Sierra Income enters into total return swap for floating-rate loans

By Angela McDaniels

Tacoma, Wash., Sept. 3 - Arbor Funding LLC, a newly formed, wholly owned financing subsidiary of Sierra Income Corp., entered into a total return swap for senior secured floating-rate loans with Citibank, NA on Aug. 27, according to an 8-K filing with the Securities and Exchange Commission.

The total return swap enables Sierra Income, through Arbor, to obtain the economic benefit of the loans subject to the total return swap in return for an interest-type payment to Citibank.

SIC Advisors LLC, Sierra Income's investment adviser, has been appointed as Arbor's designated manager. SIC Advisors will act as the investment manager of Arbor under the total return swap, including the selection of specific loans subject to the total return swap.

Arbor may select a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the total return swap) of $100 million, which is referred to as the maximum notional amount of the total return swap.

Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the total return swap agreement.

Arbor will receive from Citibank all interest and, subject to some limitations, all fees payable on the loans included in the portfolio.

Arbor will pay to Citibank interest at a rate equal to one-month Libor plus 100 basis points.

In addition, upon the termination or repayment of any loan subject to the total return swap, Arbor will either receive from Citibank the appreciation in the value of that loan or it will pay to Citibank any depreciation in the value of such loan.

Citibank may terminate the total return swap beginning on the second anniversary of the swap. SIC Advisors may terminate the total return swap on behalf of Arbor at any time. If it terminates the swap prior to the second anniversary, SIC Advisors will have to pay an early termination fee to Citibank.

Arbor must pay a minimum usage fee of 1% of the amount equal to 85% of the average daily unused portion of the maximum amount permitted under the total return swap. This minimum usage fee will not apply during the first 365 days and last 60 days of the term of the total return swap.

Arbor will also pay Citibank customary fees in connection with the establishment and maintenance of the total return swap.

Arbor must initially cash collateralize a specified percentage of each loan (generally 25% of the market value). Arbor may be required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans.

The obligations of Arbor under the total return swap agreement are non-recourse to Sierra Income, and Sierra Income's exposure under the total return swap agreement is limited to the value of its investment in Arbor, which generally will equal the value of cash collateral provided by Arbor under the total return swap agreement.

Sierra Income is a non-diversified, closed-end management company based in New York that invests in the debt of privately owned U.S. companies with a focus on senior secured debt, second-lien debt and, to a lesser extent, subordinated debt.

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