Flat Rock Enhanced Income Fund
03/07/2025 | Press release | Distributed by Public on 03/07/2025 14:31
Annual Report by Investment Company (Form N-CSR)
united states
securities and exchange commission
washington, d.c. 20549
form n-csr
certified shareholder report of registered
management investment companies
Investment Company Act file number: 811-23798
Flat Rock Enhanced Income Fund
(Exact name of registrant as specified in charter)
Robert K. Grunewald,
Chief Executive Officer
680 S. Cache Street, Suite 100,
P.O. Box 7403,
Jackson, WY 83001
(Address of principal executive offices) (Zip code)
The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, DE 19801
(Name and address of agent for service)
Copy to:
Owen J. Pinkerton, Esq.
Krisztina Nadasdy, Esq.
Eversheds Sutherland (US) LLP
700 Sixth Street, NW, Suite 700
Washington, DC 20001
(202) 383-0262
Registrant's telephone number, including area code: (307) 500-5200
Date of fiscal year end: December 31
Date of reporting period: December 31, 2024
Item 1. Reports to Stockholders.
(a)
Table of Contents
|
Shareholder Letter |
1 |
|
|
Portfolio Update |
4 |
|
|
Schedule of Investments |
7 |
|
|
Statement of Assets and Liabilities |
11 |
|
|
Statement of Operations |
12 |
|
|
Statements of Changes in Net Assets |
13 |
|
|
Statement of Cash Flows |
14 |
|
|
Financial Highlights |
15 |
|
|
Notes to Financial Statements |
17 |
|
|
Report of Independent Registered Public Accounting Firm |
30 |
|
|
Additional Information |
31 |
|
|
Trustees & Officers |
35 |
|
Flat Rock Enhanced Income Fund |
Shareholder Letter |
|
December 31, 2024 (Unaudited) |
Fellow FRBBX Shareholders:
The Flat Rock Enhanced Income Fund (the "Fund") launched on January 3, 2023, and by December 31, 2024, the Fund had $445 million of AUM invested in 48 Middle Market CLO BB notes. The Fund provides exposure to over 1,900 middle market loans via its portfolio of investments in collateralized loan obligations ("CLOs"). Despite recent Federal Reserve interest rate cuts, middle market loans still offer yields in the low-double-digitarea and have the benefit of being senior and secured obligations of the borrower. The CLO's third-partyequity investors take the initial losses on the loans we have exposure to. We believe this provides a valuable benefit for our Fund's shareholders.
The Fund returned 13.76% in 2024, and the since inception annualized return was 14.14%. We launched the Fund at a time when our target investments were trading at discounts to par value. As markets normalized over the last two years, Middle Market CLO BBs increased in value to around par. Our standard deviation since inception of 1.43% reflects the favorable market backdrop we've experienced thus far.
Fund Performance (Net)
|
Fund Performance |
1-Year |
Return |
Standard |
|||
|
Flat Rock Enhanced Income Fund |
13.76% |
14.14% |
1.43% |
|||
|
Bloomberg US Corporate High Yield Bond Index |
8.19% |
10.55% |
3.99% |
|||
|
S&P BDC Total Return Index |
16.61% |
21.42% |
13.05% |
The performance data quoted represents past performance. Current performance may be lower or higher than the performance data mentioned above. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that investor's shares, when repurchased by the Fund, may be worth more or less than their original cost. For performance information current to the most recent month-end, please call 307-500-5200.
We believe lower distribution yields will be the norm across the broader leveraged finance market in 2025. The Secured Overnight Financing Rate ("SOFR") is the floating rate benchmark for Middle Market CLO BBs. During the year, SOFR declined from 5.3% to 4.3%. Additionally, spreads tightened on our target investments from approximately SOFR + 9.0% to SOFR + 8.0%. As a result, we lowered our monthly distribution from 21.0 cents per share for 2024 to 19.3 cents per share, beginning in January 2025. We anticipate additional interest rate cuts in 2025, with the forward SOFR curve anticipating further declines to approximately 4.0% by the end 2025. Spread compression has also continued at the start of 2025.
|
Annual Report | December 31, 2024 |
1 |
|
Flat Rock Enhanced Income Fund |
Shareholder Letter |
|
December 31, 2024 (Unaudited) |
The Fund's year-enddistribution rate, adjusted for the recent decrease, was 10.68%, which we believe is favorable income for the risk we are taking in our investments. In our targeted asset class, the historical default rate is 25bps over the last thirty years.1Given the Fund's increased size, we are often able to put in orders for the full size of the Middle Market CLO BB. We believe that enables us to drive additional economics for our shareholders.
Throughout 2024, we continued to increase manager diversity in the portfolio, with CLO BBs from six new middle market managers added during the year. Our largest middle market CLOs managers at year-endwere Alliance Bernstein, Monroe Capital, First Eagle, Fortress and Brightwood. These managers have met the requirements of our rigorous due diligence process.
We view our Fund structure as a favorable way to get exposure to a diversified portfolio of middle market loans with significant downside protection provided by the CLO third-partyequity investors. Our Fund offers investors a published daily net asset value, Securities and Exchange Commission regulation and reporting, minimum 5% quarterly liquidity, and the ability to invest directly into the Fund using our ticker, FRBBX.
As always, if you have any questions, feel free to reach out.
Sincerely,
Robert Grunewald
Chief Executive Officer and Founder
Glossary: Standard Deviation is a measure that provides the dispersion around a mean. The S&P BDC Total Return Index is designed to track leading business development companies that trade on major U.S. exchanges. The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-ratecorporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. The index excludes bonds from emerging markets. Indexes are unmanaged, do not incur fees, expenses or taxes, and cannot be invested in directly.
Consider the investment risks, charges, and expenses of the Fund carefully before investing. Other information about the Fund may be obtained at https://flatrockglobal.com/flat-rock-enhanced-income-fund-frbbx. Please read it carefully.
The Fund is suitable for investors who can bear the risks associated with the Fund's limited liquidity and should be viewed as a long-term investment. Our shares have no history of public trading, nor is it intended that our shares will be listed on a national securities exchange at this time, if ever. No secondary market is expected to develop for our shares; liquidity for our shares will be provided only through quarterly repurchase offers for no less than 5% of and no more than 25% of our shares at net asset value, and there is no guarantee that an investor will be able to sell all the shares that the investor desires to sell
1. S&P Global
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2 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Shareholder Letter |
|
December 31, 2024 (Unaudited) |
in the repurchase offer. Due to these limited restrictions, an investor should consider an investment in the Fund to be of limited liquidity. Investing in our shares may be speculative and involves a high degree of risk, including the risks associated with leverage. Investing in the Fund involves risks, including the risk that shareholders may lose part or all of their investment. We intend to invest primarily in the junior debt tranches of CLOs that own a pool of senior secured loans. Our investments in the junior debt tranches of CLOs are exposed to leveraged credit risk. We may pay distributions in significant part from sources that may not be available in the future and that are unrelated to our performance, such as a returns of capital or borrowing. The amount of distributions that we may pay, if any, is uncertain. Ultimus Fund Distributors, LLC serves as our principal underwriter, within the meaning of the 1940 Act, and will act as the distributor of our shares on a best efforts' basis, subject to various conditions. You can contact Ultimus Fund Distributors at (833) 415-1088.
|
Annual Report | December 31, 2024 |
3 |
|
Flat Rock Enhanced Income Fund |
Portfolio Update |
|
December 31, 2024 (Unaudited) |
INVESTMENT OBJECTIVE
Flat Rock Enhanced Income Fund's (the "Fund") investment objective is to generate current income and, as a secondary objective, long-termcapital appreciation.
PERFORMANCE as of December 31, 2024
|
1 Year |
Since |
|||
|
Flat Rock Enhanced Income Fund(2) |
13.76% |
14.14% |
||
|
Bloomberg US Corporate High Yield Bond Index(3) |
8.19% |
10.55% |
||
|
S&P BDC Total Return Index(4) |
16.61% |
21.42% |
(1) The Fund's inception date was on January 3, 2023.
(2) Performance returns are net of management fees and other Fund expenses.
(3) The Bloomberg US Corporate High Yield Bond Index is a rules-based, market-value-weightedindex engineered to measure publicly issued non-investmentgrade USD fixed-rate, taxable and corporate bonds.
(4) The S&P BDC Total Return Index is designed to track leading business development companies ("BDCs") that trade on major U.S. exchanges. BDCs are publicly traded private equity firms that invest equity and debt capital in small and mid-sizedbusinesses, and make managerial assistance available to portfolio companies. Constituent companies are BDCs that meet minimum market capitalization and liquidity requirements. The index uses a capped market capitalization weighting scheme. Modifications are made to market cap weights, if required, to reflect available float, while applying single stock capping to the index constituents.
Performance data quoted represents past performance, which is not a guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and investment return of an investment will fluctuate so that your shares, if repurchased by the Fund, may be worth more or less than their original cost. Total return measures net investment income and capital gain or loss from portfolio investments. All performance shown assumes reinvestment of dividends and capital gains distributions.
