services: Business | % | |||||||||||||||||||||||||
| Total Debt Investments | $ | $ | % | |||||||||||||||||||||||
| Equity investments - 2.0% | ||||||||||||||||||||||||||
| Energy: Oil & Gas | ||||||||||||||||||||||||||
| Permian Production Partners | (11) | N/A | N/A | % | ||||||||||||||||||||||
| Total Energy: Oil & Gas | % | |||||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||||
| Save-a-Lot | N/A | N/A | % | |||||||||||||||||||||||
| Total Retail | % | |||||||||||||||||||||||||
| Service: Businesses | ||||||||||||||||||||||||||
| YAK BLOCKER 2 LLC SERIES A | (11) | N/A | N/A | % | ||||||||||||||||||||||
| YAK BLOCKER 2 LLC SERIES B-1 | (11) | N/A | N/A | % | ||||||||||||||||||||||
| YAK BLOCKER 2 LLC SERIES B-2 | (11) | N/A | N/A | % | ||||||||||||||||||||||
| YAK BLOCKER 2 LLC SERIES C-1 | (11) | N/A | N/A | % | ||||||||||||||||||||||
| YAK BLOCKER 2 LLC SERIES C-2 | (11) | N/A | N/A | % | ||||||||||||||||||||||
| Total Service: Businesses | % | |||||||||||||||||||||||||
| Total Equity Investments | $ | $ | % | |||||||||||||||||||||||
| Total Investments - 86.0% | $ | $ | % | |||||||||||||||||||||||
| (1) |
| (2) |
| (3) |
| 54 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED SCHEDULE OF INVESTMENTS
| (4) |
| (5) |
| (6) |
| (7) |
| (8) |
| (9) |
| (10) |
| Coupon Rate | PIK Component | Cash Component | PIK Option | |
| Accuride Corporation | ||||
| Galls LLC | ||||
| Galls LLC (Delayed Draw B) | ||||
| Permian Production Partners | ||||
| Polyvision Corp. | ||||
| Polyvision Corp. | ||||
| Polyvision Corp. (Delayed Draw) | ||||
| Polyvision Corp. (Revolver) | ||||
| Save-A-Lot |
| (11) |
| (12) |
See Notes to Consolidated Financial Statements.
| 55 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED SCHEDULE OF INVESTMENTS
| December 31, 2022 (in thousands) | ||||||||||||||||||||||||||
| Portfolio Company (1) (2) (3) | Footnotes | Investment | Spread Above Reference Rate (4) | Interest Rate (4) (5) | Maturity Date | Principal / Par Amount / Shares (6) | Amortized Cost (7) (8) | Fair Value | % of Net Assets | |||||||||||||||||
| INVESTMENTS | ` | |||||||||||||||||||||||||
| Debt investments - 65.7% | ||||||||||||||||||||||||||
| Automotive | ||||||||||||||||||||||||||
| Accuride Corporation | $ | $ | $ | % | ||||||||||||||||||||||
| Total Automotive | % | |||||||||||||||||||||||||
| Beverage, Food & Tobacco | ||||||||||||||||||||||||||
| Checkers Holdings Inc | % | |||||||||||||||||||||||||
| Total Beverage, Food & Tobacco | % | |||||||||||||||||||||||||
| Chemicals, Plastics & Rubber | ||||||||||||||||||||||||||
| Drew Marine Group Inc. | (11) | % | ||||||||||||||||||||||||
| Total Chemicals, Plastics & Rubber | % | |||||||||||||||||||||||||
| Consumer Goods: Non-Durable | ||||||||||||||||||||||||||
| Galls LLC | (10)(11) | % | ||||||||||||||||||||||||
| Galls LLC (Delayed Draw B) | (10)(11) | % | ||||||||||||||||||||||||
| Galls LLC (Revolver) | (9)(11) | % | ||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| Pure Fishing, Inc. | % | |||||||||||||||||||||||||
| Total Consumer Goods: Non-Durable | % | |||||||||||||||||||||||||
| Energy: Oil & Gas | ||||||||||||||||||||||||||
| Basic Energy Services Inc | (11)(13) | N/A | N/A | % | ||||||||||||||||||||||
| Permian Production Partners | (10)(11) | % | ||||||||||||||||||||||||
| Total Energy: Oil & Gas | % | |||||||||||||||||||||||||
| Hotel, Gaming & Leisure | ||||||||||||||||||||||||||
| ASM Global | % | |||||||||||||||||||||||||
| Total Hotel, Gaming & Leisure | % | |||||||||||||||||||||||||
| Metals & Mining | ||||||||||||||||||||||||||
| Polyvision Corp. | (10)(11) | % | ||||||||||||||||||||||||
| Polyvision Corp. | (10)(11) | % | ||||||||||||||||||||||||
| Polyvision Corp. (Delayed Draw) | (10)(11) | % | ||||||||||||||||||||||||
| Polyvision Corp. (Revolver) | (9)(10)(11) | % | ||||||||||||||||||||||||
| Total Metals & Mining | % | |||||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||||
| Save-a-Lot | % | |||||||||||||||||||||||||
| 56 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED SCHEDULE OF INVESTMENTS
| December 31, 2022 (in thousands) | ||||||||||||||||||||||||||
| Portfolio Company (1) (2) (3) | Footnotes | Investment | Spread Above Reference Rate (4) | Interest Rate (4) (5) | Maturity Date | Principal / Par Amount / Shares (6) | Amortized Cost (7) (8) | Fair Value | % of Net Assets | |||||||||||||||||
| Save-a-Lot | % | |||||||||||||||||||||||||
| Save-a-Lot | % | |||||||||||||||||||||||||
| Total Retail | % | |||||||||||||||||||||||||
| Services: Business | ||||||||||||||||||||||||||
| HealthChannels, Inc. | % | |||||||||||||||||||||||||
| Hersha Hospitality Management | (11) | % | ||||||||||||||||||||||||
| PSI Services LLC (Revolver) | (9)(11) | % | ||||||||||||||||||||||||
| PSI Services LLC (Delayed Draw) | (11) | % | ||||||||||||||||||||||||
| PSI Services LLC (Delayed Draw) | (11) | % | ||||||||||||||||||||||||
| PSI Services LLC | (11) | % | ||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| YAK Access, LLC | (11) | % | ||||||||||||||||||||||||
| Total Services: Business | % | |||||||||||||||||||||||||
| Technology | ||||||||||||||||||||||||||
| Allvue Systems (Revolver) | (9)(11) | % | ||||||||||||||||||||||||
| Allvue Systems (Term Loan) | (11) | % | ||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| Apptio, Inc. | (11) | % | ||||||||||||||||||||||||
| Apptio, Inc. (Revolver) | (9)(11) | % | ||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| Wide Orbit, Inc. (Revolver) | (9)(11)(12) | N/A | N/A | ( | ) | % | ||||||||||||||||||||
| Total Technology | % | |||||||||||||||||||||||||
| Telecommunications | ||||||||||||||||||||||||||
| Firstlight Fiber | % | |||||||||||||||||||||||||
| Total Telecommunications | % | |||||||||||||||||||||||||
| Total Debt Investments | $ | $ | % | |||||||||||||||||||||||
| Equity investments - 0.6% | ||||||||||||||||||||||||||
| Energy: Oil & Gas | ||||||||||||||||||||||||||
| Permian Production Partners | (11) | N/A | N/A | % | ||||||||||||||||||||||
| 57 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED SCHEDULE OF INVESTMENTS
| December 31, 2022 (in thousands) | ||||||||||||||||||||||||||
| Portfolio Company (1) (2) (3) | Footnotes | Investment | Spread Above Reference Rate (4) | Interest Rate (4) (5) | Maturity Date | Principal / Par Amount / Shares (6) | Amortized Cost (7) (8) | Fair Value | % of Net Assets | |||||||||||||||||
| Total Energy: Oil & Gas | % | |||||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||||
| Save-a-Lot | (11) | N/A | N/A | % | ||||||||||||||||||||||
| Total Retail | % | |||||||||||||||||||||||||
| Technology | ||||||||||||||||||||||||||
| Wide Orbit (Warrants) | (11) | N/A | N/A | % | ||||||||||||||||||||||
| Total Technology | % | |||||||||||||||||||||||||
| Total Equity Investments | $ | $ | % | |||||||||||||||||||||||
| Total Investments - 66.3% | $ | $ | % | |||||||||||||||||||||||
| December 31, 2022 (in thousands) | ||||||||||||||||||||||
| Derivative Counterparty | Settlement Date | Amount Purchased | Amount Sold | Amortized Cost (7) (8) | Fair Value | % of Net Assets | ||||||||||||||||
| Foreign Currency Forward Contracts | ||||||||||||||||||||||
| JPMorgan Chase Bank | $ | £ | $ | % | ||||||||||||||||||
| $ | % | |||||||||||||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
| 58 |
GUGGENHEIM CREDIT INCOME FUND
CONSOLIDATED SCHEDULE OF INVESTMENTS
| (7) |
| (8) |
| (9) |
| (10) |
| Coupon Rate | PIK Component | Cash Component | PIK Option | |
| Galls LLC | ||||
| Galls LLC | ||||
| Polyvision Corp. | ||||
| Polyvision Corp. | ||||
| Polyvision Corp. | ||||
| Polyvision Corp. | ||||
| Permian Production Partners |
| (11) |
| (12) |
| (13) |
See Notes to Consolidated Financial Statements.
| 59 |
GUGGENHEIM CREDIT INCOME FUND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, percentages and as otherwise indicated;
for example, with the word “million” or otherwise)
Note 1. Principal Business and Organization
Guggenheim Credit Income Fund (the “Master Fund”) was formed as a Delaware statutory trust on September 5, 2014. The Master Fund's investment objectives are to provide its shareholders with current income, capital preservation and, to a lesser extent, long-term capital appreciation by investing primarily in privately-negotiated loans to private middle market United States (U.S.) companies. On April 1, 2015, the Master Fund elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Master Fund commenced investment operations on April 2, 2015. The Master Fund serves as the master fund in a master fund/feeder fund structure. The Master Fund issues its shares ("Shares" or "Common Shares") to one or more affiliated feeder funds in a continuous series of private placement transactions.
In accordance with the offering documents and the intention of Guggenheim Credit Income Fund 2016 T ("GCIF 2016T") and Guggenheim Credit Income Fund 2019 ("GCIF 2019") (together, the "Feeder Funds") to provide substantial shareholder liquidity, the Boards of Trustees of the Master Fund and the Feeder Funds approved respective Plans of Liquidation for each company on March 30, 2021 (each, a "Liquidation Plan"). In accordance with the Liquidation Plans, the Board has declared multiple liquidating distributions. These distributions have been substantially composed of return of capital and have decreased the net asset value of the Master Fund and Feeder Funds. As such, the value on shareholder’s investment statements has decreased as liquidating distributions have been paid.
In accordance with the Liquidation Plan, the Master Fund and the Feeder Funds will remain registered as a BDC and intend to maintain their qualifications, as regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Guggenheim Partners Investment Management, LLC ("Guggenheim" or the "Advisor") is responsible for sourcing potential investments, analyzing and conducting due diligence on prospective investment opportunities, structuring investments and ongoing monitoring of the Master Fund’s investment portfolio.
On September 30, 2022, Hamilton Finance LLC ("Hamilton"), a previous, wholly-owned, special purpose financing subsidiary of the Master Fund was dissolved.
Note 2. Significant Accounting Policies
Basis of Presentation
Management has determined that the Master Fund meets the definition of an investment company and adheres to the accounting and reporting guidance in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946 — Financial Services — Investment Companies ("ASC 946").
The accompanying consolidated financial statements of the Master Fund and related financial information have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") and pursuant to the requirements for reporting on Form 10-K and Regulation S-X under the Securities Act of 1933, as amended.
