DEF 14A: MSC Income Fund Seeks Stockholder Approval for Listing on National Securities Exchange

MSC Income Fund is seeking stockholder approval for several proposals to facilitate a potential listing on a national securities exchange, including amendments to its charter and advisory agreement.

Summary

• MSC Income Fund is holding a special meeting on December 2, 2024, to vote on proposals aimed at positioning the company for a potential listing on a national securities exchange.
• The proposals include amending the company's charter to remove legacy provisions from the North American Securities Administrators Association (NASAA) Omnibus Guidelines.
• One key proposal involves limiting the transferability of shares for 365 days after a listing to mitigate potential negative pricing pressure.
• Stockholders will also vote on an amended and restated investment advisory agreement with MSC Adviser I, LLC, which includes changes to the base management fee and incentive fee structure.
• Another proposal seeks authorization to offer and sell shares below net asset value (NAV) per share during the 12 months following stockholder approval, subject to certain limitations.
• The board of directors believes these changes will better position the company for a listing and benefit stockholders, although there is no guarantee a listing will occur.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook, focusing on the potential benefits of a listing and the alignment of the company with industry standards. However, it also acknowledges potential risks and dilutive effects, resulting in a moderately positive sentiment score.

Positives

• The proposed changes aim to align MSC Income Fund with industry standards for listed BDCs.
• The amended advisory agreement includes a reduction in the base management fee, potentially lowering expenses for the company.
• The ability to sell shares below NAV provides flexibility to raise capital in response to market conditions.
• The board believes the proposed changes will improve the company's ability to attract qualified directors and officers.
• The contractual cap on Internal Administrative Expenses is a material positive change for the Company.

Negatives

• There is no guarantee that a listing will occur, even if the proposals are approved.
• Selling shares below NAV would result in immediate dilution to existing stockholders.
• Increased flexibility in indemnification of officers and directors could increase the risk that the company and stockholders will not be able to recover monetary damages.
• The proposed Charter amendment does increase the risk that the Company will (i) indemnify our Adviser for certain losses that it would not be permitted to indemnify our Adviser for under the current Charter and (ii) advance and bear our Advisers defense costs in circumstances where the current Charter would not permit such advancement.

Risks

• Market conditions may make a listing undesirable or prevent a follow-on public offering.
• The potential for significant sales of shares immediately following a listing could negatively impact the trading price.
• Failure to maintain the required asset coverage ratio could have severe negative consequences for the company.
• The Board may, consistent with its fiduciary duties, approve the sale or otherwise issue the Companys Shares at any discount to its then current NAV per share; however, the Board will consider the potential dilutive effect of the issuance of Shares at a price below the NAV per Share when considering whether to authorize any such issuance and will act in the best interests of the Company and its stockholders in doing so.

Future Outlook

The company expects a listing, which may be accompanied by a follow-on public offering, could occur as soon as market conditions permit, but there is no guarantee.

Management Comments

• The board believes that seeking approval of these changes to the Charter, which will only go into effect in the event of and immediately prior to a Listing, will avoid the cost and time delay of another stockholder vote prior to a Listing.
• The Board believes that the combination of the reduction in the capital gains incentive fee from 20% to 17.5% and the reset of the capital gains incentive fee to the Listing date appropriately balances the various other proposed changes under the Proposed Advisory Agreement with the benefits of providing the Adviser with the incentive to effectuate sales of our investments, including equity interests in LMM portfolio investments, in a favorable manner on a go-forward basis.

Industry Context

The proposals aim to align MSC Income Fund with the practices of other listed BDCs, particularly in terms of corporate governance and fee structures.

Comparison to Industry Standards

• The document states that the overwhelming majority of peer Listed BDCs do not operate under the restrictions imposed by the NASAA Guidelines.
• The document states that the Company believes that using net assets rather than Adjusted Capital for purposes of the subordinated incentive fee on income is appropriate in connection with the potential Listing of the Company and is consistent with provisions in investment advisory agreements of other Listed BDCs.
• The document states that the Board reviewed a survey highlighting the base management fees currently paid by a universe of approximately 45 listed BDCs and found that only nine of those BDCs had a base management fee of 1.0% or less.
• The document states that the Companys non-advisory expense ratio, excluding interest expense, under the Proposed Advisory Agreement would have been 0.4% of total assets based on the twelve months ended March 31, 2024, unchanged from the actual non-advisory expense ratio, excluding interest expense, under the Current Advisory Agreement, and which the Board viewed favorably compared to the peer group during this period.
• The document states that the Board reviewed a survey highlighting the non-advisory expense ratio, excluding interest expense, of 13 other non-traded, publicly offered BDCs and found that eight of them had higher ratios than the Companys under the Proposed Advisory Agreement, with the Companys ratio under the Proposed Advisory Agreement considerably lower than the average of the 13 non-traded, publicly offered BDCs.

Stakeholder Impact

• The proposals could impact shareholders through potential dilution, changes in share value, and access to liquidity.
• Employees may be affected by changes in the company's operations and investment strategy.
• Portfolio companies could be impacted by changes in the company's investment focus.

Next Steps

• Stockholders will vote on the proposals at the Special Meeting on December 2, 2024.
• If approved, the company will proceed with preparations for a potential listing on a national securities exchange.
• The board will determine the final terms of any share sales, including those below NAV.

Key Dates

Keywords

listing, business development company, BDC, proxy statement, MSC Income Fund, NASAA Guidelines, advisory agreement, net asset value, NAV, share issuance