The Fund is a continuously offered, non-diversified, closed-endmanagement investment company that is operated as an interval fund. The Fund is suitable only for investors who can bear the risks associated with the Fund's limited liquidity and should be viewed as a long-terminvestment. The Fund's shares have no history of public trading, nor is it intended that its shares will be listed on a national securities exchange at this time, if ever. Investing in the Fund's shares may be speculative and involves a high degree of risk, including the risks associated with leverage. Investing in the Fund involves risk, including the risk that shareholders may receive little or no return on their investment or that shareholders may lose part or all of their investment. The Fund intends to invest primarily in the junior debt tranches of CLOs that own a pool of senior secured loans made to companies whose debt is rated below investment grade or, in limited circumstances, unrated. The Fund's investments in the junior debt tranches of CLOs are exposed to leveraged credit risk. The Fund may pay distributions in significant part from sources that may not be available in the future and that are unrelated to its performance, such as a return of capital or borrowings. The amount of distributions that the Fund may pay, if any, is uncertain.
|
4 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Portfolio Update |
|
December 31, 2024 (Unaudited) |
ASSET ALLOCATION as of December 31, 2024*
* Holdings are subject to change.
Percentages are based on net assets of the Fund.
TOP TEN HOLDINGS*as of December 31, 2024
|
% of Net Assets |
||
|
Monroe Capital MML CLO Ltd., Series 2024-1A |
5.53% |
|
|
Maranon Loan Funding Ltd., Series 2021-3A |
4.63% |
|
|
Lake Shore MM CLO V LLC., Series 2022-1A |
4.36% |
|
|
Lake Shore MM CLO II Ltd., Series 2019-2A |
4.24% |
|
|
Brightwood Capital MM CLO Ltd., Series 2019-1A |
4.23% |
|
|
ABPCI Direct Lending Fund ABS III LLC, Series 2023-1A |
3.78% |
|
|
Churchill Middle Market CLO Ltd., Series 2019-1A |
3.77% |
|
|
HPS Private Credit CLO LLC, Series 2024-2A |
3.77% |
|
|
Blackrock Mt. Hood CLO X LLC, Series 2023-1A |
3.42% |
|
|
BlackRock Maroon Bells CLO XI LLC, Series 2022-1A |
3.38% |
* Holdings are subject to change and exclude cash equivalents.
|
Annual Report | December 31, 2024 |
5 |
|
Flat Rock Enhanced Income Fund |
Portfolio Update |
|
December 31, 2024 (Unaudited) |
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
The graph below illustrates the growth of a hypothetical $10,000 investment assuming the purchase of common shares at the NAV of $20.00 on January 3, 2023 (commencement of operations) and tracking its progress through December 31, 2024.
The hypothetical $10,000 investment at inception includes changes due to share price and reinvestment of dividends and capital gains. The chart does not imply future performance. Indexes are unmanaged, do not incur fees, expenses or taxes, and cannot be invested in directly. Performance quoted does not include a deduction for taxes that a shareholder would pay upon the Fund's repurchase of the shareholder's shares.
|
6 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Schedule of Investments |
|
December 31, 2024 |
|
Principal |
Fair Value |
|||||
|
COLLATERALIZED LOAN OBLIGATIONS DEBT(a)(b) - 104.45% |
||||||
|
ABPCI Direct Lending Fund ABS II LLC, Series 2022-2A, |
$ |
5,249,474 |
$ |
4,731,219 |
||
|
ABPCI Direct Lending Fund ABS III LLC, Series 2023-1A, |
16,500,000 |
16,124,123 |
||||
|
ABPCI Direct Lending Fund ABS IV LP, Series 2024-1A, |
11,000,000 |
10,975,433 |
||||
|
ABPCI Direct Lending Fund CLO I LLC, Series 2023-12A, |
6,200,000 |
6,266,649 |
||||
|
ABPCI Direct Lending Fund CLO Ltd., Series 2023-15A, |
3,000,000 |
3,011,961 |
||||
|
ABPCI Direct Lending Fund CLO Ltd., Series 2019-5A, |
14,000,000 |
14,066,849 |
||||
|
ABPCI Direct Lending Fund CLO Ltd., Series 2023-16A, |
12,000,000 |
12,057,923 |
||||
|
Barings Middle Market CLO Ltd., Series 2023-IIA, |
8,500,000 |
8,344,868 |
||||
|
Barings Middle Market CLO Ltd., Series 2021-IA, |
1,000,000 |
1,004,443 |
||||
|
Barings Middle Market CLO Ltd., Series 2023-IA, |
11,500,000 |
11,550,176 |
||||
|
BCC Middle Market CLO LLC, Series 2023-1A, |
3,750,000 |
3,802,518 |
||||
|
BCC Middle Market CLO LLC, Series 2018-1A, |
10,000,000 |
10,073,486 |
||||
|
BlackRock Maroon Bells CLO XI LLC, Series 2022-1A, |
14,500,000 |
14,427,500 |
||||
|
Blackrock Mt. Hood CLO X LLC, Series 2023-1I, |
654,052 |
661,766 |
||||
|
Blackrock Mt. Hood CLO X LLC, Series 2023-1A, |
14,413,362 |
14,583,371 |
||||
|
Brightwood Capital MM CLO Ltd., Series 2020-1, |
13,000,000 |
12,916,522 |
||||
|
Brightwood Capital MM CLO Ltd., Series 2019-1A, |
18,000,000 |
18,054,023 |
||||
|
Brightwood Capital MM CLO Ltd., Series 2024-2A, |
5,000,000 |
5,022,025 |
||||
|
Churchill Middle Market CLO Ltd., Series 2019-1A, |
16,000,000 |
16,076,942 |
||||
|
See Notes to Financial Statements. |
|
|
Annual Report | December 31, 2024 |
7 |
|
Flat Rock Enhanced Income Fund |
Schedule of Investments |
|
|
December 31, 2024 |
|
Principal |
Fair Value |
|||||
|
COLLATERALIZED LOAN OBLIGATIONS DEBT(a)(b) - 104.45% |
||||||
|
CIFC-LBC Middle Market CLO LLC, Series 2023-1A, |
$ |
3,750,000 |
$ |
3,790,434 |
||
|
Fortress Credit Opportunities XIX CLO, LLC, Series 2022-19A, |
14,000,000 |
14,042,063 |
||||
|
Fortress Credit Opportunities XXI CLO LLC, Series 2023-21A, |
14,000,000 |
14,000,000 |
||||
|
Fortress Credit Opportunities XXI CLO, LLC, Series 2023-21A, |
14,000,000 |
14,050,072 |
||||
|
Great Lakes CLO Ltd., Series 2019-1A, |
7,512,500 |
7,562,156 |
||||
|
Great Lakes CLO Ltd., Series 2021-5A, |
9,950,000 |
9,502,640 |
||||
|
Great Lakes CLO Ltd., Series 2021-6A, |
5,150,000 |
5,169,829 |
||||
|
Great Lakes Kcap F3c Senior LLC, Series 2017-1A, |
13,500,000 |
13,509,000 |
||||
|
Guggenheim Corp. Funding, Series 2023-6A, |
7,500,000 |
7,580,904 |
||||
|
HPS Private Credit CLO LLC, Series 2023-1A, |
11,000,000 |
11,155,826 |
||||
|
HPS Private Credit CLO LLC, Series 2024-2A, |
16,000,000 |
16,071,150 |
||||
|
Jefferies Credit Partners Direct Lending CLO Ltd., Series 2024-1A, |
1,200,000 |
1,206,968 |
||||
|
Lake Shore MM CLO II Ltd., Series 2019-2A, |
18,000,000 |
18,096,901 |
||||
|
Lake Shore MM CLO IV Ltd., Series 2021-1A, |
5,488,000 |
5,504,398 |
||||
|
Lake Shore MM CLO V LLC, Series 2022-1A, |
18,800,000 |
18,612,000 |
||||
|
Maranon Loan Funding Ltd., Series 2021-3A, |
19,700,000 |
19,756,832 |
||||
|
MCF CLO IV, LLC, Series 2014-1A, |
2,000,000 |
2,007,995 |
||||
|
MCF CLO LLC, Series 2019-1A, |
5,000,000 |
5,018,500 |
||||
|
MCF CLO VIII Ltd., Series 2018-1A, |
2,000,000 |
2,007,741 |
||||
|
See Notes to Financial Statements. |
|
|
8 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Schedule of Investments |
|
December 31, 2024 |
|
Principal |
Fair Value |
|||||
|
COLLATERALIZED LOAN OBLIGATIONS DEBT(a)(b) - 104.45% |
||||||
|
Monroe Capital MML CLO Ltd., Series 2019-2A, |
$ |
3,000,000 |
$ |
3,007,657 |
||
|
Monroe Capital MML CLO Ltd., Series 2021-1A, |
6,540,000 |
6,569,527 |
||||
|
Monroe Capital MML CLO Ltd., Series 2019-1X, |
2,000,000 |
2,006,873 |
||||
|
Monroe Capital MML CLO Ltd., Series 2023-1A, |
3,000,000 |
3,026,175 |
||||
|
Monroe Capital MML CLO Ltd., Series 2024-1A, |
24,000,000 |
23,592,616 |
||||
|
Monroe Capital MML CLO VIII Ltd., Series 2019-1A, |
4,200,000 |
4,214,433 |
||||
|
Monroe Capital MML CLO X Ltd., Series 2020-1A, |
4,500,000 |
4,516,754 |
||||
|
Monroe Capital MML CLO XVII Ltd., Series 2024-2A, |
14,000,000 |
14,024,175 |
||||
|
Mount Logan Funding LP, Series 2018-1A, |
2,000,000 |
2,007,244 |
||||
|
PennantPark CLO V Ltd., Series 2022-5A, |
6,000,000 |
6,018,873 |
||||
|
TCP Whitney CLO Ltd., Series 2017-1A, |
4,000,000 |
4,015,637 |
||||
|
TOTAL COLLATERALIZED LOAN OBLIGATIONS DEBT |
445,397,170 |
|||||
|
Shares |
Fair Value |
||||||
|
SHORT-TERM INVESTMENTS - 0.00% |
|||||||
|
MONEY MARKET FUNDS - 0.00% |
|||||||
|
First American Government Obligations Fund, Class X, 4.41%(d) |
$ |
116 |
$ |
116 |
|||
|
TOTAL SHORT-TERM INVESTMENTS |
116 |
||||||
|
TOTAL INVESTMENTS - 104.45% |
445,397,286 |
||||||
|
Liabilities in Excess of Other Assets - (4.45)% |
(18,963,359 |
) |
|||||
|
NET ASSETS - 100.00% |
$ |
426,433,927 |
|||||
(a) The level 3 assets were a result of unavailable quoted prices from an active market or the unavailability of other significant observable inputs.
|
See Notes to Financial Statements. |
|
|
Annual Report | December 31, 2024 |
9 |
|
Flat Rock Enhanced Income Fund |
Schedule of Investments |
|
|
December 31, 2024 |
(b) Security exempt from registration under Rule 144A or Section 4(a)(2) of the Securities Act of 1933. These securities may normally be sold to qualified institutional buyers in transactions exempt from registration. Total fair value of Rule 144A securities amounts to $445,397,170, which represented 104.45% of net assets as of December 31, 2024.