Principles of Consolidation
As provided under ASC 946, the Master Fund will generally not consolidate its investment in a company other than an investment in an investment company or an operating company whose business consists of providing substantially all of its services to the benefit of the Master Fund. Accordingly, the Master Fund consolidated the results of its wholly-owned subsidiary in its consolidated financial statements. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the reported amounts of income and expenses during the reported period and (iii) disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ materially from those estimates under different assumptions and conditions.
| 60 |
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
Cash consists of demand deposits held at a major U.S. financial institution and the amount recorded on the consolidated statements of assets and liabilities exceeds the Federal Deposit Insurance Corporation insured limit. Management believes the credit risk related to its demand deposits is minimal.
Cash equivalents include short-term,
highly liquid instruments with an original maturity of three months or less. As of December 31, 2023, the Master Fund's cash equivalents
of $
Valuation of Investments
The Master Fund measures the value of its investments in accordance with ASC Topic 820 — Fair Value Measurement (“ASC 820”), issued by the FASB. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable and willing and able to transact. In accordance with ASC 820, the Master Fund considers its principal market to be the market that has the greatest volume and level of activity.
ASC 820 defines hierarchical levels directly related to the amount of subjectivity associated with the inputs used to determine fair values of assets and liabilities. The hierarchical levels and types of inputs used to measure fair value for each level are described as follows:
Level 1 - Quoted prices are available in active markets for identical investments as of the reporting date. Publicly listed equities and debt securities, publicly listed derivatives, money market/short-term investment funds and foreign currency are generally included in Level 1. The Master Fund does not adjust the quoted price for these investments.
Level 2 - Valuation inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. In certain cases, debt and equity securities are valued on the basis of prices from orderly transactions for similar investments in active markets between market participants and provided by reputable dealers or independent pricing services. In determining the value of a particular investment, independent pricing services may use certain information with respect to transactions in such investments, quotations from multiple dealers or brokers, pricing matrices, market transactions in comparable investments and various relationships between investments. Investments generally included in this category are corporate bonds and loans.
Level 3 - Valuation inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation. Investments generally included in this category are illiquid corporate bonds and loans and preferred stock investments that lack observable market pricing.
In certain cases, the inputs used to measure fair value may fall within different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Depending on the relative liquidity in the markets for certain investments, the Master Fund may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are severely limited, or not available, or otherwise not reliable. The Master Fund’s assessment of the significance of a particular input to the fair value measurement requires judgment, and the consideration of factors specific to the investment.
Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to the Master Fund’s portfolio investments for which market quotations are not readily available, the Master Fund's board of trustees ("Board of Trustees"), including our trustees who are not "interested persons" as defined in the 1940 Act (the "Independent Trustees"), is responsible for determining in good faith the fair value of the Master Fund’s portfolio investments in accordance with the valuation policy and procedures approved by the Board of Trustees. Pursuant to Rule 2a-5 under the 1940 Act (“Rule 2a-5”), the Board of Trustees has designated the Advisor as the valuation designee to perform fair valuation determinations for the Master Fund with respect to all Fund investments and/or other assets. The Advisor conducts a fair value determination process on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required.
| 61 |
Notes to Consolidated Financial Statements
The U.S. Securities and Exchange Commission (the “SEC”) adopted Rule 2a-5 which establishes requirements for determining fair value in good faith and became effective September 8, 2022. Rule 2a-5 also defines when “readily available market quotations” for purposes of the 1940 Act and establishes requirements for determining whether a fund must fair value a security in good faith.
The valuation techniques used by the Master Fund for the assets that are classified as Level 3 in the fair value hierarchy are described below.
Senior Debt and Subordinated Debt: Senior debt and subordinated debt investments are valued at initial transaction price and are subsequently valued using (i) market data for similar instruments (e.g., recent transactions or indicative broker quotes), and/or (ii) valuation models. Valuation models may be based on investment yield analysis and discounted cash flow techniques, where the key inputs include risk-adjusted discount rates and required rates of return, based on the analysis of similar debt investments issued by similar issuers.
Equity/Other Investments: Equity/other investments are valued at initial transaction price and are subsequently valued using valuation models in the absence of readily observable market prices. Valuation models are generally based on (i) market and income (discounted cash flow) approaches, in which various internal and external factors are considered, and (ii) earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples analysis. Factors include key financial inputs and recent public and private transactions for comparable investments. Key inputs used for the discounted cash flow approach include the weighted average cost of capital and investment terminal values derived from EBITDA multiples. An illiquidity discount may be applied where appropriate.
The Master Fund utilizes several valuation techniques that use unobservable pricing inputs and assumptions in determining the fair value of its Level 3 investments. The valuation techniques, as well as the key unobservable inputs that have a significant impact on the Master Fund’s investments classified and valued as Level 3 in the valuation hierarchy, are described in Note 5. Fair Value of Financial Instruments. The unobservable inputs and assumptions may differ by asset and in the application of the Master Fund’s valuation methodologies. The reported fair value estimates could vary materially if the Master Fund had chosen to incorporate different unobservable pricing inputs and assumptions.
The determination of fair value involves subjective judgments and estimates. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of investments may differ materially from the values that would have been determined had a readily available market value existed for such investments. Further, such investments are generally less liquid than publicly traded securities. If the Master Fund was required to liquidate a portfolio investment that does not have a readily available market value in a forced or liquidation sale, the Master Fund could realize significantly less value than the value recorded by the Master Fund.
Security Transactions and Realized/Unrealized Gains or Losses
Investments purchased on a secondary market basis are recorded on the trade date. Loan originations are recorded on the funding date. All investments sold are derecognized on the trade date. The Master Fund measures realized gains or losses from the repayment or sale of investments using the specific lot identification method. Realized gains or losses are measured by the difference between (i) the net proceeds from the repayment or sale, inclusive of any prepayment premiums and (ii) the amortized cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily measures the change in investment values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. The amortized cost basis of investments includes (i) the original cost, net of original issue discount and loan origination fees, if any, and (ii) adjustments for the accretion/amortization of market discounts and premiums. The Master Fund reports changes in fair value of investments as net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.
| 62 |
Notes to Consolidated Financial Statements
Interest Income
Interest income is recorded on an accrual basis and includes amortization of premiums to par value and accretion of discounts to par value. Discounts and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method, or straight-line method, as applicable. Loan origination, closing and other fees received by the Master Fund directly or indirectly from borrowers in connection with the closing of investments are accreted over the contractual life of the debt investment as interest income based on the effective interest method.
Certain of the Master Fund’s investments in debt securities may contain a contractual payment-in-kind ("PIK") interest provision. The PIK provisions generally feature the obligation, or the option, at each interest payment date of making interest payments in (i) cash, (ii) additional securities or (iii) a combination of cash and additional securities. PIK interest, computed at the contractual rate specified in the investment’s credit agreement, is accrued as interest income and recorded as interest receivable up to the interest payment date. On the interest payment date, the Master Fund will capitalize the accrued interest receivable attributable to PIK as additional principal due from the borrower. When additional PIK securities are received on the interest payment date, they typically have the same terms, including maturity dates and interest rates, as the original securities issued. PIK interest generally becomes due on the investment's maturity date or call date.
If the portfolio company's valuation indicates the value of the PIK security is not sufficient to cover the contractual PIK interest, the Master Fund will not accrue additional PIK interest income and will record an allowance for any accrued PIK interest receivable as a reduction of interest income in the period the Master Fund determines it is not collectible.
Debt securities are placed on non-accrual status when principal or interest payments are at least 90 days past due or when there is reasonable doubt that principal or interest will be collected. Generally, accrued interest is reversed against interest income when a debt security is placed on non-accrual status. Interest payments received on debt securities on non-accrual status may be recognized as interest income or applied to principal based on management’s judgment. Debt securities on non-accrual status are restored to accrual status when past due principal and interest are paid, and, in management’s judgment, such securities are likely to remain current on interest payment obligations. The Master Fund may make exceptions to this treatment if the debt security has sufficient collateral value and is in the process of collection.
Dividend Income
Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Each distribution received from limited liability company (“LLC”) and limited partnership (“LP”) equity investments is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Master Fund will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
Fee Income
Guggenheim, or its affiliates, may provide financial advisory services to portfolio companies and in return may receive fees for capital structuring services. Guggenheim is obligated to remit to the Master Fund any earned capital structuring fees based on the pro rata portion of the Master Fund’s investment in originated co-investment transactions. These fees are generally non-recurring and are recognized as fee income by the Master Fund upon the earlier of the investment commitment date or investment closing date. The Master Fund may also receive fees for investment commitments, amendments to credit agreements and other services rendered to portfolio companies. Such fees are recognized as fee income when earned or when the services are rendered.
Derivative Instruments
Derivative instruments solely consist of foreign currency forward contracts. The Master Fund recognizes all derivative instruments as assets or liabilities at fair value in its consolidated financial statements. Foreign currency forward contracts entered into by the Master Fund are not designated as hedging instruments, and as a result, the Master Fund presents changes in fair value through net change in unrealized appreciation (depreciation) on foreign currency forward contracts in the consolidated statements of operations. Realized gains and losses that occur upon the cash settlement of the foreign currency forward contracts are included in net realized gains (losses) on foreign currency forward contracts on the consolidated statements of operations.
| 63 |
Notes to Consolidated Financial Statements
Foreign Currency Translation, Transactions and Gains (Losses)
Foreign currency amounts are translated into U.S. dollars on the following basis: (i) at the exchange rate on the last business day of the reporting period for the fair value of investment securities, other assets and liabilities; and (ii) at the prevailing exchange rate on the respective recording dates for the purchase and sale of investment securities, income, expenses, gains and losses.
Net assets and fair values are presented based on the applicable foreign exchange rates described above and the Master Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held; therefore, fluctuations related to foreign exchange rate conversions are included with the net realized gains (losses) and unrealized appreciation (depreciation) on investments.
Net realized gains or losses on foreign currency transactions arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded by the Master Fund and the U.S. dollar equivalent of the amounts actually received or paid by the Master Fund.
Unrealized appreciation (depreciation) from foreign currency translation for foreign currency forward contracts is included in net change in unrealized appreciation (depreciation) on foreign currency forward contracts in the consolidated statements of operations and is included in accumulated earnings (loss), net of distributions on the consolidated statements of assets and liabilities.
Investment Advisory Fees
The Master Fund incurs investment advisory fees including: (i) a base management fee and (ii) a performance-based incentive fee which includes (a) an incentive fee on income and (b) an incentive fee on capital gains, due to Guggenheim pursuant to an investment advisory agreement between the Master Fund and Guggenheim (the "Investment Advisory Agreement") as described in Note 6. Related Party Agreements and Transactions. The two components of the performance-based incentive fee will be combined and expensed in the consolidated statements of operations and accrued in the consolidated statements of assets and liabilities as accrued performance-based incentive fee. Pursuant to the terms of the Investment Advisory Agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement) based on the Master Fund’s realized capital gains on a cumulative basis from inception, net of all realized capital losses and unrealized depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. Although the terms of the Investment Advisory Agreement do not provide for the inclusion of unrealized gains in the calculation of the incentive fee on capital gains, the Master Fund includes unrealized gains in the calculation of the incentive fee on capital gains in accordance with GAAP. Therefore the accrued amount, if any, represents an estimate of the incentive fees that may be payable to Guggenheim if the Master Fund’s entire investment portfolio was liquidated at its fair value as of the date of the consolidated statements of assets and liabilities, even though Guggenheim is not entitled to any incentive fee based on unrealized appreciation unless and until such unrealized appreciation is realized.
Deferred Financing Costs
Deferred financing costs represent fees and other direct incremental costs incurred in connection with the arrangement of the Master Fund's borrowings. These costs are presented in the consolidated statements of assets and liabilities as a direct deduction of the debt liability to which the costs pertain. These costs are amortized using the effective interest method and are included in interest expense on the consolidated statements of operations over the life of the borrowings.
