Home / Offering Memorandum / RISK FACTORS AND INVESTMENT CONSIDERATIONS / Leverage Risk

18.69. Leverage Risk

The use of leverage creates an opportunity for increased common share net investment income dividends, but also creates risks for the holders of common shares. The Investment Compartment cannot assure you that the use of leverage, if employed, will result in a higher yield on the common shares. Any leveraging strategy the Investment Compartment employs may not be successful.

Leverage involves risks and special considerations for common shareholders, including:

1.  the likelihood of greater volatility of NAV, market price and dividend rate of the common shares than a comparable portfolio without leverage;

2.  the risk that fluctuations in interest rates on borrowings and short-term debt or in the interest or dividend rates on any leverage that the Investment Compartment must pay will reduce the return to the common shareholders;

3.  the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the common shares than if the Investment Compartment were not leveraged, which may result in a greater decline in the market price of the common shares;

4.  when the Investment Compartment uses financial leverage, the management fee payable to the Manager will be higher than if the Investment Compartment did not use leverage; and

5.  leverage may increase operating costs, which may reduce total return

Any decline in the NAV of the Investment Compartment’s investments will be borne entirely by the holders of common shares. Therefore, if the market value of the Investment Compartment’s portfolio declines, leverage will result in a greater decrease in NAV to the holders of common shares than if the Investment Compartment were not leveraged. This greater NAV decrease will also tend to cause a greater decline in the market price for the common shares. While the Investment Compartment may from time to time consider reducing any outstanding leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and NAV associated with leverage, there can be no assurance that the Investment Compartment will actually reduce any outstanding leverage in the future or that any reduction, if undertaken, will benefit the holders of common shares. Changes in the future direction of interest rates are very difficult to predict accurately. If the Investment Compartment were to reduce any outstanding leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in any outstanding leverage would likely operate to reduce the income and/or total returns to holders of common shares relative to the circumstance where the Investment Compartment had not reduced any of its outstanding leverage. The Investment Compartment may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and determine not to reduce any of its outstanding leverage as described above.

The Investment Compartment does not intend to borrow money or issue debt securities or preferred shares during its first full year of operations, but may in the future borrow funds from credit institutions or other financial institutions, or issue debt securities or preferred shares, as described in this prospectus. Certain types of leverage the Investment Compartment may use may result in the Investment Compartment being subject to covenants relating to asset coverage and portfolio composition requirements. The Investment Compartment may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for any debt securities or preferred shares issued by the Investment Compartment. The Manager does not believe that these covenants or guidelines will impede it from managing the Investment Compartment’s portfolio in accordance with the Investment Compartment’s investment objectives and policies.

The Investment Compartment may invest in the securities of other investment companies. Such investment companies may also be leveraged, and will therefore be subject to the leverage risks described above. This additional leverage may in certain market conditions reduce the NAV of the Investment Compartment’s common shares and the returns to the holders of common shares.