(c) Variable rate security. Interest rate resets periodically. The rate shown is the effective interest rate as of December 31, 2024. For securities based on a published reference rate and spread, the reference rate and spread (in basis points) are indicated parenthetically. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities, therefore, do not indicate a reference rate and spread.
(d) Rate disclosed is the seven day effective yield as of December 31, 2024.
Investment Abbreviations:
SOFR - Secured Overnight Financing Rate
Reference Rates:
3M US SOFR - 3 Month SOFR as of December 31, 2024 was 4.69%.
|
See Notes to Financial Statements. |
|
|
10 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Statement of Assets and Liabilities |
|
|
December 31, 2024 |
|
Assets |
|
|
Investments in securities at fair value (cost $439,542,892) |
$ 445,397,286 |
|
Dividends and interest receivable |
10,670,775 |
|
Receivable for fund shares sold |
1,919,385 |
|
Prepaid expenses |
94,429 |
|
Total Assets |
458,081,875 |
|
Liabilities |
|
|
Payable for investments purchased |
14,000,000 |
|
Mandatorily redeemable preferred stock (net of deferred financing costs of $129,172)(a) (see Note 10) |
9,870,828 |
|
Line of credit (see Note 9) |
5,078,000 |
|
Incentive fee payable |
1,761,999 |
|
Management fee payable |
502,419 |
|
Payable for excise tax |
70,730 |
|
Payable for audit and tax services |
93,067 |
|
Payable for fund accounting and administration fees |
38,896 |
|
Dividends payable on redeemable preferred stock |
38,244 |
|
Accrued interest expense |
23,684 |
|
Other accrued expenses |
170,081 |
|
Total Liabilities |
31,647,948 |
|
Net Assets |
$ 426,433,927 |
|
Commitments and Contingencies (see Note 12) |
|
|
Net Assets consist of: |
|
|
Paid-in capital |
418,156,606 |
|
Accumulated earnings |
8,277,321 |
|
Net Assets |
$ 426,433,927 |
|
Fund Shares: |
|
|
Net Assets |
$ 426,433,927 |
|
Shares of beneficial interest outstanding |
19,662,688 |
|
Net asset value and offering price per share |
$ 21.69 |
(a) $10,000 liquidation value per share. 1,000 shares authorized, issued and outstanding.
|
See Notes to Financial Statements. |
|
|
Annual Report | December 31, 2024 |
11 |
|
Flat Rock Enhanced Income Fund |
Statement of Operations |
|
For the year ended December 31, 2024 |
|
Investment Income |
|
|
Interest income |
$ 44,477,022 |
|
Dividend income |
620,011 |
|
Total investment income |
45,097,033 |
|
Expenses |
|
|
Incentive fees |
5,729,496 |
|
Management fees |
4,191,892 |
|
Dividends on redeemable preferred stock |
897,960 |
|
Transfer agent fees and expenses |
504,130 |
|
Accounting and administration fees |
265,235 |
|
Amortization of deferred financing cost |
169,467 |
|
Excise tax expense |
70,730 |
|
Audit and tax services fees |
107,392 |
|
Legal expenses |
98,218 |
|
Printing expenses |
75,076 |
|
Registration expenses |
59,567 |
|
Trustee expenses |
45,000 |
|
Custodian expenses |
33,642 |
|
Line of credit interest expense |
31,517 |
|
Pricing expenses |
31,038 |
|
Compliance expenses |
24,000 |
|
Miscellaneous expenses |
127,113 |
|
Total expenses |
12,461,473 |
|
Net investment income |
32,635,560 |
|
Net Realized and Change in Unrealized Gain (Loss) on Investments |
|
|
Net realized gain on: |
|
|
Investments |
30,899 |
|
Change in unrealized appreciation on: |
|
|
Investments |
3,361,798 |
|
Net realized and change in unrealized appreciation (depreciation) on investments |
3,392,697 |
|
Net increase in net assets resulting from operations |
$ 36,028,257 |
|
See Notes to Financial Statements. |
|
|
12 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Statements of Changes in Net Assets |
|
|
For the Year |
For the Period |
|
|
Increase (Decrease) in Net Assets due to: |
||
|
Operations |
||
|
Net investment income |
$ 32,635,560 |
$ 11,090,256 |
|
Net realized gain on investments |
30,899 |
- |
|
Net change in unrealized appreciation on investments |
3,361,798 |
2,492,596 |
|
Net increase in net assets resulting from operations |
36,028,257 |
13,582,852 |
|
Distributions to Shareholders from Earnings |
(33,517,221) |
(8,007,162) |
|
Total distributions |
(33,517,221) |
(8,007,162) |
|
Capital Transactions |
||
|
Proceeds from shares sold |
260,775,288 |
170,214,229 |
|
Reinvestment of distributions |
5,656,419 |
1,937,401 |
|
Amount paid for shares redeemed |
(19,397,265) |
(938,871) |
|
Net increase in net assets resulting from capital transactions |
247,034,442 |
171,212,759 |
|
Total Increase in Net Assets |
249,545,478 |
176,788,449 |
|
Net Assets |
||
|
Beginning of period |
176,888,449 |
100,000 |
|
End of period |
$ 426,433,927 |
$ 176,888,449 |
|
Share Transactions |
||
|
Shares sold |
12,029,021 |
8,214,560 |
|
Shares issued in reinvestment of distributions |
262,193 |
92,331 |
|
Shares redeemed |
(895,896) |
(44,521) |
|
Total Shares Transactions |
11,395,318 |
8,262,370 |
(a) For the period January 3, 2023 (commencement of operations) to December 31, 2023.