Distributions
Distributions to the Master Fund's common shareholders are periodically declared by its Board of Trustees and recognized as a liability on the record date.
| 64 |
Notes to Consolidated Financial Statements
Federal Income Taxes
Beginning with its tax year ended December 31, 2015, the Master Fund has elected to be treated for federal income tax purposes, and thereafter intends to maintain its qualification, as a RIC under the Code. Generally, a RIC is not subject to federal income taxes on distributed income and gains if it distributes dividends in a timely manner out of assets legally available for distributions to its shareholders of an amount generally at least equal to 90% of its “Investment Company Taxable Income,” as defined in the Code. The Master Fund intends to distribute sufficient dividends to maintain its RIC status each year and it does not anticipate paying a material level of federal income taxes.
The Master Fund is generally subject
to nondeductible federal excise taxes if it does not distribute dividends to its shareholders in respect of each calendar year of an amount
at least equal to the sum of (i)
The Master Fund follows ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Penalties or interest, if applicable, that may be assessed relating to income taxes would be classified as other expenses in the statements of operations. Management has reviewed all open tax years and concluded that there is no effect to the Master Funds’ financial positions or results of operations and no tax liability was required to be recorded resulting from unrecognized tax benefits relating to uncertain income tax position taken or expected to be taken on a tax return. During this period, the Master Fund did not incur any material interest or penalties. Open tax years are those years that are open for examination by the relevant income taxing authority. As of December 31, 2023, open U.S. Federal and state income tax years include the tax years ended December 31, 2020 through December 31, 2023. The Master Fund has no examinations in progress. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
Note 3. Investments
The following table presents the composition of the investment portfolio at amortized cost and fair value as of December 31, 2023 and December 31, 2022, respectively, with corresponding percentages of total investments at fair value:
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Fair Value | Percentage of Investments at Fair Value | Amortized Cost | Fair Value | Percentage of Investments at Fair Value | |||||||||||||||||||
| Senior secured loans - first lien | $ | $ | % | $ | $ | % | ||||||||||||||||||
| Senior secured loans - second lien | ||||||||||||||||||||||||
| Senior secured bonds | ||||||||||||||||||||||||
| Total senior debt | $ | $ | % | $ | $ | % | ||||||||||||||||||
| Equity and other | ||||||||||||||||||||||||
| Total investments | $ | $ | % | $ | $ | % | ||||||||||||||||||
| 65 |
Notes to Consolidated Financial Statements
The following table presents the composition of the investment portfolio by industry classifications at amortized cost and fair value as of December 31, 2023 and December 31, 2022, respectively, with corresponding percentages of total investments at fair value:
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Industry Classification | Amortized Cost | Fair Value | Percentage of Investments at Fair Value | Amortized Cost | Fair Value | Percentage of Investments at Fair Value | ||||||||||||||||||
| Services: Business | $ | $ | % | $ | $ | % | ||||||||||||||||||
| Consumer Goods: Non-Durable | ||||||||||||||||||||||||
| Technology | ||||||||||||||||||||||||
| Metals & Mining | ||||||||||||||||||||||||
| Automotive | ||||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||
| Chemicals, Plastics & Rubber | ||||||||||||||||||||||||
| Beverage, Food & Tobacco | ||||||||||||||||||||||||
| Energy: Oil & Gas | ||||||||||||||||||||||||
| Hotel, Gaming & Leisure | ||||||||||||||||||||||||
| Telecommunications | ||||||||||||||||||||||||
| Total investments | $ | $ | % | $ | $ | % | ||||||||||||||||||
The following table presents the geographic dispersion of the investment portfolio as a percentage of total investments at fair value as of December 31, 2023 and December 31, 2022:
| Geographic Dispersion | December 31, 2023 | December 31, 2022 | ||||||
| United States of America | % | % | ||||||
| Total investments | % | % | ||||||
Note 4. Derivative Instruments
The Master Fund may enter into foreign currency forward contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies and to economically hedge the impact that an adverse change in foreign exchange rates would have on the value of the Master Fund's investments denominated in foreign currencies. A foreign currency forward contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract forward exchange rate and the forward market exchange rate on the last day of the period presented as unrealized appreciation or depreciation. Realized gains or losses are recognized when forward contracts are settled. Risks arise as a result of the potential inability of the counterparties to meet the terms of their contracts; the Master Fund attempts to limit counterparty risk by only dealing with well-known counterparties and those that it believes have the financial resources to honor their obligations. As of December 31, 2023, there are no open foreign currency forward contracts.
The following tables present the Master Fund's open foreign currency forward contracts as of December 31, 2022:
| December 31, 2022 | ||||||||||||||||||||||
| Foreign Currency | Settlement Date | Statement Location | Counterparty | Amount Transacted | Notional Value at Settlement | Notional Value at Period End | Fair Value | |||||||||||||||
| JPMorgan Chase Bank, N.A. | £ | $ | $ | $ | ||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||
| 66 |
Notes to Consolidated Financial Statements
The following table presents the net realized and unrealized gains and losses on derivative instruments recorded by the Master Fund for the years ended December 31, 2023, December 31, 2022, and December 31, 2021:
| For the Years Ended December 31, | ||||||||||||||
| Statement Location | 2023 | 2022 | 2021 | |||||||||||
| Net realized gains (losses) | ||||||||||||||
| Foreign currency forward contracts | Net realized gains (losses) on foreign currency forward contracts | $ | $ | $ | ( | ) | ||||||||
| Net change in unrealized appreciation (depreciation) | ||||||||||||||
| Foreign currency forward contracts | Net change in unrealized appreciation (depreciation) on foreign currency forward contracts | ( | ) | |||||||||||
| Net realized and unrealized gains on foreign currency forward contracts | $ | $ | $ | |||||||||||
For derivatives traded under an International Swaps and Derivatives Association Master Agreement ("ISDA Master Agreement"), the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Master Fund and/or the counterparty. Cash collateral that has been pledged, if any, to cover obligations of the Master Fund and cash collateral received from the counterparty, if any, is reported on the consolidated statements of assets and liabilities as collateral deposits (received) for foreign currency forward contracts. Generally, the amount of collateral due from or to a party has to exceed a minimum transfer amount threshold before a transfer is required. To the extent amounts due to the Master Fund from a counterparty are not fully collateralized, the Master Fund bears the risk of loss from counterparty non-performance.
The following table presents the Master Fund's derivative assets and liabilities by counterparty, net of amounts available for offset under a master netting agreement or similar arrangement, and net of related collateral received by the Master Fund for assets or pledged for liabilities as of December 31, 2023 and December 31, 2022:
| As of | Counterparty | Gross Derivative Assets in Statement of Assets and Liabilities | Gross Derivative Liabilities in Statement of Assets and Liabilities | Collateral Pledged (Received) | Net position of Derivative Assets, Liabilities and Pledged Collateral | |||||||||||||
| December 31, 2023 | JP Morgan Chase Bank, N.A. | $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | JP Morgan Chase Bank, N.A. | $ | $ | $ | $ | |||||||||||||
Note 5. Fair Value of Financial Instruments
The following tables present the segmentation of the investment portfolio at fair value, as of December 31, 2023 and December 31, 2022, according to the fair value hierarchy as described in Note 2. Significant Accounting Policies:
| December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Investments | ||||||||||||||||
| Senior secured loans - first lien | $ | $ | $ | $ | ||||||||||||
| Senior secured loans - second lien | ||||||||||||||||
| Senior secured bonds | ||||||||||||||||
| Total senior debt | $ | $ | $ | $ | ||||||||||||
| Equity and other | ||||||||||||||||
| Total investments | $ | $ | $ | $ | ||||||||||||
| Percentage | % | % | % | % | ||||||||||||
| Derivative Instruments | ||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | $ | ||||||||||||
| 67 |
Notes to Consolidated Financial Statements
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Investments | ||||||||||||||||
| Senior secured loans - first lien | $ | $ | $ | $ | ||||||||||||
| Senior secured loans - second lien | ||||||||||||||||
| Senior secured bonds | ||||||||||||||||
| Total senior debt | $ | $ | $ | $ | ||||||||||||
| Equity and other | ||||||||||||||||
| Total investments | $ | $ | $ | $ | ||||||||||||
| Percentage | % | % | % | % | ||||||||||||
| Derivative Instruments | ||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | $ | ||||||||||||
Significant Level 3 Unobservable Inputs
The following tables present quantitative information related to the significant Level 3 unobservable inputs associated with the determination of fair value for certain investments as of December 31, 2023 and December 31, 2022:
| December 31, 2023 | ||||||||||||||
| Asset Category | Fair Value | Valuation Techniques (1) | Unobservable Inputs (2) | Weighted Average Input Value | Range (3) | Impact to Valuation from an Increase in Input (4) | ||||||||
| Senior Secured Loans - First Lien | $ | |||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Equity/Other | $ | 4.6x | 4.6x | |||||||||||
| $ | 5.15x | 4.8x - 5.5x | ||||||||||||
| 26333x | 26333x | |||||||||||||
| 9.9x | 9.9x | |||||||||||||
| $ | ||||||||||||||
| Total | $ | |||||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
| 68 |
Notes to Consolidated Financial Statements
| December 31, 2022 | ||||||||||||||
| Asset Category | Fair Value | Valuation Techniques (1) | Unobservable Inputs (2) | Weighted Average Input Value | Range (3) | Impact to Valuation from an Increase in Input (4) | ||||||||
| Senior Secured Loans - First Lien | $ | |||||||||||||
| Equity/Other | $ | 5x | 5x | |||||||||||
| 28043x | 28043x | |||||||||||||
| 12.3x | 12.3x | |||||||||||||
| $ | 10.6x | 10.6x | ||||||||||||
| Total | $ | 25,095 | ||||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
In addition to the Level 3 valuation methodologies and unobservable inputs noted above, the Master Fund, in accordance with its valuation policy, may also use other valuation techniques and methodologies when determining the fair value estimates for its investments.
The following tables present a roll-forward of the fair value changes for all investments for which the Master Fund determines fair value using Level 3 unobservable inputs for the years ended December 31, 2023 and December 31, 2022:
| For the Year Ended December 31, 2023 | ||||||||||||||||||||
| Senior Secured Loans - First Lien | Senior Secured Loans - Second Lien | Senior Secured Bonds | Equity and Other | Total | ||||||||||||||||
| Balance as of January 1, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Additions (1) | ||||||||||||||||||||
| Sales and repayments (2) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net realized gains (3) | ||||||||||||||||||||
| Net change in unrealized depreciation on investments (4) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net discount accretion | ||||||||||||||||||||
| Restructuring | ( | ) | ||||||||||||||||||
| Transfers into Level 3 (5) | ||||||||||||||||||||
| Transfers out of Level 3 (6) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Fair value balance as of December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Change in net unrealized depreciation on investments held as of December 31, 2023 | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
| 69 |
Notes to Consolidated Financial Statements
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
| For the Year Ended December 31, 2022 | ||||||||||||||||||||
| Senior Secured Loans - First Lien | Senior Secured Loans - Second Lien | Senior Secured Bonds | Equity and Other | Total | ||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Additions (1) | ||||||||||||||||||||
| Sales and repayments (2) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net realized gains (losses) (3) | ( | ) | ||||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments (4) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net discount accretion | ||||||||||||||||||||
| Transfers into Level 3 (5) | ||||||||||||||||||||
| Transfers out of Level 3 (6) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Fair value balance as of December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Change in net unrealized appreciation (depreciation) on investments held as of December 31, 2022 | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
Note 6. Related Party Agreements and Transactions
The Master Fund is affiliated with Guggenheim Credit Income Fund 2016 T ("GCIF 2016T") and Guggenheim Credit Income Fund 2019 ("GCIF 2019") (together, the "Feeder Funds"). The membership of the Boards of Trustees for the Master Fund, GCIF 2016T and GCIF 2019 are identical. The Feeder Funds have invested, and/or intend to invest, substantially all of the proceeds from their public offerings of common shares in the acquisition of the Master Fund's Common Shares.
One of the Master Fund's executive officers, Brian Binder, Senior Vice President, serves as an executive officer of Guggenheim. All of the Master Fund's executive officers also serve as executive officers of the Feeder Funds.
Guggenheim and/or its affiliates receive, as applicable, compensation for (i) investment advisory services, (ii) reimbursement of expenses in connection with investment advisory activities, administrative services and organizing the Master Fund and (iii) capital markets services in connection with the raising of equity capital for Feeder Funds affiliated with the Master Fund, as more fully discussed below.
| 70 |
Notes to Consolidated Financial Statements
Investment Advisory Agreements and Compensation of the Advisor
The Master Fund is party to an Investment Advisory Agreement with Guggenheim, pursuant to which the Master Fund agreed to pay Guggenheim an investment advisory fee consisting of two components: (i) a management fee and (ii) a performance-based incentive fee. Guggenheim continues to be entitled to reimbursement of certain expenses incurred on behalf of the Master Fund in connection with investment operations and investment transactions.
Management Fees: The management
fee is calculated at an annual rate of
Performance-based Incentive Fee: The performance-based incentive fee consists of two parts: (i) an incentive fee on income and (ii) an incentive fee on capital gains.
| (i) | The incentive fee on income is paid quarterly, if earned; it is computed as the sum of (A) |
| (ii) | The incentive fee on capital gains is paid annually, if earned; it is equal to 20% of realized capital gains on a cumulative basis from inception, net of (A) all realized capital losses and unrealized depreciation on a cumulative basis from inception, and (B) the aggregate amount, if any, of previously paid incentive fees on capital gains. |
All fees are computed in accordance with a detailed fee calculation methodology as approved by the Board of Trustees.
The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty: (i) by the Master Fund upon 60 days' written notice to Guggenheim, or (ii) by Guggenheim upon not less than 120 days' written notice to the Master Fund. In the event that the Investment Advisory Agreement is terminated by Guggenheim, and if the Independent Trustees elect to continue the Master Fund, then Guggenheim shall pay all direct expenses incurred by the Master Fund as a result of Guggenheim's withdrawal, up to, but not exceeding $250,000. Unless earlier terminated, the Investment Advisory Agreement will remain in effect for a period of two years from the date on which the Master Fund's shareholders approved the Investment Advisory Agreement and will remain in effect year to year thereafter if approved annually (i) by a majority of the Master Fund's Independent Trustees and (ii) the Master Fund's Board of Trustees or the holders of a majority of the Master Fund's outstanding voting securities.
Administrative Services Agreement
The Master Fund entered into an administrative services agreement with Guggenheim (the "Administrative Services Agreement") whereby Guggenheim agreed to provide administrative services to the Master Fund, including office facilities and equipment, and clerical, bookkeeping and record-keeping services. More specifically, Guggenheim, serving as the administrator (the "Administrator"), performs and oversees the Master Fund's required administrative services, which included financial and corporate record-keeping, preparing and disseminating the Master Fund's reports to its shareholders and filing reports with the SEC. In addition, the Administrator assists in determining net asset value, overseeing the preparation and filing of tax returns, overseeing the payment of expenses and distributions and overseeing the performance of administrative and professional services fees rendered by others. For providing these services, facilities and personnel, the Master Fund reimburses the Administrator for the allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administrative Services Agreement. To the extent that the Administrator outsources any of its functions, the Master Fund may pay the fees associated with such functions on a direct basis, without incremental profit to the Administrator.
The Administrative Services Agreement may be terminated at any time, without the payment of any penalty: (i) by the Master Fund upon 60 days' written notice to the Administrator upon the vote of the Master Fund's Independent Trustees, or (ii) by the Administrator upon not less than 120 days' written notice to the Master Fund. Unless earlier terminated, the Administrative Services Agreement will remain in effect for two years, and thereafter shall continue automatically for successive one-year periods if approved annually by a majority of the Board of Trustees and the Master Fund's Independent Trustees.
| 71 |
Notes to Consolidated Financial Statements
Dealer Manager Agreement
The Master fund is party to a dealer manager agreement, as amended (the "Dealer Manager Agreement") with Guggenheim Funds Distributors, LLC ("GFD") an affiliate of Guggenheim. Under the terms of the Dealer Manager Agreement, GFD is to act on a best efforts basis as the exclusive dealer manager for (i) GCIF 2016T's and GCIF 2019's public offerings of common shares and (ii) the public offering of common shares for future feeder funds affiliated with the Master Fund. The Master Fund is not responsible for the compensation of GFD pursuant to the terms of the Dealer Manager Agreement; therefore, fees compensating GFD are not presented in this periodic report. As to a Feeder Fund, the Deal Manager Agreement may be terminated by a Feeder Fund or GFD upon 60 calendar days' written notice to the other party.
Capital Structuring Fees and Administrative Agency Fees
Guggenheim and its affiliates are obligated to remit to the Master Fund any earned capital structuring fees and administrative agency fees (i.e. loan administration fees) based on the Master Fund's pro rata portion of the co-investment transactions or originated investments in which the Master Fund participates.
Summary of Related Party Transactions
The following table presents the related party fees, expenses and transactions for the years ended December 31, 2023, December 31, 2022 and December 31, 2021:
| For the Years Ended December 31, | ||||||||||||||
| Related Party (1) (2) | Source Agreement & Description | 2023 | 2022 | 2021 | ||||||||||
| Expenses: | ||||||||||||||
| Guggenheim | Investment Advisory Agreement - management fee | $ | $ | $ | ||||||||||
| Guggenheim | Administrative Services Agreement - expense reimbursement | |||||||||||||
| Income: | ||||||||||||||
| Guggenheim | Share on capital structuring fees and administrative agency fees | |||||||||||||
| (1) |
| (2) |
Co-Investment Transactions Exemptive Relief
The Master Fund was granted an SEC exemptive order which grants the Master Fund exemptive relief permitting the Master Fund, subject to the satisfaction of specific conditions and requirements, to co-invest in privately negotiated investment transactions with certain affiliates of Guggenheim.
Indemnification
The Investment Advisory Agreement and Administrative Services Agreement provide certain indemnifications to Guggenheim, its directors, officers, persons associated with Guggenheim and its affiliates, including the administrator. In addition, the Master Fund's Declaration of Trust, as amended, provides certain indemnifications to its officers, trustees, agents and certain other persons. As of December 31, 2023 management believes that the risk of incurring any losses for such indemnifications is remote.
Note 7. Borrowings
Hamilton Credit Facility
On December 17, 2015, Hamilton initially entered into a senior-secured term loan, as amended (the “Hamilton Credit Facility”) with JPMorgan Chase Bank, National Association ("JPM"), as administrative agent, each of the lenders from time to time party thereto, and U.S. Bank National Association, as collateral agent, collateral administrator and securities intermediary.
| 72 |
Notes to Consolidated Financial Statements
On November 29, 2021, Hamilton repaid in full all outstanding amounts due in connection with, and terminated all commitments under, the Hamilton Credit Facility. On September 30, 2022, Hamilton was dissolved.
The components of the Master Fund's interest expense and other financing costs for years ended December 31, 2023, December 31, 2022 and December 31, 2021 were as follows:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Stated Interest Expense | $ | $ | $ | |||||||||
| Unused/undrawn fees | ||||||||||||
| Amortization of deferred financing costs | ||||||||||||
| Total Interest Expense | $ | $ | $ | |||||||||
| Average borrowings | $ | $ | $ | |||||||||
| Weighted average interest rate (1) | % | % | % | |||||||||
| Amortized financing costs | % | % | % | |||||||||
| Total borrowing cost | % | % | % | |||||||||
| (1) |
Note 8. Commitments and Contingencies
The amounts associated with unfunded commitments to provide funds to portfolio companies are not recorded in the Master Fund’s consolidated statements of assets and liabilities. Since these commitments and the associated amounts may expire without being drawn upon, the total commitment amount does not necessarily represent a future cash requirement. As of December 31, 2023 and December 31, 2022, the Master Fund’s unfunded commitments consisted of the following:
| Total Unfunded Commitments | ||||||||
| Category / Portfolio Company (1) | December 31, 2023 | December 31, 2022 | ||||||
| Allvue Systems (Revolver) | ||||||||
| Apptio, Inc. (Revolver) | ||||||||
| Galls LLC (Revolver) | ||||||||
| Polyvision Corp. (Revolver) | ||||||||
| PSI Services LLC (Revolver) | (2) | (2) | ||||||
| Wide Orbit (Revolver) | ||||||||
| Total Unfunded Commitments | $ | $ | ||||||
| (1) |
| (2) |
| 73 |
Notes to Consolidated Financial Statements
Note 9. Financial Highlights
The following per Common Share data and financial ratios have been derived from information provided in the consolidated financial statements. The following is a schedule of financial highlights during the years ended December 31, 2023, December 31, 2022, December 31, 2021, December 31, 2020 and December 31, 2019:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||
| PER COMMON SHARE OPERATING PERFORMANCE | ||||||||||||||||||||
| Net asset value, beginning of year | $ | $ | $ | $ | $ | |||||||||||||||
| Net investment income (1) | ||||||||||||||||||||
| Net realized losses (1) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net change in unrealized appreciation (depreciation) (2) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net increase (decrease) resulting from operations | ( | ) | ||||||||||||||||||
| Distributions to Common Shareholders (3) | ||||||||||||||||||||
| Distributions from net investment income | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Distributions from return of capital | ( | ) | ||||||||||||||||||
| Distributions representing return of capital | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net decrease resulting from distributions | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net asset value, end of year | $ | $ | $ | $ | $ | |||||||||||||||
| INVESTMENT RETURNS | ||||||||||||||||||||
| Total investment return (4) | % | ( | )% | % | % | % | ||||||||||||||
| RATIOS/SUPPLEMENTAL DATA | ||||||||||||||||||||
| Net assets, end of year | $ | $ | $ | $ | $ | |||||||||||||||
| Average net assets (5) | $ | $ | $ | $ | $ | |||||||||||||||
| Common Shares outstanding, end of year | ||||||||||||||||||||
| Weighted average Common Shares outstanding | ||||||||||||||||||||
| Ratios-to-average net assets: (5) | ||||||||||||||||||||
| Total expenses | % | % | % | % | % | |||||||||||||||
| Net investment income | % | % | % | % | % | |||||||||||||||
| Average outstanding borrowings (5) | $ | $ | $ | $ | $ | |||||||||||||||
| Portfolio turnover rate (5) (6) | % | % | % | % | % | |||||||||||||||
| Asset coverage ratio (7) | % | |||||||||||||||||||
| (1) |
| (2) |
| (3) |
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Notes to Consolidated Financial Statements
| (4) |
| (5) |
| (6) |
| (7) |
Note 10. Distributions
The following table summarizes the distributions that the Master Fund declared on its Common Shares during the years ended December 31, 2023, December 31, 2022 and December 31, 2021:
| Record Date | Payment Date | Distribution Per Common Share at Record Date | Distribution Per Common Share at Payment Date | Cash Distribution | ||||||||||
| For Calendar Year 2023 | ||||||||||||||
| $ | $ | $ | ||||||||||||
| $ | $ | |||||||||||||
| For Calendar Year 2022 | ||||||||||||||
| $ | $ | $ | ||||||||||||
| $ | $ | |||||||||||||
| For Calendar Year 2021 | ||||||||||||||
| $ | $ | $ | ||||||||||||
| $ | $ | |||||||||||||
For income tax purposes, the Master Fund estimates that its 2023 calendar year distributions are covered by taxable income and the return of capital (see Note 11. Taxable/Distributable Income).
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Notes to Consolidated Financial Statements
Note 11. Taxable/Distributable Income
Income and capital gain distributions are determined in accordance with the Code and federal tax regulations, which may differ from amounts determined in accordance with GAAP. The book-to-tax basis differences, which could be material, may be due to differing treatments of income and gains on various investment securities held by the Master Fund and expenses incurred by the Master Fund. Permanent book-to-tax basis differences result in reclassifications to paid-in capital in excess of par value and accumulated distributions in excess of net investment income. Undistributed (distributions in excess of) net investment income, accumulated net realized gains and accumulated net unrealized appreciation on investments, may include temporary book and tax basis differences which will reverse in subsequent periods.