|
See Notes to Financial Statements. |
|
|
Annual Report | December 31, 2024 |
13 |
|
Flat Rock Enhanced Income Fund |
Statement of Cash Flows |
|
For the fiscal year ended December 31, 2024 |
|
CASH FLOWS RESULTING FROM OPERATING ACTIVITIES: |
|||
|
Net increase in net assets resulting from operations |
$ |
36,028,257 |
|
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |
|||
|
Purchase of investment securities |
(324,343,453) |
||
|
Proceeds from sales of investment securities |
67,862,335 |
||
|
Net sales of short-term investments securities |
15,559,776 |
||
|
Amortization of premium and accretion of discount on investments, net |
(4,654,633) |
||
|
Net realized (gain) on: |
|||
|
Investments |
(30,899) |
||
|
Net change in unrealized (appreciation)/depreciation on: |
|||
|
Investments |
(3,361,798) |
||
|
(Increase)/Decrease in assets: |
|||
|
Receivable for fund shares sold |
(1,003,702) |
||
|
Dividends and interest receivable |
(6,175,052) |
||
|
Prepaid expenses |
(50,236) |
||
|
Increase/(Decrease) in liabilities: |
|||
|
Management fee payable |
302,589 |
||
|
Payable for excise tax |
(48,420) |
||
|
Payable for fund accounting and administration fees |
23,069 |
||
|
Incentive fee payable |
992,135 |
||
|
Payable for audit and tax services |
8,152 |
||
|
Payable to trustees |
(15,000) |
||
|
Accrued interest expense |
23,684 |
||
|
Other accrued expenses |
143,876 |
||
|
Net cash used in operating activities |
(218,739,320) |
||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||
|
Proceeds from shares sold |
260,775,288 |
||
|
Cost of shares repurchased |
(19,397,265) |
||
|
Distributions paid (net of reinvestments) |
(27,860,802) |
||
|
Mandatorily redeemable preferred stock |
148,991 |
||
|
Dividends payable on redeemable preferred stock |
(4,892) |
||
|
Borrowings on line of credit |
21,476,000 |
||
|
Payments on line of credit |
(16,398,000) |
||
|
Net cash provided by financing activities |
218,739,320 |
||
|
Net increase/(decrease) in cash |
- |
||
|
Cash, beginning of year |
$ |
- |
|
|
Cash, end of year |
$ |
- |
|
|
Non-cash financing activities not included herein consist of: |
|||
|
Reinvestment of dividends and distributions: |
$ |
5,656,419 |
|
|
Supplemental Disclosure of Cash Flow Information |
|||
|
Cash paid for interest on line of credit: |
$ |
7,833 |
|
|
Cash paid for dividends on mandatory redeemable preferred stock: |
$ |
897,637 |
|
See Notes to Financial Statements. |
|
|
14 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Financial Highlights |
|
|
For the |
For the |
|||||
|
Per Share Operating Performance |
||||||
|
Net asset value, beginning of period |
$ |
21.40 |
$ |
20.00 |
||
|
Income/(loss) from investment operations: |
||||||
|
Net investment income(b) |
2.41 |
2.55 |
||||
|
Net realized and unrealized gains/(losses) from investments |
0.40 |
0.25 |
||||
|
Total income/(loss) from investment operations |
2.81 |
2.80 |
||||
|
Less distributions: |
||||||
|
Net investment income |
(2.52) |
(1.40) |
||||
|
Total distributions |
(2.52) |
(1.40) |
||||
|
Net asset value, end of period |
$ |
21.69 |
$ |
21.40 |
||
|
Total return(c) |
13.86% |
14.35%(d) |
||||
|
Ratios/Supplemental Data: |
||||||
|
Net assets, end of period (in thousands) |
$ |
426,434 |
$ |
176,888 |
||
|
Ratios To Average Net Assets (including interest on line of credit and distributions on redeemable preferred stock) |
||||||
|
Ratio of expenses to average net assets including fee waivers |
4.25% |
3.68%(e)(f) |
||||
|
Ratio of expenses to average net assets excluding fee waivers |
4.25% |
3.79%(e) |
||||
|
Ratio of net investment income to average net assets including fee waivers |
11.13% |
12.17%(e) |
||||
|
Ratio of net investment income to average net assets excluding fee waivers |
11.13% |
12.06%(e) |
||||
|
Ratios To Average Net Assets (excluding interest on line of credit and distributions on redeemable preferred stock) |
||||||
|
Ratio of expenses to average net assets including fee waivers |
3.93% |
3.54%(e)(f) |
||||
|
Ratio of expenses to average net assets excluding fee waivers |
3.93% |
3.65%(e) |
||||
|
Ratio of net investment income to average net assets including fee waivers |
11.45% |
12.31%(e) |
||||
|
Ratio of net investment income to average net assets excluding fee waivers |
11.45% |
12.20%(e) |
||||
|
Portfolio turnover rate |
27% |
2%(d) |
||||
|
Line of Credit: |
||||||
|
Aggregate principal amount, end of period (000s): |
$ |
5,078 |
$ |
- |
||
|
Asset coverage, end of period per $1,000:(g) |
84,977 |
- |
||||
|
Redeemable Preferred Stock: |
||||||
|
Liquidation value, end of period (000s): |
$ |
10,000 |
$ |
10,000 |
||
|
Asset coverage, end of period per share:(h) |
43,647 |
18,705 |
||||
* Includes adjustments in accordance with accounting principles generally accepted in the United States and, consequently, the net asset values for financial reporting purposes and the returns based upon those net asset values may differ from the net asset values and returns for shareholder transactions.
|
See Notes to Financial Statements. |
|
|
Annual Report | December 31, 2024 |
15 |
|
Flat Rock Enhanced Income Fund |
Financial Highlights |
(a) For the period January 3, 2023 (commencement of operations) to December 31, 2023.
(b) Based on average shares outstanding during the period.
(c) Total return in the above table represents the rate that the investor would have earned or lost on an investment in the Fund, assuming reinvestment of distributions.
(d) Not annualized.
(e) Annualized.
(f) The ratio of expenses to average net assets including fee waivers includes $101,463 in voluntary advisory fee waivers representing (0.11)%. For the period from January 3, 2023 to April 30, 2023, the Adviser voluntarily agreed to fully waive the management fee for the Fund. This voluntary waiver is not subject to recoupment.
(g) Calculated by subtracting the Fund's total liabilities (excluding the Line of Credit and accumulated unpaid interest on Line of Credit) from the Fund's total assets and dividing by the outstanding Line of Credit balance.
(h) Asset coverage ratio is calculated by subtracting the Fund's total liabilities (excluding the liquidation value of the Mandatorily Redeemable Preferred Stock including distributions payable on Mandatorily Redeemable Preferred Stock) from the Fund's total assets and dividing by the liquidation value of the Mandatorily Redeemable Preferred Stock. The asset coverage per share figure is expressed in terms of dollar amounts per share of outstanding Preferred Stock.
|
See Notes to Financial Statements. |
|
|
16 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
|
1. ORGANIZATION |
Flat Rock Enhanced Income Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as a non-diversified, closed-endmanagement investment company. The shares of beneficial interest of the Fund (the "Shares") are continuously offered under Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"). The Fund operates as an interval fund pursuant to Rule 23c-3under the 1940 Act and has adopted a fundamental policy to conduct quarterly repurchase offers at net asset value ("NAV").
The Fund's investment objective is to generate current income and, as a secondary objective, long-termcapital appreciation.
The Fund was formed as a Delaware statutory trust on April 19, 2022 and operates pursuant to an Amended and Restated Agreement and Declaration of Trust governed by and interpreted in accordance with the laws of the State of Delaware. The Fund had no operations from that date to January 3, 2023, other than those related to organizational matters and the registration of its shares under applicable securities laws.
Regulatory Update - The Fund is deemed to be an individual reporting segment and is not part of a consolidated reporting entity. The objective and strategy of the Fund is used by the Adviser to make investment decisions, and the results of the operations, as shown in the statements of operations and the financial highlights is the information utilized for the day-to-daymanagement of the Fund. The Fund is party to the expense agreements as disclosed in the notes to the financial statements and resources are not allocated to the Fund based on performance measurements. Due to the significance of oversight and their role, the Adviser is deemed to be the Chief Operating Decision Maker.
|
2. SIGNIFICANT ACCOUNTING POLICIES |
The following is a summary of significant accounting policies followed by the Fund in preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Fund is an investment company under U.S. GAAP and follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946.
Use of Estimates: The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of increases and decreases in net assets from operations during the period. Actual results could differ from these estimates.
Preferred Shares: In accordance with ASC 480-10-25, the Fund's mandatorily redeemable preferred stock have been classified as debt on the Statement of Assets and Liabilities. Refer to "Note 10. Mandatorily Redeemable Preferred Stock" for further details.
Security Valuation: The Fund determines the NAV of its shares daily as of the close of regular trading (normally, 4:00 p.m., Eastern time) on each day that the New York Stock Exchange ("NYSE") is open for business.
|
Annual Report | December 31, 2024 |
17 |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
The 1940 Act requires the Fund to determine the value of its portfolio securities using market quotations when "readily available," and when market quotations are not readily available, portfolio securities must be valued at fair value, as determined in good faith by the Fund's Board. As stated in Rule 2a-5under the 1940 Act, determining fair value in good faith requires (i) assessment and management of risks, (ii) establishment of fair value methodologies, (iii) testing of fair value methodologies, and (iv) evaluation of pricing services. Under Rule 2a-5, a fund's board may designate the fund's adviser as "valuation designee" to perform fair value determinations. The Board, including a majority of the Trustees who are not "interested persons" of the Fund, as such term is defined in the 1940 Act, has designated the Adviser to perform fair value determinations and act as "valuation designee" for each Fund's investments.
The Fund records its investments at fair value, which is defined as 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. The valuation techniques used to determine fair value are further discussed below.
It is the policy of the Fund to value its portfolio securities using market quotations when readily available. For purposes of this policy, a market quotation is readily available only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the Fund can access at the measurement date, provided that a quotation will not be readily available if it is not reliable. If market quotations are not readily available, securities or other assets will be valued at their fair market value as determined using the valuation methodologies approved by the Board.
Equity securities for which market quotations are available are generally valued at the last sale price or official closing price on the primary market or exchange on which they trade.
Short-termdebt securities having a remaining maturity of 60 days or less when purchased are valued at cost adjusted for amortization of premiums and accretion of discounts, which approximates fair value.
The Fund primarily invests in junior debt tranches of CLOs. In valuing such investments, the Adviser considers a number of factors, including: 1) the indicative prices provided by a recognized, independent third-partyindustry pricing service, and the implied yield of such prices; 2) recent trading prices for specific investments; 3) recent purchases and sales known to the Adviser in similar securities; 4) the indicative prices for specific investments and similar securities provided by the broker who arranges transactions in such CLOs; and 5) the Adviser's own models. While the use of an independent third-partyindustry pricing service can be a source for valuing its CLO investments, the Adviser will not use the price provided by a third-partyservice if it believes that the price does not accurately reflect fair value, and will instead utilize another methodology outlined above to make its own assessment of fair value.
Federal Income Taxes: The Fund has elected to be treated for U.S. federal income tax purposes as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended. Accordingly, the Fund will generally not pay corporate-levelU.S. federal income taxes on any net ordinary income or capital gains that are timely distributed to shareholders. To qualify as a RIC, the Fund must, among other things, meet certain source-of-incomeand asset diversification requirements and timely distribute at least 90% of its investment company taxable income each year to its shareholders.
Management has analyzed the Fund's tax positions and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for the open tax year ended December 31, 2023, or expected to be taken in the Fund's December 31, 2024 year-endtax returns. The Fund files U.S. federal, state, and local tax returns as required. The Fund's tax returns
|
18 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations which is generally three years after the filing of the tax return for federal purposes and four years for most state returns.
The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expenses on the Statement of Operations. During the fiscal year ended December 31, 2024, the Fund paid $70,730 in excise tax.
Securities Transactions and Investment Income: Investment security transactions are accounted for on a trade date basis. Dividend income is recorded on the ex-dividenddate. Discounts and premiums on securities purchased are amortized or accreted using the effective interest method. Realized gains and losses from securities transactions and unrealized appreciation and depreciation of securities are determined using the identified cost basis method for financial reporting purposes.
Distributions to Shareholders: The Fund normally pays dividends, if any, monthly, and distributes capital gains, if any, on an annual basis. Income dividend distributions are derived from dividends and interest income the Fund receives from its investments, including short term capital gains. Long term capital gain distributions are derived from gains realized when the Fund sells a security it has owned for more than one year.
Cash and Cash Equivalents: Cash and cash equivalents (e.g., U.S. Treasury bills) may include demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost, which approximates fair value. The Fund deposits its cash and cash equivalents with highly-ratedbanking corporations and, at times, may exceed the insured limits under applicable law.
|
3. FAIR VALUE MEASUREMENTS |
The Fund utilizes various inputs to measure the fair value of its investments. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available. These inputs are categorized in the following hierarchy under applicable financial accounting standards:
|
Level 1 |
- |
Unadjusted quoted prices in active markets for identical assets and liabilities that the Fund has the ability to access at the measurement date. |
||||
|
Level 2 |
- |
Significant observable inputs (including quoted prices for the identical instrument on an inactive market, quoted prices for similar instruments, interest rates, prepayment spreads, credit risk, yield curves, default rates and similar data). |
||||
|
Level 3 |
- |
Significant unobservable inputs (including the Fund's own assumptions in determining the fair value of the investments) to the extent relevant observable inputs are not available, for the asset or liability at the measurement date. |
|
Annual Report | December 31, 2024 |
19 |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The inputs used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following table summarizes the inputs used to value the Fund's investments under the fair value hierarchy levels as of December 31, 2024:
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||
|
Collateralized Loan Obligations Debt |
$ |
- |
$ |
- |
$ |
445,397,170 |
$ |
445,397,170 |
||||
|
Short-Term Investments |
116 |
- |
- |
116 |
||||||||
|
Total |
$ |
116 |
$ |
- |
$ |
445,397,170 |
$ |
445,397,286 |
||||
The following is a reconciliation of the fair value of investments for which the Fund has used Level 3 unobservable inputs in determining fair value as of December 31, 2024:
|
Balance |
Realized |
Amortization/ |
Change in |
Purchases |
Sales/ |
Transfer |
Transfer |
Balance |
|||||||||||||||||||
|
Collateralized Loan Obligations Debt |
$ |
166,868,722 |
$ |
30,899 |
$ |
4,654,633 |
$ |
3,361,798 |
$ |
338,343,453 |
$ |
(67,862,335) |
$ |
- |
$ |
- |
$ |
445,397,170 |
|||||||||
The net change in unrealized appreciation included in the Statement of Operations attributable to Level 3 investments still held at December 31, 2024 was as follows:
|
Net Change in |
|||
|
Collateralized Loan Obligations Debt |
$ |
1,249,925 |
|
|
Total |
$ |
1,249,925 |
|
|
20 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
The following table summarizes the valuation techniques and significant unobservable inputs used for the Fund's investments that are categorized in Level 3 of the fair value hierarchy as of December 31, 2024:
|
Assets |
Fair Value |
Valuation |
Unobservable |
Range/Weighted |
Impact to |
||||||
|
Collateralized Loan Obligations Debt |
$ |
398,357,670 |
Market Quotes |
NBIB(1) |
90.13 - 101.42/ |
Increase |
|||||
|
$ |
47,039,500 |
Recent transaction |
Acquisition cost |
99.00 - 100.00/ |
Increase |
||||||
(1) The Fund generally uses non-bindingindicative bid prices ("NBIB") provided by an independent pricing service or broker on the valuation date as the primary basis for the fair value determinations for CLO debt investments. These prices are non-bindingand may not be determinative of fair value. Each price is evaluated by the Valuation Committee in conjunction with additional information compiled by the Adviser, including performance and covenant compliance information as provided by the respective CLO's independent trustee.
(2) Weighted averages are calculated based on fair value of investments.
(3) The impact on fair value measurement of an increase in each unobservable input is in isolation
|
4. INVESTMENT ADVISORY SERVICES AND OTHER AGREEMENTS |
Flat Rock Global, LLC serves as the investment adviser to the Fund pursuant to the terms of an investment advisory agreement (the "Advisory Agreement"). Under the terms of the Advisory Agreement, the Adviser provides the Fund such investment advice as it deems advisable and furnishes a continuous investment program for the Fund consistent with the Fund's investment objective and strategies. As compensation for its management services, the Fund pays the Adviser a management fee of 1.375% (as a percentage of the average daily value of total assets), paid monthly in arrears, calculated based on the average daily value of total assets during such period.
In addition to the management fee, the Adviser is entitled to an incentive fee. The incentive fee is calculated and payable quarterly in arrears in an amount equal to 15.0% of the Fund's "pre-incentivefee net investment income" for the immediately preceding quarter, and is subject to a hurdle rate, expressed as a rate of return on the Fund's "adjusted capital," equal to 1.75% per quarter (or an annualized hurdle rate of 7.00%), subject to a "catch-up" feature, which allows the Adviser to recover foregone incentive fees that were previously limited by the hurdle rate. For this purpose, "pre-incentivefee net investment income" means interest income, dividend income and any other income accrued during the calendar quarter, minus the Fund's operating expenses for the quarter (including the management fee, expenses reimbursed to the Adviser for any administrative services provided by the Adviser and any interest expense and distributions paid on any issued and outstanding preferred shares, but excluding the incentive fee). Pre-incentivefee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kindinterest and zero-couponsecurities), accrued income that the Fund has not yet received in cash. Pre-incentivefee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. "Adjusted capital" means the cumulative gross proceeds received by the Fund from the sale of shares (including pursuant to the Fund's distribution reinvestment plan), reduced by amounts paid in connection with purchases of the Fund's shares pursuant to the Fund's Repurchase Program.
|
Annual Report | December 31, 2024 |
21 |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
The calculation of the incentive fee on pre-incentivefee net investment income for each quarter is as follows:
• No incentive fee is payable in any calendar quarter in which the Fund's pre-incentivefee net investment income does not exceed the hurdle rate of 1.75% per quarter (or an annualized rate of 7.00%);
• 100% of the Fund's pre-incentivefee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.0588%. This portion of the Fund's pre-incentivefee net investment income (which exceeds the hurdle rate but is less than or equal to 2.0588%) is referred to as the "catch-up." The "catch-up" provision is intended to provide the Adviser with an incentive fee of 15.0% on all of the Fund's pre-incentivefee net investment income when its pre-incentivefee net investment income reaches 2.0588% in any calendar quarter; and
• 15.0% of the amount of our pre-incentivefee net investment income, if any, that exceeds 2.0588% in any calendar quarter is payable to the Adviser once the hurdle rate is reached and the catch-upis achieved (15.0% of all pre-incentivefee net investment income thereafter will be allocated to the Adviser).
For the fiscal year ended December 31, 2024, the Adviser earned $4,191,892 in management fees and $5,729,496 in incentive fees. The Adviser paid all expenses incurred in connection with to the organization, offering, and initial registration of the Fund. Such expenses are not subject to repayment by the Fund to the Adviser.
Ultimus Fund Solutions, LLC ("Ultimus" or "Administrator") provides the Fund with administration, fund accounting and transfer agent services, including all regulatory reporting. Under the terms of a Master Services Agreement, Ultimus receives fees from the Fund for these services.
U.S. Bank N.A. serves as the Fund's custodian.
The Fund has entered into a Distribution Agreement with Ultimus Fund Distributors, LLC (the "Distributor"), a wholly-ownedsubsidiary of Ultimus, to provide distribution services to the Fund. The Distributor serves as principal underwriter/distributor of shares of the Fund. Under the terms of a Distribution Agreement, the Distributor receives fees from the Fund for these services.
Ultimus, U.S. Bank N.A., and the Distributor are not considered affiliates, as defined under the 1940 Act, of the Fund.
|
5. REPURCHASE OFFERS |
The Fund conducts quarterly repurchase offers of 5% of the Fund's outstanding shares. Repurchase offers in excess of 5% are made solely at the discretion of the Board and investors should not rely on any expectation of repurchase offers in excess of 5%. In the event that a repurchase offer is oversubscribed, shareholders may only be able to have a portion of their shares repurchased.