For the years ended December 31, 2023, December 31, 2022 and December 31, 2021, the Master Fund made the following reclassifications of permanent book and tax basis differences:
| For the Years Ended December 31, | ||||||||||||
| Capital Accounts | 2023 | 2022 | 2021 | |||||||||
| Paid in capital in excess of par value | $ | ( | ) | $ | ( | ) | $ | |||||
| Undistributed net investment income | ( | ) | ||||||||||
| Accumulated realized gains (losses) | ( | ) | ( | ) | ||||||||
| Total | $ | $ | $ | |||||||||
The following table reconciles net increase in net assets resulting from operations to total taxable income available for distributions for the years ended December 31, 2023, December 31, 2022 and December 31, 2021:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net increase (decrease) in net assets resulting from operations | $ | $ | ( | ) | $ | |||||||
| Net realized losses | ||||||||||||
| Net change in unrealized (appreciation) depreciation | ( | ) | ( | ) | ||||||||
| Other book-tax difference | ||||||||||||
| Total taxable income and gains available for distributions | $ | $ | $ | |||||||||
The Master Fund did not incur U.S. federal excise tax for the calendar years ended December 31, 2022 and December 31, 2021 and the Master Fund does not expect to incur a U.S. federal excise tax for the calendar year ended December 31, 2023. The tax character of shareholder distributions attributable to the fiscal years ended December 31, 2023, December 31, 2022 and December 31, 2021 was as follows:
| For the Years Ended December 31, | ||||||||||||
| Distributions Attributable To: | 2023 | 2022 | 2021 | |||||||||
| Ordinary income (including short-term capital gains) | $ | $ | $ | |||||||||
| Return of Capital Distribution | ||||||||||||
| Total distributions | $ | $ | $ | |||||||||
| Distributions as a percentage of taxable income and gains available for distributions (1) | % | % | % | |||||||||
| (1) |
As of December 31, 2023 and December 31, 2022, the components of tax basis accumulated earnings (loss) were as follows:
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| Undistributed capital losses | $ | ( | ) | $ | ( | ) | ||
| Unrealized loss | ( | ) | ( | ) | ||||
| Other temporary adjustments | ( | ) | ( | ) | ||||
| Total accumulated (loss), net | $ | ( | ) | $ | ( | ) | ||
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Notes to Consolidated Financial Statements
Under the current tax law, the Master Fund may carry forward net capital losses indefinitely to use to offset capital gains realized in future years, and their character is retained as either short-term and/or long-term. At December 31, 2023, the Master Fund had incurred $(8,272) of long-term capital losses and $(21) of short-term capital losses.
Note 12. Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years ended December 31, 2023, December 31, 2022 and December 31, 2021 are presented below:
| As of and for the three months ended | ||||||||||||||||
| December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | |||||||||||||
| Total investment income | $ | $ | $ | $ | ||||||||||||
| Net investment income | ||||||||||||||||
| Net realized and unrealized gains (losses) | ( | ) | ( | ) | ||||||||||||
| Net increase (decrease) in net assets resulting from operations | ( | ) | ||||||||||||||
| Net assets | ||||||||||||||||
| Total investment income per Common Share - basic and diluted | ||||||||||||||||
| Net investment income per Common Share - basic and diluted | ||||||||||||||||
| Earnings (loss) per Common Share - basic and diluted | ) | |||||||||||||||
| Net asset value per Common Share at end of quarter | ||||||||||||||||
| As of and for the three months ended | ||||||||||||||||
| December 31, 2022 | September 30, 2022 | June 30, 2022 | March 31, 2022 | |||||||||||||
| Total investment income | $ | $ | $ | $ | ||||||||||||
| Net investment income | ||||||||||||||||
| Net realized and unrealized gains (losses) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net increase (decrease) in net assets resulting from operations | ( | ) | ( | ) | ||||||||||||
| Net assets | ||||||||||||||||
| Total investment income per Common Share - basic and diluted | ||||||||||||||||
| Net investment income per Common Share - basic and diluted | ||||||||||||||||
| Earnings (loss) per Common Share - basic and diluted | ) | ) | ||||||||||||||
| Net asset value per Common Share at end of quarter | ||||||||||||||||
| As of and for the three months ended | ||||||||||||||||
| December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | |||||||||||||
| Total investment income | $ | $ | $ | $ | ||||||||||||
| Net investment income | ||||||||||||||||
| Net realized and unrealized gains (losses) | ( | ) | ( | ) | ||||||||||||
| Net increase in net assets resulting from operations | ||||||||||||||||
| Net assets | ||||||||||||||||
| Total investment income per Common Share - basic and diluted | ||||||||||||||||
| Net investment income per Common Share - basic and diluted | ||||||||||||||||
| Earnings (loss) per Common Share - basic and diluted | ||||||||||||||||
| Net asset value per Common Share at end of quarter | ||||||||||||||||
Note 13. Subsequent Events
Management has evaluated subsequent events through the date of issuance of these consolidated financial statements and has determined that there are no subsequent events outside the ordinary scope of business that require adjustment to, or disclosure in, the consolidated financial statements.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There are no and have not been any disagreements between the Master Fund and its independent accountant on any matter of accounting principles, practices, or financial statement disclosure.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act, is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
Our Chief Executive Officer and Chief Financial Officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2023, have concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, were effective as of December 31, 2023 at a reasonable level of assurance.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting at December 31, 2023. In making this assessment, we used criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework). Based on our assessment, management concluded that, at December 31, 2023, our internal control over financial reporting is effective based on those criteria.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to SEC rules that exempt us from the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
Changes in Internal Control over Financial Reporting
During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Board of Trustees
Pursuant to the Master Fund's Declaration of Trust and bylaws, the Master Fund's business and affairs are managed under the direction of the Board of Trustees, which has overall responsibility for monitoring and overseeing the Master Fund’s management and operations. The Board of Trustees consists of three members, two of whom are considered Independent Trustees. The initial Trustees were elected by the Master Fund's organizational shareholders. The Trustees are subject to removal or replacement in accordance with Delaware law and the Master Fund’s Declaration of Trust.
On November 8, 2023, the Master Fund announced that Eric Rosenblatt tendered his resignation as a trustee of the Master Fund to pursue other opportunities. Mr. Rosenblatt served as an independent trustee, a member of the Audit Committee and Nominating and Governance Committee, and as Chairman of the Independent Trustees Committee. Mr. Rosenblatt’s decision to resign is not the result of any disagreement with the Master Fund, its advisor or their affiliates regarding their operations, policies, practices or otherwise.
Messrs. Goodman, and Roth are “Independent Trustees,” defined as Trustees who (i) are not “interested persons” of the Master Fund as defined in Section 2(a)(19) of the 1940 Act, and (ii) meet the independence requirements of Section 10A(m)(3) of the Exchange Act, and the rules and regulations of the SEC thereunder and under the Securities Act.
The responsibilities of the Board of Trustees include the oversight of our investment activities, quarterly valuations of our assets, financing arrangements and corporate governance activities. The Board of Trustees, including the Independent Trustees, oversees and monitors our investment performance and, beginning with the second anniversary of the effective date of the Investment Advisory Agreement, annually reviews the compensation the Master Fund pays to Guggenheim and to determine that the provisions of the Investment Advisory Agreement are carried out.
The Board of Trustees currently has an Independent Trustees Committee, an Audit Committee, and a Nominating and Governance Committee, and it may establish additional committees from time to time as necessary to fulfill its obligations. The Board of Trustees has not established a compensation committee because the executive officers of the Master Fund do not receive any compensation from the Master Fund. The Board of Trustees, as a whole, participates in the consideration of Independent Trustee compensation and its decisions on Independent Trustee compensation are based on, among other things, a review of director and trustee compensation data for comparable BDCs.
Biographies of Interested Trustees
Matthew S. Bloom serves as Senior Managing Director and Co-Head of Guggenheim’s Corporate Credit Group, and has been with Guggenheim Partners since 2006. He is also a member of the Investment Committee overseeing Guggenheim’s corporate credit investing activities and serves as Chairman and CEO of Guggenheim Credit Income Fund. He has over 15 years of experience in the high yield, leveraged loan and private debt markets. During his career at the firm, Mr. Bloom has been an analyst covering a variety of sectors, and subsequently led an industry team that focused on investing in the consumer, financial, food, gaming, industrials, retail, services and transportation sectors. In addition, Mr. Bloom has served as the Head of Research. Prior to joining Guggenheim, Mr. Bloom worked as an attorney at Skadden, Arps, Slate, Meagher & Flom in the Mergers & Acquisitions and Banking & Institutional Investing groups. Mr. Bloom received his B.S. from University of Florida and his J.D. from Columbia University School of Law.
Mr. Bloom was selected as an Interested Trustee because of his extensive knowledge of corporate credit investing activities and the Master Fund's business and operations. Additionally, his experience as Co-Head of Guggenheim’s Corporate Credit Group and an Investment Committee Member at Guggenheim Partners is particularly relevant to his trusteeship, and which we believe provides us with exceptional experience and leadership.
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Biographies of Independent Trustees
Marc S. Goodman serves as an Independent Trustee, a member of the Audit Committee and the Independent Trustees Committee, and as Chairman of the Nominating and Governance Committee. He is a Co-Founder and Managing Director of Conyers Consulting Group, LLC, a consulting firm for asset management companies. Until March 31, 2014, he was Co-Executive Chairman and Global Co-Chief Investment Officer of the Kenmar Olympia Group. Prior to that Mr. Goodman was the President, Co-Chief Executive Officer, and Co-Chief Investment Officer of The Kenmar Group. Prior to co-founding The Kenmar Group in 1983, Mr. Goodman was a Vice President and Director of Pasternak, Baum and Co., Inc., a global dealer of cash commodities. Mr. Goodman graduated from the Bernard M. Baruch School of Business of the City University of New York with a BBA degree and an MBA in Finance and Investments. He was awarded an Economics and Finance Department Fellowship during his studies. Mr. Goodman is the Chairman of the Board of the Stacy Joy Goodman Memorial Foundation, a non-profit charity committed to finding a cure for juvenile diabetes. Mr. Goodman also serves on the Diabetes Research Institute Foundation’s National Board and Executive Committee, as well as the Foundation’s Northeast Board and its Executive Committee.
Mr. Goodman was selected as one of our two Independent Trustees because of his experience in the asset management industry and as a chief investment officer; as well as his prior and current experience as a director for other non-traditional funds.
Peter E. Roth serves as an Independent Trustee and a member of the Nominating and Governance Committee and the Independent Trustees Committee, and as Chairman of the Audit Committee. He is the Managing Partner of the Rothpoint Group llc, a consulting firm specializing in the financial services industry.
Mr. Roth is a Non-Executive Director and Senior Independent Director of the City of London Investment Group plc, a publicly traded (London Stock Exchange) asset management firm. He is also Chairman of the Audit Committee and a member of the Nomination Committee and Remuneration Committee. Mr. Roth serves as a Director of the Stone Point Credit Corporation and is Chairman of the Audit Committee and a Member of the Nomination and Governance Committee. In the non-profit sector, he is on the Board of St. Mary’s Healthcare System for Children and is Chairman of the Finance Committee and a member of the Executive Committee.
Prior to establishing Rothpoint, Mr. Roth had a 35 year plus career in the financial services industry. He was the head of investment banking at Fox, Pitt, Kelton Inc. for thirteen years and a member of the firm’s Operating Committee. At Keefe, Bruyette & Woods, he joined as the Head of Insurance Investment Banking and later became the Chief Executive Officer of KBW Asset Management, an SEC registered investment firm specializing in the financial services sector. He served on the firm’s Operating Committee and was a member of the Board of Directors of KBW, Inc. at the time of its initial public offering. Mr. Roth received a Bachelor of Arts degree from the University of Pennsylvania and Master’s of Business Administration from The Wharton School at the University of Pennsylvania.
Mr. Roth was selected as one of our two Independent Trustees because of his prior experience in capital raising transactions and strategic planning and his leadership roles at several firms in the financial service industry. He also has finance expertise which, we believe, is beneficial in providing leadership on the Audit Committee.
Supplemental information regarding our Trustees is set forth below. Unless otherwise noted, the address for each Trustee is c/o Guggenheim Credit Income Fund, 330 Madison Avenue, New York, New York 10017. The same five Trustees also serve on each of the Feeder Funds’ Board of Trustees where they have overall responsibility for overseeing each of the Feeder Funds’ management and operations. As of December 31, 2023, the master fund/feeder fund complex consisted of the Master Fund, GCIF 2019 and GCIF 2016T (collectively, the "GCIF Master/Feeder Complex"), each entity representing a distinct trust with a class of securities registered pursuant to Section 12 of the Exchange Act.
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| Name and Age of Trustee | Position(s) Held with Company | Term of Office-Length of Time Served | Principal Occupation(s) Past Five Years (1) | Other Directorships Held by Trustee |
| Interested Trustees (2) | ||||
| Matthew S. Bloom, 46 | Chief Executive Officer, Chairman of the Board of Trustees and President | Appointed 2017 | Senior Managing Director and Head of Research, Guggenheim Partners, (2006-present). | GCIF Master/Feeder Complex (2017-present). |
| Independent Trustees | ||||
| Marc S. Goodman, 75 | Trustee, Chairman of the Nominating and Governance Committee, Member of the Audit Committee, Member of the Independent Trustees Committee | Appointed 2015 | Managing Director, Conyers Consulting Group, (2014-present); Managing Director, Statsure Financial Services (2017-present); Co-Executive Chairman, Co-Chief Investment Officer, Kenmar Olympia Group, (1983-2014). | GCIF Master/Feeder Complex (2015-present); Director, Duet Commodities Fund Limited, (2014-2017); Director, Electrum Special Acquisition Corporation, (2015-2018). |
| Peter E. Roth, 65 | Trustee, Chairman of the Audit Committee(3), Member of the Nominating and Governance Committee, Member of the Independent Trustees Committee | Appointed 2015 | Managing Partner, Rothpoint Group llc, (2017-present); Managing Partner, JP Charter Oak Advisors llc, (2012-2018); Chief Executive Officer, KBW Asset Management, Inc., (2006-2012). | GCIF Master/Feeder Complex (2015-present); Non Executive Director, City of London Investment Group plc, (2019-present); Non Executive Director, City of London Investment Management, (2019-present); Board Member, St. Mary’s Healthcare System for Children, (2010-present); Director, Stone Point Credit Corporation (2020 - Present) |
| (1) | Guggenheim Partners is an affiliate of the Master Fund. |
| (2) | Messrs. Bloom, our Interested Trustee, is a senior executive of Guggenheim who provides services to us. |
| (3) | Our Board of Trustees has determined that Independent Trustee and Audit Committee Chairman Peter E. Roth is an "audit committee financial expert" as that term is defined under Item 407(d)(5) of Regulation S-K of the Exchange Act. |
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Executive Officers
Information regarding our executive officers is set forth below. Unless otherwise noted, the address for each executive officer is c/o Guggenheim Credit Income Fund, 330 Madison Avenue, New York, New York 10017. The five executive officers identified below also serve as executive officers of the two affiliated Feeder Funds in the same positions. The Master Fund does not have any employees.
| Name and Age of Officer | Position(s) Held with Company |
Term of Office-Length of Time Served |
Principal Occupation(s) Past Five Years (1) |
Other Directorships Held by Officer |
| Matthew S. Bloom, 46 | Chief Executive Officer, Chairman of the Board of Trustees and President | Appointed 2017 | Senior Managing Director and Head of Research, Guggenheim Partners, (2006-present). | GCIF Master/Feeder Complex (2017 - present). |
| James Howley, 52 | Chief Financial Officer and Treasurer | Appointed 2022 | Chief Financial Officer, Chief Accounting Officer, Treasurer, Guggenheim Partners (2022-present); Asset Treasurer (2004-2022). | None |
| Amy J. Lee, 62 | Secretary and Chief Legal Officer | Appointed 2018 |
Current: Interested Trustee, certain other funds in the Fund Complex(2) (2018-present); Chief Legal Officer, certain other funds in the Fund Complex (2014-present); Vice President, certain other funds in the Fund Complex (2007-present); Senior Managing Director, Guggenheim Investments (2012-present).
Former: President and Chief Executive Officer, certain other funds in the Fund Complex (2017-2019); Vice President, Associate General Counsel and Assistant Secretary, Security Benefit Life Insurance Company and Security Benefit Corporation (2004-2012). |
Guggenheim Fund Complex (2)(2018-present) |
| Brian E. Binder, 52 | Senior Vice President | Appointed 2018 |
Current: President and Chief Executive Officer, certain other funds in the Guggenheim Fund Complex (2) (2018-present); President and Chief Executive Officer, Guggenheim Funds Investment Advisors, LLC and Security Investors, LLC (2018-present); Senior Managing Director and Chief Administrative Officer, Guggenheim Investments (2018-present).
Former: Managing Director and President, Deutsche Funds, and Head of US Product, Trading and Fund Administration, Deutsche Asset Management (2013-2018); Managing Director, Head of Business Management and Consulting, Invesco Ltd. (2010-2012). |
Director, Guggenheim Partners Fund Management (Europe) Limited, (2018 - present).
Chairman of the Board of Managers, Guggenheim Funds investment Advisors, LLC, (2018 - present). |
| Joanna M. Catalucci, 57 | Chief Compliance Officer and Anti-Money Laundering Officer | Appointed 2018 |
Current: Chief Compliance Officer, certain funds in the Guggenheim Fund Complex (2) (2012-present); Senior Managing Director, Guggenheim Investments (2012-present).
Former: Chief Compliance Officer and Secretary, certain other funds in the Guggenheim Fund Complex (2008-2012); Senior Vice President & Chief Compliance Officer, Security Investors, LLC and certain affiliates (2010-2012); Chief Compliance Officer and Senior Vice President, Rydex Advisors, LLC and certain affiliates (2010-2011). |
Member of Board of Trustees, Merrimack College, (2018 - present). |
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| (1) | Guggenheim, Guggenheim Partners, W. P. Carey Inc. and CCA are affiliates of the Master Fund for all or a portion of 2023. |
| (2) | The Guggenheim Fund Complex includes all registered closed- and open-end funds (including all of their portfolios) advised by the Advisor and any funds that have an investment adviser or servicing agent that is an affiliated person of the Advisor. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that Trustees, Executive Officers and persons who are the beneficial owners of more than 10% of our Common Shares file reports of their ownership and changes in ownership of our Common Shares with the SEC and to furnish us with copies of all such Section 16 reports that they file. Based solely upon a review of the copies of such reports furnished to us as filed with the SEC and other written representations that no other reports were required to be filed during the year, the Master Fund believes that all Trustees, Executive Officers and beneficial owners of 10% or more of our Common Shares were in compliance with the reporting requirements of Section 16(a) of the Exchange Act during 2023.
Code of Ethics
The Master Fund adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Persons subject to this code of ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the requirements of the code of ethics. A copy of our code of ethics is available at www.guggenheiminvestments.com/credit-income-fund/corporate-governance.
Corporate Governance
Board of Trustees Leadership Structure
Our business and affairs are managed under the direction of our Board of Trustees. Among other things, our Board of Trustees sets broad policies for us and approves the appointment of our Advisor, administrator and officers. The role of our Board of Trustees, and of any individual Trustee, is one of oversight and not of management of our day-to-day affairs.
Under our Bylaws, our Board of Trustees may designate one of our Trustees as Chairman to preside over meetings of our Board of Trustees and meetings of shareholders, and to perform such other duties as may be assigned to him or her by our Board of Trustees. Presently, Mr. Bloom serves as Chairman of our Board of Trustees and is an “interested person” by virtue of his professional association with Guggenheim. We believe that it is in the best interests of our shareholders for Mr. Bloom to serve as Chairman of our Board of Trustees because of his experience in matters of relevance to our business. Our Board of Trustees has determined that the compositions of the Audit Committee and the Independent Trustees Committee are appropriate means to address any potential conflicts of interest that may arise from the Chairman’s status as an interested person of us. We believe that our Board of Trustees’ flexibility to determine its Chairman and reorganize its leadership structure from time to time is in the best interests of us and our shareholders.
Our Independent Trustees have designated an Independent Trustee, who is also the Chairman of the Independent Trustees Committee to serve as the lead Independent Trustee on our Board of Trustees. The designation of a lead Independent Trustee is for an indefinite term, but may be voted on from time to time. The lead Independent Trustee may succeed himself or herself in that position. If the lead Independent Trustee is unavailable for a meeting, his or her immediate predecessor or an Independent Trustee designated by the other Independent Trustees will serve as lead Independent Trustee for such meeting. The lead Independent Trustee presides over meetings of our Independent Trustees Committee. The lead Independent Trustee also serves as a liaison between our Independent Trustees Committee and our management on a wide variety of matters, including agenda items for our Board of Trustees meetings. Designation as such does not impose on the lead Independent Trustee any obligations or standards greater than or different from those of our other Trustees.
All of the Independent Trustees play an active role on the Board of Trustees. The Independent Trustees compose a majority of our Board of Trustees and are closely involved in all material deliberations related to us. Our Board of Trustees believes that, with these practices, each Independent Trustee has an equal involvement in the actions and oversight role of our Board of Trustees and equal accountability to us and our shareholders. Our Independent Trustees are expected to meet separately (i) as part of each regular Board of Trustees meeting, and (ii) with our chief compliance officer, as part of at least one Board of Trustees meeting each year. Our Independent Trustees Committee may hold additional meetings at the request of the lead Independent Trustee or another Independent Trustee.
Our Board of Trustees, which reviews its leadership structure periodically as part of its self-assessment process, further believes that its structure is presently appropriate to enable it to exercise its oversight of us.
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Board of Trustees’ Role in Risk Oversight
Our Board of Trustees oversees our business and operations, including certain risk management functions. Risk management is a broad concept comprising many disparate elements (for example, investment risk, issuer and counterparty risk, compliance risk, operational risk and business continuity risk). Our Board of Trustees implements its risk oversight function both as a whole and through its committees. In the course of providing oversight, our Board of Trustees and its committees receive reports on our Advisor’s activities, including reports regarding our investment portfolio and financial accounting and reporting. Our Board of Trustees also receives a quarterly report from our Chief Compliance Officer, who reports on our compliance with federal and state securities laws and our internal compliance policies and procedures, as well as those of our Advisor, administrator and transfer agent. The Audit Committee’s meetings with our independent public accounting firm also contribute to its oversight of certain internal control risks. In addition, our Board of Trustees meets periodically with our Advisor to receive reports regarding our operations, including reports on certain investment and operational risks, and our Independent Trustees are encouraged to communicate directly with senior members of our management.
Our Board of Trustees believes that this role in risk oversight is appropriate. We believe that we have robust internal processes in place and a strong internal control environment to identify and manage risks. However, not all risks that may affect us can be identified, or processes and controls developed to eliminate or mitigate their occurrence or effects, and some risks are beyond the control of us, our Advisor, the administrator and our other service providers.
Board of Trustees Committees - Independent Trustees Committee, Audit Committee, Nominating and Governance Committee
Our Independent Trustees also serve on one or more of the following committees, which have been established by our Board of Trustees to handle certain designated responsibilities. The Board of Trustees has designated a Chairman of each committee. The Board of Trustees may establish additional committees, change the membership of any committee, fill all vacancies, designate alternate members to replace any absent or disqualified member of any committee or dissolve any committee as it deems necessary and in our best interest.
Independent Trustees Committee. Our Independent Trustees Committee consists of all of our Independent Trustees. Mr. Goodman currently serves as Chairman of the Independent Trustees Committee. The Independent Trustees Committee assists the Board of Trustees by acting as a liaison between the Board of Trustees and our principal service providers, including without limitation, our Advisor. The Independent Trustees Committee is responsible for assessing the flow of information between our management and the Board of Trustees and overseeing the annual approval process of the Investment Advisory Agreement and the Administrative Services Agreement. The Independent Trustees Committee is also responsible for addressing conflict of interest matters and directing the retention of any consultants that the Board of Trustees may deem necessary or appropriate. Time is allotted at each quarterly meeting of our Board of Trustees for the Independent Trustees to meet and discuss any issues that they deem necessary or appropriate. The Independent Trustees may also choose to meet in executive session outside the presence of the Interested Trustees during the course of other meetings of our Board of Trustees or at other times as they deem necessary or appropriate.