Quarterly repurchases occur in the months of February, May, August and November. A repurchase offer notice will be sent to shareholders at least 21 calendar days before the repurchase request deadline. The repurchase price will be the Fund's NAV determined on the repurchase pricing date, which is ordinarily expected to be the repurchase request deadline. Payment for all shares repurchased pursuant to these offers will be made not later than seven calendar days after the repurchase pricing date.
|
22 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
During the fiscal year ended December 31, 2024, the Fund completed four quarterly repurchase offers. In these offers, the Fund offered to repurchase 5% of the number of its outstanding shares as of the repurchase pricing dates. The result of the repurchase offers were as follows:
|
Repurchase Offer |
Repurchase Offer |
|||
|
Commencement Date |
January 9, 2024 |
April 10, 2024 |
||
|
Repurchase Request Deadline |
February 14, 2024 |
May 15, 2024 |
||
|
Repurchase Pricing Date |
February 14, 2024 |
May 15, 2024 |
||
|
Amount Repurchased |
$2,561,051 |
$1,769,406 |
||
|
Shares Repurchased |
119,452 |
81,577 |
|
Repurchase Offer |
Repurchase Offer |
|||
|
Commencement Date |
July 10, 2024 |
October 11, 2024 |
||
|
Repurchase Request Deadline |
August 14, 2024 |
November 15, 2024 |
||
|
Repurchase Pricing Date |
August 14, 2024 |
November 15, 2024 |
||
|
Amount Repurchased |
$3,926,585 |
$11,140,223 |
||
|
Shares Repurchased |
180,782 |
514,084 |
|
6. PORTFOLIO INFORMATION |
Purchases and sales of securities for the fiscal year ended December 31, 2024, excluding short-termsecurities, were as follows:
|
Purchases of Securities |
Proceeds from Sales of Securities |
|||
|
$338,343,452 |
$67,862,335 |
|
7. TAXES |
Tax Basis of Investments
Net unrealized appreciation/(depreciation) of investments based on federal tax cost as of December 31, 2024, was as follows:
|
Gross Unrealized Appreciation |
$ |
6,145,817 |
|
|
Gross Unrealized Depreciation |
(291,423) |
||
|
Net Unrealized Appreciation on Investments |
$ |
5,854,394 |
|
|
Tax Cost |
$ |
439,542,892 |
Distributions are determined in accordance with U.S. federal income tax regulations, which differ from U.S. GAAP, and therefore, may differ significantly in amount or character from net investment income and realized gains for financial statement purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
|
Annual Report | December 31, 2024 |
23 |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
The tax character of distributions paid by the Fund for the periods ended December 31, 2024 and December 31, 2023, were as follows:
|
2024 |
2023 |
|||||
|
Distributions paid from: |
||||||
|
Ordinary Income |
$ |
33,517,221 |
$ |
8,007,162 |
||
|
Long-Term Capital Gain |
- |
- |
||||
|
Total |
$ |
33,517,221 |
$ |
8,007,162 |
||
Permanent book and tax differences, primarily attributable to the tax treatment of non-deductibleexpenses, resulted in reclassifications for the year ended December 31, 2024, as follows:
|
Paid-in Capital |
Accumulated Earnings |
|||
|
$(70,730) |
$70,730 |
As of December 31, 2024, the components of accumulated earnings/(deficit) on a tax basis were as follows:
|
Undistributed Ordinary Income |
$ |
2,392,028 |
|
|
Undistributed Long-Term Capital Gains |
30,899 |
||
|
Unrealized Appreciation |
5,854,394 |
||
|
Total |
$ |
8,277,321 |
|
8. RISK FACTORS |
In the normal course of business, the Fund invests in financial instruments and enters into financial transactions where risk of potential loss exists due to such things as changes in the market (global market risk) or failure or inability of the other party to a transaction to perform (credit risk). See below for a detailed description of select principal risks. The following list is not intended to be a comprehensive description of all of the potential risks associated with the Fund. The Fund's prospectus provides a detailed discussion of the Fund's risks.
CLO Risk: Investments in CLOs carry risks, including, but not limited to (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the possibility that the investments in CLOs are subordinate to other classes or tranches thereof; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results. In addition, at the time of issuance, the CLO may not be fully invested. Until the CLO is fully invested, the debt service of the CLO may exceed the amount of interest earned from the CLO's portfolio. Though not exclusively, the Fund will typically be in a first loss or subordinated position with respect to realized losses on the assets of the CLOs in which it is invested. The Fund may recognize phantom taxable income from its investments in the subordinated tranches of CLOs and structured notes.
Between the closing date and the effective date of a CLO, the CLO collateral manager will generally expect to purchase additional collateral obligations for the CLO. During this period, the price and availability of these collateral obligations may be adversely affected by a number of market factors, including price
|
24 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
volatility and availability of investments suitable for the CLO, which could hamper the ability of the collateral manager to acquire a portfolio of collateral obligations that will satisfy specified concentration limitations and allow the CLO to reach the initial par amount of collateral prior to the effective date. An inability or delay in reaching the target initial par amount of collateral may adversely affect the timing and amount of interest or principal payments received by the holders of the CLO debt securities and distributions of the CLO on equity securities and could result in early redemptions which may cause CLO debt and equity investors to receive less than the face value of their investment.
The failure by a CLO in which the Fund invests to satisfy financial covenants, including with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in the CLO's payments to the Fund. In the event that a CLO fails certain tests, holders of CLO senior debt may be entitled to additional payments that would, in turn, reduce the payments the Fund would otherwise be entitled to receive. Separately, the Fund 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 CLO or any other investment the Fund may make. If any of these occur, it could adversely affect the Fund's operating results and cash flows.
The Fund's CLO investments are exposed to leveraged credit risk. If certain minimum collateral value ratios and/or interest coverage ratios are not met by a CLO, primarily due to senior secured loan defaults, then cash flow that otherwise would have been available to pay distributions to the Fund on its CLO investments may instead be used to redeem any senior notes or to purchase additional senior secured loans, until the ratios again exceed the minimum required levels or any senior notes are repaid in full. The Fund's CLO investments and/or the underlying senior secured loans may prepay more quickly than expected, which could have an adverse impact on the Fund's net assets.
Liquidity Risk: The securities issued by CLOs generally offer less liquidity than below investment grade or high-yieldcorporate debt, and are subject to certain transfer restrictions imposed on certain financial and other eligibility requirements on prospective transferees. Other investments the Fund may purchase through privately negotiated transactions may also be illiquid or subject to legal restrictions on their transfer. As a result of this illiquidity, the Fund's ability to sell certain investments quickly, or at all, in response to changes in economic and other conditions and to receive a fair price when selling such investments may be limited, which could prevent the Fund from making sales to mitigate losses on such investments. In addition, CLOs are subject to the possibility of liquidation upon an event of default, which could result in full loss of value to the CLO equity and junior debt investors.
Global Markets Risk: The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund's portfolio may underperform due to inflation (or expectations for inflation), interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, regulatory events and governmental or quasi-governmentalactions. The occurrence of global events similar to those in recent years may result in market volatility, and may have long term effects on both the U.S. and global financial markets. For example, Russia's ongoing military interventions in Ukraine have led to, and may lead to additional sanctions being levied by the United States, European Union and other countries against Russia. Russia's military incursion and the resulting sanctions could adversely affect global energy and financial markets and thus could affect the value of the Fund's investments, even beyond any direct exposure the Fund may have to Russian issuers or the adjoining geographic regions. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial.
|
Annual Report | December 31, 2024 |
25 |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
Any such disruptions caused by Russian military action or resulting sanctions may magnify the impact of other risks. In addition, the Israel-Hamasconflict as well as the potential risk for a wider conflict could negatively affect financial markets. Geopolitical tensions introduce uncertainty into global markets. This conflict could disrupt regional trade and supply chains, potentially affecting U.S. businesses with exposure to the region. Additionally, the Middle East plays a pivotal role in the global energy sector, and prolonged instability could impact oil prices, leading to increased costs for businesses and consumers. Furthermore, the U.S.'s diplomatic ties and commitments in the region mean that it might become more directly involved, either diplomatically or militarily, diverting attention and resources. These and any related events could significantly impact the Fund's performance and the value of an investment in the Fund, even if the Fund does not have direct exposure. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
Credit Risk: The Fund is subject to the risk that the issuer or guarantor of an obligation, or the counterparty to a transaction, may fail, or become less able, to make timely payment of interest or principal or otherwise honor its obligations or default completely. The strategies utilized by the Adviser require accurate and detailed credit analysis of issuers, and there can be no assurance that its analysis will be accurate or complete. The Fund may be subject to substantial losses in the event of credit deterioration or bankruptcy of one or more issuers in its portfolio. Financial strength and solvency of an issuer are the primary factors influencing credit risk. The Fund could lose money if the issuer or guarantor of a debt security is unable or unwilling, or is perceived (whether by market participants, rating agencies, pricing services or otherwise) as unable or unwilling, to make timely principal and/or interest payments, or to otherwise honor its obligations.
Senior secured loans of issuers that underlie the CLOs in which the Fund invests could deteriorate as a result of, among other factors, an adverse development in their business, a change in the competitive environment or an economic downturn. As a result, companies that the Adviser may have expected to be stable may operate, or expect to operate, at a loss or have significant variations in operating results, may require substantial additional capital to support their operations or maintain their competitive position, or may otherwise have a weak financial condition or be experiencing financial distress. In addition, inadequacy of collateral or credit enhancement for a debt obligation may affect its credit risk.
Although the Fund may invest in investments that the Adviser believes are secured by specific collateral, the value of which may exceed the principal amount of the investments at the time of initial investment, there can be no assurance that the liquidation of any such collateral would satisfy the borrower's obligation in the event of non-paymentof scheduled interest or principal payments with respect to such investment, or that such collateral could be readily liquidated. In addition, in the event of bankruptcy of a borrower, the Fund could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing an investment. Under certain circumstances, collateral securing an investment may be released without the consent of the Fund.
Credit risk is typically greater for securities with ratings that are below investment grade (commonly referred to as "junk bonds"). Since the Fund can invest significantly in high-yieldinvestments considered speculative in nature and unsecured investments, this risk may be substantial. The Fund's right to payment and its security interest, if any, may be subordinated to the payment rights and security interests of more senior creditors. This risk may also be greater to the extent the Fund uses leverage in connection with the management of the Fund. Changes in the actual or perceived creditworthiness of an issuer, or a downgrade or default affecting any of the Fund's securities, could affect the Fund's performance.
|
26 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
Valuation Risk: Most of the Fund's investments are not traded on national securities exchanges, and the Fund does not have the benefit of market quotations or other pricing data from such an exchange. Certain of the Fund's investments will have the benefit of third-partybid-askquotations. With respect to investments for which pricing data is not readily available or when such pricing data is deemed not to represent fair value, the Adviser determines fair value using the valuation procedures approved by the Board. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments the Fund makes.