Audit Committee. Our Audit Committee consists of all of our Independent Trustees, each of whom meets the independence standards established by the SEC for audit committees and is not an “interested person” for purposes of the 1940 Act. Mr. Roth serves as Chairman of the Audit Committee. Our Board of Trustees has determined that Mr. Roth is an “audit committee financial expert” as that term is defined under Item 407 of Regulation S-K of the Exchange Act. The Audit Committee operates pursuant to a written charter and meets periodically as necessary. A copy of the Audit Committee’s charter is available on our website at www.guggenheiminvestments.com/credit-income-fund/corporate-governance. The Audit Committee is responsible for selecting, engaging and discharging our independent accountants; reviewing the plans, scope and results of the audit engagement with our independent accountants; approving professional services provided by our independent accountants (including compensation therefore); reviewing the independence of our independent accountants; and reviewing the adequacy of our internal controls over financial reporting.
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Nominating and Governance Committee. Our Nominating and Governance Committee consists of all of our Independent Trustees. Mr. Goodman serves as Chairman of the Nominating and Governance Committee. The Nominating and Governance Committee operates pursuant to a written charter and meets periodically as necessary. A copy of the Nominating and Governance Committee’s charter is available on our website at www.guggenheiminvestments.com/credit-income-fund/corporate-governance. The Nominating and Governance Committee is responsible for selecting, researching and nominating Trustees for election by our shareholders, selecting nominees to fill vacancies on the Board of Trustees or a committee of the Board of Trustees, developing and recommending to the Board of Trustees a set of corporate governance principles and overseeing the evaluation of the Board of Trustees and our management. Our Nominating and Governance Committee will consider shareholders’ proposed nominations for Trustees. A shareholder who desires to recommend a nominee must submit a request in writing pursuant to the relevant provisions of our bylaws. Our Nominating and Governance Committee will consider nominees recommended in writing by a shareholder (other than shareholder recommendations of himself or herself) to serve as Trustees, provided that: (i) such person is a shareholder of our Company at the time he, she or it recommends such nominee and is entitled to vote at the meeting of shareholders at which Trustees will be elected; and (ii) the committee will make the final determination as to the qualifications of the individual to be nominated. The committee will evaluate each nominee recommended by a shareholder to serve as Trustee in the same manner as it would evaluate potential nominees identified by the committee.
The Delaware Trustee
Wilmington Trust, National Association (the “Delaware Trustee”) serves as our sole Trustee in the State of Delaware. The Delaware Trustee’s principal offices are located at 1100 North Market Street, Wilmington, Delaware 19890. The Delaware Trustee is unaffiliated with us. The rights and duties of the Delaware Trustee are governed by the provisions of the Delaware Statutory Trust Act and by our Declaration of Trust.
The Delaware Trustee will accept service of legal process on us in the State of Delaware. The duties of the Delaware Trustee are limited to the execution of any certificates required to be filed with the Delaware Secretary of State, which the Delaware Trustee is required to execute under the Delaware Statutory Trust Act. The Delaware Trustee does not owe any other duties to us or our shareholders. The Declaration of Trust provides that the Delaware Trustee is permitted to resign upon at least 30 days’ notice to us, provided, that any such resignation will not be effective until a successor trustee is appointed by our Board of Trustees or a court of competent jurisdiction, or a successor is appointed by a court of competent jurisdiction pursuant to a court petition by the Delaware Trustee. The Declaration of Trust provides that the Delaware Trustee is compensated by us in accordance with a separate fee agreement, and is indemnified by us, as appropriate, against any and all losses, damages, liabilities, claims, actions, suits, costs, expenses, disbursements (including the reasonable fees and expenses of counsel), taxes and penalties of any kind and nature whatsoever, to the extent such expenses arise out of or are imposed upon the Delaware Trustee with respect to the performance of its duties pursuant to our Declaration of Trust, or the formation, operation or termination of the Master Fund. The Delaware Trustee shall not be indemnified by us for any expenses that result from the gross negligence, bad faith or willful misconduct of the Delaware Trustee. Our Board of Trustees has discretion to replace the Delaware Trustee.
Under Delaware law, neither the Delaware Trustee, either in its capacity as Delaware Trustee or in its individual capacity, nor any director, officer or controlling person of the Delaware Trustee is, or has any liability as, the issuer or a Trustee, officer or controlling person of the issuer.
Under our Declaration of Trust, the Delaware Trustee’s duties are limited to (i) accepting legal process served on the Master Fund in Delaware and (ii) execution of any certificates required to be filed with the Delaware Secretary of State that the Delaware Trustee is required to execute under Section 3811 of the Delaware Statutory Trust Act. The Delaware Trustee has no duty or liability to supervise or monitor the performance of our Board of Trustees, nor does the Delaware Trustee have any liability for the acts or omissions of our Board of Trustees. Because the Delaware Trustee delegates substantially all of its authority over our operations to our Board of Trustees, the Delaware Trustee itself is not registered in any capacity with the SEC.
Item 11. Executive Compensation.
| (a) | Compensation of Executive Officers |
As an externally managed BDC, we rely on the services of Guggenheim as investment advisor under the Investment Advisory Agreement. Guggenheim also provides administrative services to the Master Fund under an Administrative Services Agreement. Of the Master Fund’s executive officers, and Brian Binder, Senior Vice President, serve as executive officers of Guggenheim. None of the Master Fund's executive officers receive direct compensation from us. Guggenheim is reimbursed by us for the allocable portion of administrative services performed by some of the Master Fund's executive officers.
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| (b) | Compensation of Independent Trustees |
The Board of Trustees is responsible for evaluating and approving trustee compensation; making decisions on trustee compensation, which are based on, among other things, a review of compensation data of comparable BDCs and investment companies.
In fiscal year 2023, the compensation schedule for each Independent Trustee consisted of a $70,000 annual retainer fee, $2,500 for participation in each regular in-person Board of Trustees meetings, $1,000 for (i) all committee meetings held during any regular Board of Trustees meeting and (ii) telephonic meetings of the Board of Trustees and committees, $250 for consideration and approval of co-investment transaction resolutions submitted for unanimous written consent, and reasonable out-of-pocket expenses incurred in connection with attending via conference call and webinar meetings of the Board of Trustees and committee. In addition, the Audit Committee chairman is compensated with a $10,000 annual retainer fee. The table below sets forth the compensation received by each Independent Trustee from the Master Fund for the fiscal year ended December 31, 2023; the Independent Trustees did not receive any additional compensation from the Feeder Funds and compensation for the Delaware Trustee and Independent Trustees' travel expenses are not included in the table below.
| INDEPENDENT TRUSTEE COMPENSATION | ||||
| Fiscal Year ended December 31, 2023 | ||||
| Independent Trustee Names | Total fees earned and received in cash | |||
| Marc S. Goodman | $ | 92,000 | ||
| Eric Rosenblatt | 86,806 | (1) | ||
| Peter E. Roth | 102,000 | |||
| $ | 280,806 | |||
| (1) | Due to the resignation of Mr. Rosenblatt, compensation earned was pro-rated based on time served for the year ended December 31, 2023 and outstanding expense reimbursements for out-of-pocket expenses. |
In fiscal year 2023, there were no changes to the compensation schedule for each Independent Trustee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
The following table sets forth, as of the date of this Report, information with respect to the beneficial ownership of our Shares by:
| • | each person known to us to beneficially own more than 5% of the outstanding Common Shares, |
| • | each Feeder Fund, |
| • | each of our Trustees and each executive officer, and |
| • | all of our Trustees and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. There are no Shares subject to options that are currently exercisable or exercisable within 60 days of the date of this Report. Ownership information for those persons who beneficially own 5% or more of our Shares is based upon information furnished by our transfer agent and other information provided by such persons, if available. A shareholder that owns more than 25% of our Shares is deemed to control us (as such term is defined in the 1940 Act).
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| Name of Beneficial Owner (1) | Number | Percentage of current ownership(2) | ||||||
| Beneficial Owners of More Than 5%:(2) | ||||||||
| IDF III, LLC; 227 West Monroe St., Chicago, IL 60606 | 2,777,778 | 10.85 | % | |||||
| Feeder Funds: (3) | ||||||||
| Guggenheim Credit Income Fund 2019 | 5,046,351 | 19.71 | % | |||||
| Guggenheim Credit Income Fund 2016 T | 17,061,497 | 66.66 | % | |||||
| Trustees and Executive Officers: | ||||||||
| Trustees: | ||||||||
| Matthew S. Bloom (4) | — | — | % | |||||
| Marc S. Goodman | — | — | % | |||||
| Peter E. Roth | — | — | % | |||||
| Executive Officers: | ||||||||
| James Howley, Chief Financial Officer and Treasurer | — | — | % | |||||
| Amy J. Lee, Secretary and Chief Legal Officer | — | — | % | |||||
| Brian Binder, Senior Vice President | — | — | % | |||||
| Joanna M. Catalucci, Chief Compliance Officer and Anti-Money Laundering Officer | — | — | % | |||||
| All Trustees and Executive Officers as a group (7 persons): | — | — | % | |||||
| (1) | Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. |
| (2) | Based on a total of 25,594,125 Shares issued and outstanding as of March 22, 2024. |
| (3) | Each Feeder Fund is registered with the SEC and its financial statements may be viewed at www.sec.gov. |
| (4) | Matthew S. Bloom is also the Chief Executive Officer and President of the registrant. |
Item 13. Certain Relationships and Related Transactions, and Trustee Independence.
Potential Conflicts of Interest
The members, directors, officers and other personnel of Guggenheim allocate their time between advising us and managing other investment and business affairs in an appropriate manner. However, Guggenheim will continue to devote the time, resources and other services necessary to managing its other investment and business activities and Guggenheim is not precluded from conducting activities unrelated to our business affairs. As a result of these business activities, Guggenheim may have conflicts of interest in allocating management time, services and functions among us and other business ventures or clients.
We may compete with other advisory clients or affiliates of Guggenheim for investments, subjecting Guggenheim and its affiliates to certain conflicts of interest in evaluating the suitability of investment opportunities or making acquisitions on our behalf.
Guggenheim and its respective affiliates may give advice and recommend securities to other clients which may differ from advice given to, or securities recommended or bought for, us even though their investment objectives may be similar to ours. As a result, Guggenheim may at certain times be simultaneously seeking to purchase or dispose of investments for the Master Fund and for other clients for which they serve as advisor.
To the extent not restricted by confidentiality requirements or applicable law, Guggenheim may apply experience and information gained in providing services to our portfolio companies in providing services to competing companies invested in by our affiliates’ other clients.
As a BDC, we are limited in our ability to invest in any portfolio company in which an affiliate’s other client has an investment. We are also limited in our ability to co-invest in a portfolio company with Guggenheim or one or more of its affiliates. Some of these co-investments are only permitted pursuant to reliance on previous no-action letters or an exemptive order from the SEC.
From time to time, and to the extent consistent with the 1940 Act and the rules and regulations promulgated thereunder, or with the co-investment transaction exemptive relief we received from the SEC, we and other clients for which Guggenheim provides investment management services or carries on investment activities may make investments at different levels of an investment entity’s capital structure or otherwise in different classes of an issuer’s securities. These investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by us and such other clients, including in the case of financial distress of the investment entity.
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From time to time, and to the extent consistent with the 1940 Act and the rules and regulations promulgated thereunder, or with the co-investment transaction exemptive relief we received from the SEC, Guggenheim and its affiliates may receive capital structuring fees and loan administration fees in connection with our investments. Guggenheim and its affiliates are obligated to remit to us any earned capital structuring fees and loan administration fees based on our pro rata portion of the co-investment transactions in which we participate.