Interest Rate Risk: Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. The Fund intends to fund portions of its investments with borrowings, and at such time, its net investment income will be affected by the difference between the rate at which it invests and the rate at which it borrows. Accordingly, the Fund cannot assure that a significant change in market interest risks will not have a material adverse effect on its net investment income.
|
9. LINE OF CREDIT |
On September 6, 2024, the Fund entered into a Loan Agreement with U.S. Bank National Association ("U.S. Bank"), pursuant to which the U.S. Bank agreed to provide the Fund with a Line of Credit with an uncommitted amount of $20,000,000. This Loan Agreement will expire on September 5, 2025.
Outstanding principal amounts under the Agreement bear interest at a rate per annum equal to the Prime Rate. The principal amounts under the Agreement are collateralized by a perfected, first priority security interest in the assets of the Fund. The Fund agrees to pay fees to U.S. Bank for administering the obligations of the Fund under the Agreement as well as reasonable out-of-pocketexpenses related to the Agreement, including reasonable attorneys' fees, documentation fees, and other legal expenses. The maximum amount outstanding during the year ended December 31, 2024 was $13,731,000. The average balance and weighted average interest rate, based on the number of days outstanding, for the year ended December 31, 2024 was $4,889,296 and 7.56%, respectively. The interest rate and balance outstanding as of December 31, 2024 was 7.50% and $5,078,000, respectively.
|
10. MANDATORILY REDEEMABLE PREFERRED STOCK |
At December 31, 2024, the Fund had issued and outstanding 1,000 shares of Series A Term Preferred Shares. The Series A Term Preferred Shares have a liquidation preference of $10,000 per share plus accrued and unpaid dividends (whether or not declared). The Fund issued 1,000 of Series A Term Preferred Shares on November 7, 2023. The Series A Term Preferred Shares are entitled to a dividend at a rate of 3 month SOFR + 3.75% per year based on the $10,000 liquidation preference before the common stock is entitled to receive any dividends. The Series A Term Preferred Shares are redeemable at $10,000 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Fund's option commencing on November 9, 2023.
|
Series |
Mandatory |
Annual |
Shares |
Aggregate |
Unamortized |
Carrying Value |
Estimated |
||||||||||||
|
Series A |
November 9, 2025 |
3M SOFR + 3.75% |
$ |
1,000 |
$ |
10,000,000 |
$ |
129,172 |
$ |
9,870,828 |
$ |
10,058,527 |
|||||||
|
Annual Report | December 31, 2024 |
27 |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
The following table summarizes the valuation techniques and unobservable inputs used for the valuation of the Fund's outstanding Preferred Shares:
|
Assets |
Fair Value |
Valuation Techniques |
Unobservable |
Range/Weighted |
Impact to |
||||||
|
Floating Rate Series A Cumulative Term Preferred Shares Due 2025 |
$ |
10,058,527 |
Income Approach (Discounted Cash Flow Model) |
Discount Rates |
7.13% - 8.75%/7.91% |
Decrease |
|||||
(1) Weighted averages are calculated based on fair value of investments
(2) The impact on fair value measurement of an increase in each unobservable input is in isolation.
|
11. DISTRIBUTION REINVESTMENT PLAN |
The Board approved the establishment of a distribution reinvestment plan (the "DRIP"). The DRIP was first applied to the reinvestment of cash distributions paid on or after May 9, 2023.
Under the DRIP, cash distributions paid to participating stockholders are reinvested in shares at a price equal to the net asset value per share of the shares as of such date.
|
12. COMMITMENTS AND CONTINGENCIES |
In the normal course of business, the Fund enters into contracts that may contain a variety of representations that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund expects the risk of loss to be remote.
|
13. SUBSEQUENT EVENTS |
The Fund has evaluated events and transactions through the date the financial statements were issued and has identified the following events for disclosure in the financial statements:
Subsequent to December 31, 2024, the Fund paid the Line of Credit in full on January 6, 2025.
Subsequent to December 31, 2024, the Fund paid the following distributions:
|
Ex-Date |
Record Date |
Payable Date |
Rate (per share) |
|||
|
January 8, 2025 |
January 7, 2025 |
January 10, 2025 |
$0.193 |
|||
|
February 10, 2025 |
February 7, 2025 |
February 11, 2025 |
0.193 |
|
28 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Notes to Financial Statements |
|
December 31, 2024 |
On January 10, 2025, the Fund commenced a quarterly repurchase offer. In this offer, the Fund offered to repurchase up to 5% of the number of its outstanding shares as of the Repurchase Pricing Date. The result of the repurchase offers was as follow:
|
Repurchase Offer |
||
|
Commencement Date |
January 10, 2025 |
|
|
Repurchase Request Deadline |
February 14, 2025 |
|
|
Repurchase Pricing Date |
February 14, 2025 |
|
|
Amount Repurchased |
$5,295,855 |
|
|
Shares Repurchased |
245,292 |
|
Annual Report | December 31, 2024 |
29 |
|
Flat Rock Enhanced Income Fund |
Report of Independent Registered |
To the Shareholders and Board of Trustees of
Flat Rock Enhanced Income Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Flat Rock Enhanced Income Fund (the"Fund") as of December 31, 2024, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets and the financial highlights for the year then ended and for the period from January 3, 2023 (commencement of operations) through December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2024, the results of its operations and its cash flows for the year then ended, and the changes in net assets and financial highlights for the year then ended and for the period from January 3, 2023 (commencement of operations) through December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the 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 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.
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, 2024, by correspondence with the custodian. 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.
We have served as the auditor of one or more investment companies advised by Flat Rock Global, LLC since 2018.
COHEN & COMPANY, LTD.
Philadelphia, Pennsylvania
February 28, 2025
|
30 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Additional Information |
|
December 31, 2024 (Unaudited) |
|
PROXY VOTING |
A description of the Fund's proxy voting policies and procedures is available without charge, upon request by calling 1-307-500-5200, or on the SEC's website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the twelve-month period ended June 30th is available on the SEC's website at http://www.sec.gov.
|
PORTFOLIO HOLDINGS |
The Fund files a monthly portfolio investments report with the U.S. Securities and Exchange Commission ("SEC") on Form N-PORT within 60 days after the end of the Fund's first and third quarters. Copies of the Fund's Form N-PORT are available without charge, upon request, by contacting the Fund at 1-307-500-5200, or on the SEC's website at http://www.sec.gov.
|
PRIVACY NOTICE |
Rev. Oct. 2022 |
|
FACTS |
WHAT DOES FLAT ROCK ENHANCED INCOME FUND DO WITH YOUR PERSONAL INFORMATION? |
|
|
Why? |
Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
|
|
What? |
The types of personal information we collect and share depend on the product or service you have with us. This information can include: |
|
|
Social Security number |
Purchase History |
|
|
When you are no longerour customer, we continue to share your information as described in this notice. |
||
|
How? |
All financial companies need to share customers' personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers' personal information; the reasons Flat Rock Enhanced Income Fund chooses to share; and whether you can limit this sharing. |
|
|
Annual Report | December 31, 2024 |
31 |
|
Flat Rock Enhanced Income Fund |
Additional Information |
|
December 31, 2024 (Unaudited) |
|
REASONS WE CAN SHARE YOUR |
Does Flat |
Can you limit |
|
|
For our everyday business purposes - such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus |
Yes |
No |
|
|
For our marketing purposes - to offer our products and services to you |
No |
We don't share |
|
|
For joint marketing with other financial companies |
No |
We don't share |
|
|
For our affiliates' everyday business purposes - |
No |
We don't share |
|
|
For our affiliates' everyday business purposes - |
No |
We don't share |
|
|
For nonaffiliates to market to you |
No |
We don't share |
|
|
QUESTIONS? |
Call (307) 500-5200 |
||
|
32 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Additional Information |
|
December 31, 2024 (Unaudited) |
|
WHO WE ARE |
|
|
Who is providing |
Flat Rock Enhanced Income Fund |
|
WHAT WE DO |
|
|
How does Flat Rock Enhanced Income Fund protect my personal information? |
To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. Our service providers are held accountable for adhering to strict policies and procedures to prevent any misuse of your nonpublic personal information. |
|
How does Flat Rock Enhanced Income Fund collect my personal information? |
We collect your personal information, for example, when you • Open an account • Provide account information • Give us your contact information • Make deposits or withdrawals from your account • Make a wire transfer • Tell us where to send the money • Tells us who receives the money • Show your government-issued ID • Show your driver's license We also collect your personal information from other companies. |
|
Why can't I limit |
Federal law gives you the right to limit only • Sharing for affiliates' everyday business purposes - information about your creditworthiness • Affiliates from using your information to market to you • Sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
|
Annual Report | December 31, 2024 |
33 |
|
Flat Rock Enhanced Income Fund |
Additional Information |
|
December 31, 2024 (Unaudited) |
|
DEFINITIONS |
|
|
Affiliates |
Companies related by common ownership or control. They can be financial and nonfinancial companies. • Flat Rock Enhanced Income Fund does not share with our affiliates for marketing purposes. |
|
Nonaffiliates |
Companies not related by common ownership or control. They can be financial and nonfinancial companies. • Flat Rock Enhanced Income Fund does not share with nonaffiliates so they can market to you. |
|
Joint marketing |
A formal agreement between nonaffiliated financial companies that together market financial products or services to you. • Flat Rock Enhanced Income Fund doesn't jointly market. |
|
34 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Trustees & Officers |
|
December 31, 2024 (Unaudited) |
Trustees
The Fund's statement of additional information includes additional information about the Fund's Trustees and officers and is available without charge, upon request, by calling (307) 500-5200 or by visiting www.flatrockglobal.com. The business address for each Trustee and officer of the Fund is c/o Flat Rock Enhanced Income Fund, 680 S. Cache Street, Suite 100, P.O. Box 7403, Jackson, WY 83001, unless otherwise noted.