Certain investments made by us might result in Guggenheim representatives or employees receiving a position on the governing body of a portfolio company as well as fees associated with such position. Any fees received will be passed through to the us in accordance with the 1940 Act.
Guggenheim and its affiliates may advise a broad range of investment funds, vehicles and other accounts, including proprietary vehicles, that make investments worldwide. Guggenheim may also make investments for its own account.
By reason of the advisory, investment banking and/or other activities of Guggenheim and its affiliates, Guggenheim may acquire confidential or material non-public information or be restricted from initiating transactions in certain securities. This may also happen if, for example, any members of the board of directors of a portfolio company are nominated or designated by Guggenheim or any of its affiliates. Guggenheim will not be free to divulge, or to act upon, any such confidential or material non-public information, and because of these restrictions, Guggenheim may not be able to initiate a transaction for the Master Fund that it otherwise might have initiated (including taking a new position or adding to an existing position). As a result, the Master Fund may be frozen in an investment position that it otherwise might have liquidated or closed out, or may not be able to acquire a position that it might otherwise have acquired.
Guggenheim and its affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships, or from engaging in other business activities, even though such activities may compete with us or may require substantial resources.
Guggenheim may have, or enter into, advisory relationships with other advisory clients that could lead to circumstances in which a conflict of interest between Guggenheim and its advisory clients could exist or develop. In addition, to the extent that another client of Guggenheim holds a different class of securities of the same issuer than us, the interest of such client and our interest may not be aligned. As a result of these conflicts and restrictions, Guggenheim may be unable to implement our investment strategies as effectively as they could have in the absence of such conflicts or restrictions. In order to avoid these conflicts and restrictions, Guggenheim may choose to exit these investments prematurely and, as a result, we would forgo any future positive return associated with such investments.
No rebates or give-ups may be received by Guggenheim or its affiliates, nor may Guggenheim participate in any reciprocal business arrangements that would circumvent the prohibition of rebates or give-ups.
Various potential and actual conflicts of interest may arise as a result of the investment banking, commercial banking, asset management, financing and financial advisory services and products provided by Guggenheim and its affiliates. Guggenheim and its affiliates may purchase, hold and sell, both for their respective accounts or for the account of their respective clients, on a principal or agency basis, loans, securities and other obligations and financial instruments and engage in private equity investment activities. Subject to applicable law, Guggenheim and its affiliates will not be restricted in their performance of any such services or in the types of debt or equity investments that they may make. In conducting the foregoing activities, Guggenheim and its affiliates will be acting for their own account or the account of their clients and, subject to applicable law, will have no obligation to act in the interest of the Master Fund.
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Transactions with Related Persons, Promoters and Certain Control Persons
Guggenheim may be deemed a promoter and control person of the Master Fund. From inception through September 10, 2017, the Master Fund was party to the Prior Investment Advisory Agreement and the Prior Administrative Services Agreement with CCA. On August 10, 2017, CCA resigned as the Master Fund's investment advisor and administrator, and the Board of Trustees selected Guggenheim to perform the Master Fund's investment advisory and administrative responsibilities, both events concurrently effective on September 11, 2017. The Master Fund is currently party to the Investment Advisory Agreement and the Administrative Services Agreement with Guggenheim. Guggenheim earns investment advisory fees, performance-based incentive fees, and is reimbursed for the costs of providing administrative services.
Under the terms of the Investment Advisory Agreement Guggenheim is responsible for performing the following tasks:
| • | determining the composition and allocation of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such strategies; |
| • | identifying, evaluating, negotiating and structuring the investments we make; |
| • | performing due diligence on prospective portfolio companies; |
| • | executing, closing, servicing and monitoring the investments we make; |
| • | arrangement of debt financing; |
| • | determining the securities and other assets that we will purchase, retain or sell; and |
| • | providing us with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of our capital. |
Guggenheim is responsible for identifying, evaluating, negotiating and structuring our investments. These activities will be carried out by its investment teams and are subject to the oversight of Guggenheim’s senior investment personnel. Certain affiliated co-investment transactions, to the extent permitted by an SEC exemptive order, may require the additional approval of our Independent Trustees Committee.
During 2023 and 2022, we incurred $0.7 million and $2.0 million in management fees, respectively, which were payable to Guggenheim.
Guggenheim also oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, investor relations and other administrative services. Guggenheim also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, Guggenheim assists us in calculating our net asset value, oversees the preparation and filing of tax returns, the printing and dissemination of reports to our shareholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others.
For providing these services, facilities and personnel, we reimburse Guggenheim for administrative expenses it incurs in performing its obligations. The amount of this reimbursement is set at the lesser of (i) Guggenheim’s actual costs and (ii) the amount that we would be required to pay for comparable administrative services in the same geographic location. Guggenheim is required to allocate the cost of such services to us based on objective factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our Board of Trustees assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our Board of Trustees considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our Board of Trustees compares the total amount paid to Guggenheim for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. We will not reimburse Guggenheim for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Guggenheim.
During 2023 and 2022, $0.4 million and $0.4 million, respectively, was paid to Guggenheim to cover personnel expenses, which amount includes both cash compensation and employee benefits, excludes amounts paid by Guggenheim to their respective executive officers (which are not reimbursed by us), and includes an allocation of office rental expenses and of certain other overhead expenses.
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Each of the Investment Advisory Agreement and the Administrative Services Agreement, unless earlier terminated as described below, will remain in effect for two years, and thereafter shall continue automatically for successive one-year periods, if approved annually by (i) a majority of our Independent Trustees, (ii) our Board of Trustees or the holders of a majority of our outstanding voting securities in the case of the Investment Advisory Agreement and (iii) our Board of Trustees in the case of the Administrative Services Agreement.
Each of the Investment Advisory Agreement and the Administrative Services Agreement will automatically terminate in the event of its assignment. In accordance with the 1940 Act, the Master Fund may terminate the Investment Advisory Agreement and the Administrative Services Agreement with Guggenheim upon 60 days’ written notice. The decision to terminate any agreement may be made by a majority of our Independent Trustees or the holders of a majority of our outstanding Shares.
Guggenheim will be permitted to voluntarily terminate the Investment Advisory Agreement and the Administrative Services Agreement, upon 120 days’ prior written notice.
Under the Investment Advisory Agreement, the Master Fund expects, to the extent permitted by applicable law and in the discretion of the Board of Trustees, to indemnify Guggenheim and certain of its affiliates.
Additionally, as a BDC, we must offer managerial assistance to our eligible portfolio companies (“EPCs”). This managerial assistance may include monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of our EPCs and providing other organizational and financial guidance. Guggenheim makes available such managerial assistance, on our behalf, to our EPCs, whether or not they request this assistance. We may receive fees for these services and will reimburse Guggenheim for their allocated costs in providing such assistance, subject to review and approval by our Board of Trustees.
Policies and Procedures With Respect to Related Party Transactions
The Master Fund's Board of Trustees (including all of the Independent Trustees) has approved policies and procedures for the oversight, review and approval of transactions involving the Master Fund and persons related to the Master Fund. For example, the Board of Trustees has approved procedures for the calculation of management and incentive fees payable to Guggenheim and for the reimbursement of organizational and offering expenses paid by Guggenheim. The Master Fund has also adopted a Code of Ethics, prohibiting its Access Persons (as that term is defined under the 1940 Act) and other related parties from engaging in any business transaction or arrangement for personal profit that is not in the best interests of the Master Fund or its shareholders in violation of the fiduciary duty owed to the Master Fund and its shareholders.
Further, the Audit Committee is required by its charter to review with both the Master Fund's management and its independent accountants all related-party transactions or dealings with parties related to the Master Fund, and the Independent Trustees Committee reviews and approves the payment of reimbursements to the administrator for certain costs allocated to the Master Fund pursuant to the Administrative Services Agreement.
Trustee Independence
We define Independent Trustees as those trustees who (i) are not “interested persons” of us as defined in Section 2(a)(19) of the 1940 Act, and (ii) meet the independence requirements of Section 10A(m)(3) of the Exchange Act, and the rules and regulations of the SEC thereunder and under the Securities Act. A list of our interested and independent trustees is presented in Item 10. Directors, Executive Officers and Corporate Governance.
Item 14. Principal Accountant Fees and Services.
The following table summarizes the audit and non-audit related fees accrued or paid to Ernst & Young LLP (the "Independent Accountant") for professional services performed for the Master Fund's fiscal years ended December 31, 2023 and December 31, 2022, respectively.
| Fiscal Year | Audit and Quarterly Review Fees | Tax Fees (2) | ||||||
| 2023 | $ | 359,688 | $ | 19,169 | ||||
| 2022 | $ | 371,692 | $ | 19,169 | ||||
The following table summarizes the audit-related fees and non-audit related fees accrued or paid to the Independent Accountant for professional services performed for our affiliated Feeder Funds in fiscal years ended December 31, 2023 and December 31, 2022.
| GCIF 2016T | GCIF 2019 | |||||||
| Fiscal Year | Audit-Related and Tax Fees (1)(2) | Audit-Related and Tax Fees (1)(2) | ||||||
| 2023 | $ | 8,173 | $ | 8,173 | ||||
| 2022 | $ | 8,173 | $ | 8,173 | ||||
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| (1) | Audit-Related Fees: This category consists of those fees accrued or billed to the named entity by the independent accountant in connection with the periodic review of the named entity's registration statements. |
| (2) | Tax Fees: This category consists of fees accrued or billed to the named entity by the independent accountant for tax compliance services and preparation of income tax returns. |
Audit Committee's Pre-Approval Policy on Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm
The Master Fund maintains an Audit Committee charter that, among other things, mandates that the Audit Committee:
| • | appoint and retain each year a firm or firms of independent accountants to audit the accounts and records of the Companies, to approve the terms of compensation of such Independent Accountant and to terminate such Independent Accountant as they deem appropriate; |
| • | pre-approve the engagement of the Independent Accountant to render audit and/or permissible non-audit services (including the fees charged and proposed to be charged by the Independent Accountant), subject to the de minimis exceptions under Section 10A(i)(1)(B) of the Exchange Act, and as otherwise required by law; and |
| • | pre-approve non-audit services (subject to the de minimis exceptions under Section 10A(i)(1)(B) of the Exchange Act) rendered by the Independent Accountant to the Master Fund's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is sub-contracted or overseen by another investment adviser), and to any entity controlling, controlled by or under common control with its investment adviser that provides ongoing services to the Master Fund if the scope of the non-audit related services under the engagement relates directly to the operations and financial reporting of the Master Fund. |
All of the audit and non-audit services provided by the independent registered public accounting firm for which fees were incurred by us and our affiliates for fiscal years ended December 31, 2023 and December 31, 2022 were pre-approved by the Audit Committee in accordance with its pre-approval policy.
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PART IV
Item 15. Exhibits and Consolidated Financial Statement Schedules.
| a. | The following consolidated financial statements are filed as part of this Report in Part II. Item 8. Financial Statements and Supplementary Data. |
| b. | No financial statements are filed because the required information is presented in the consolidated financial statements or notes in this Report in Part II. Item 8. Consolidated Financial Statements and Supplementary Data. |
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EXHIBIT INDEX
The following exhibits are filed or incorporated as part of this Report.
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Item 16. Form 10-K Summary.
None.
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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.
| Guggenheim Credit Income Fund | ||||
| Date: | March 22, 2024 | By: | /s/ Matthew S. Bloom | |
| MATTHEW S. BLOOM | ||||
| Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| Date: | March 22, 2024 | By: | /s/ James Howley | |
| JAMES HOWLEY | ||||
| Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | |
| /s/ Matthew S. Bloom | |||
| Matthew S. Bloom | Chief Executive Officer and Trustee | March 22, 2024 | |
| (Principal Executive Officer) | |||
| /s/ James Howley | |||
| James Howley | Chief Financial Officer | March 22, 2024 | |
| (Principal Financial Officer) | |||
| /s/ Marc S. Goodman | |||
| Marc S. Goodman | Trustee | March 22, 2024 | |
| /s/ Peter E. Roth | |||
| Peter E. Roth | Trustee | March 22, 2024 |
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