Interested Trustee
|
Name and Year |
Position(s) Held |
Principal |
Number of |
Other |
||||
|
Robert K. Grunewald |
Interested Trustee and Chief Executive Officer, Since Inception |
President and Chief Executive Officer of Flat Rock Core Income Fund (since 2020); President and Chief Executive Officer of Flat Rock Opportunity Fund (since 2018); President and Chief Executive Officer of Flat Rock Capital Corp. (2017 to 2020); Chief Executive Officer of Flat Rock Global (since 2016); President and Chief Investment Officer of Business Development Corp. of America (BDCA) (2011 to 2015). |
3 |
Flat Rock Core Income Fund; Flat Rock Opportunity Fund; Flat Rock Capital Corp. |
* Mr. Grunewald is an interested person of the Fund (as defined in the 1940 Act) (an "Interested Trustee") because of his position with Flat Rock Global.
(1) Each Trustee serves during the continued lifetime of the Fund and will not be subject to a term limit.
(2) The term "Fund Complex" includes the Fund, Flat Rock Core Income Fund and Flat Rock Opportunity Fund.
|
Annual Report | December 31, 2024 |
35 |
|
Flat Rock Enhanced Income Fund |
Trustees & Officers |
|
December 31, 2024 (Unaudited) |
Independent Trustees
|
Name and Year |
Position(s) Held |
Principal |
Number of |
Other |
||||
|
Marshall H. Durston |
Independent Trustee, Since Inception |
Retired (since 2023); Managing Director of Spaulding & Slye Investments, a wholly owned subsidiary of Jones Lang LaSalle (2010 to 2023). |
3 |
Flat Rock Core Income Fund; Flat Rock Opportunity Fund; Flat Rock Capital Corp. |
||||
|
R. Scott Coolidge |
Independent Trustee, Since Inception |
Partner at Human Capital Advisors (since 2015); Senior Vice President and Vice President, Freddie Mac (2003 to 2015). |
3 |
Flat Rock Core Income Fund; Flat Rock Opportunity Fund; Flat Rock Capital Corp. |
||||
|
Paul E. Finnen |
Independent Trustee, Since Inception |
Owner, Paul E. Finnen & Associates (a Real Estate Appraisal company) (since 1985) |
2 |
Flat Rock Core Income Fund |
(1) Each Trustee serves during the continued lifetime of the Fund and will not be subject to a term limit.
(2) The term "Fund Complex" includes the Fund, Flat Rock Core Income Fund and Flat Rock Opportunity Fund.
|
36 |
www.flatrockglobal.com |
|
Flat Rock Enhanced Income Fund |
Trustees & Officers |
|
December 31, 2024 (Unaudited) |
Officers Who are Not Trustees
Information regarding our officers who are not trustees is as follows. The address for each officer is c/o Flat Rock Enhanced Income Fund, 680 S. Cache Street, Suite 100, P.O. Box 7403, Jackson, WY 83001, unless otherwise noted.
|
Name and Year |
Position(s) Held with the |
Principal Occupation(s) During the Past 5 Years |
||
|
Ryan Ripp |
Chief Financial Officer, Treasurer and Secretary, Since Inception |
Chief Financial Officer of Flat Rock Global, LLC, Flat Rock Core Income Fund and Flat Rock Opportunity Fund (Since 2021); Chief Compliance Officer of Flat Rock Global, LLC, Flat Rock Core Income Fund and Flat Rock Opportunity Fund (2021 to 2022); Consultant, Boston Consulting Group (2020 to 2021); Associate, McKinsey & Company (2017 to 2020); Senior Associate, Equity Research, Citi (2014 to 2016) |
||
|
Shiloh Bates |
Chief Investment Officer, Since Inception |
Managing Director of Flat Rock Global (since 2018); Chief Investment Officer of Flat Rock Opportunity Fund (since 2018); Managing Director, Benefit Street Partners (2016 to 2018); Managing Director, BDCA Adviser (2012 to 2016). |
||
|
Andy Chica |
Chief Compliance Officer, Since Inception |
Chief Compliance Officer of Flat Rock Opportunity Fund, Flat Rock Core Income Fund and Flat Rock Global, LLC (since 2022); Principal, NexTier Solutions (since 2022); Chief Compliance Officer and Compliance Director, Cipperman Compliance Services, LLC (2019 to 2022); Chief Compliance Officer, Hatteras Funds (2007 to 2019). |
(1) Officers are typically elected every year, unless an officer earlier retires, resigns or is removed from office.
|
Annual Report | December 31, 2024 |
37 |
Must be accompanied or preceded by a Prospectus.
Ultimus Fund Distributors, LLC is the Distributor for the Flat Rock Enhanced Income Fund.
(b) Not applicable to Registrant.
Item 2. Code of Ethics.
The Registrant, as of the end of the period covered by this report on Form N-CSR, has adopted a code of ethics that applies to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller or any persons performing similar functions on behalf of the Registrant. During the period covered by this report, no amendments were made to the provisions of the code of ethics and no implicit or explicit waivers to the provisions of the code of ethics were granted. The Registrant's code of ethics, as adopted on May 23, 2023, is attached as an exhibit to this report.
Item 3. Audit Committee Financial Expert.
The Board of Trustees of the Registrant has determined that the Registrant has at least one audit committee financial expert serving on its audit committee. The Board of Trustees has designated Mr. Marshall H. Durston as the Fund's "audit committee financial expert," as defined in the instructions to Item 3(a) of Form N-CSR, based on the Board's review of his qualifications. Mr. Durston is "independent" as defined in paragraph (a)(2) of Item 3 to Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees: For the Registrant's fiscal year ended December 31, 2023 and December 31, 2024, the aggregate fees billed for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements was $82,500 and $130,000, respectively.
(b) Audit-Related Fees: For the Registrant's fiscal year ended December 31, 2023 and December 31, 2024, the aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant's annual financial statements and are not reported under paragraph (a) of this Item was $0 and $0, respectively.
(c) Tax Fees: For the Registrant's fiscal year ended December 31, 2023 and December 31, 2024, the aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was $10,500 and $11,500, respectively. The tax fees for fiscal year 2023 and 2024 are related to dividend calculation, excise tax preparation and tax return preparation.
(d) All Other Fees: For the Registrant's fiscal year ended December 31, 2023 and December 31, 2024, the aggregate fees billed by the principal accountant for services other than the services reported in paragraphs (a) through (c) of this item was $0 and $0, respectively.
(e)(1) Audit Committee Pre-Approval Policies and Procedures: All services to be performed by the Registrant's principal accountant must be pre-approvedby the Registrant's audit committee.
(e)(2) No services described in paragraphs (b) through (d) were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01of Regulation S-X.
(f) Not applicable.
(g) The aggregate non-auditfees billed by the Registrant's principal accountant for services rendered to the Fund and the Fund's investment adviser for the fiscal year ended December 31, 2023 and December 31, 2024 was $0 and $0, respectively.
(h) Not applicable.
(i) Not applicable.
(j) Not applicable.
Item 5. Audit Committee of Listed Companies.
Not applicable to Registrant.
Item 6. Investments.
(a) The Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this report.
(b) Not applicable to Registrant.
Item 7. Financial Statements and Financial Highlights for Open-End Management Investment Companies.
(a) Not applicable to Registrant.
(b) Not applicable to Registrant.
Item 8. Changes in and Disagreements with Accountants for Open-End Management Investment Companies.
Not applicable to Registrant.
Item 9. Proxy Disclosures for Open-End Management Investment Companies.
Not applicable to Registrant.
Item 10. Remuneration Paid to Directors, Officers, and Others of Open-End Management Investment Companies.
Not applicable to Registrant.
Item 11. Statement Regarding Basis for Approval of Investment Advisory Contract.
Not applicable.
Item 12. Disclosure of Proxy Voting Policies and Procedures for Closed-EndManagement Investment Companies.
Flat Rock Enhanced Income Fund, a Delaware statutory trust (the "Fund"), has delegated its proxy voting responsibility to its investment adviser, Flat Rock Global, LLC (the "Adviser"). The Proxy Voting Policies and Procedures of the Adviser are set forth below. The guidelines are reviewed periodically by the Adviser and the Fund's non-interestedtrustees and, accordingly, are subject to change.
Introduction
As an investment adviser registered under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the Adviser has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, the Adviser recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.
These policies and procedures for voting proxies for the investment advisory clients of the Adviser are intended to comply with Section 206 of, and Rule 206(4)-6under, the Advisers Act.
Proxy Policies
The Adviser will vote proxies relating to the Fund's portfolio securities in the best interest of its clients' shareholders. The Adviser will review on a case-by-casebasis each proposal submitted for a shareholder vote to determine its impact on the portfolio securities held by each of its clients. Although the Adviser will generally vote against proposals that may have a negative impact on its clients' portfolio securities, it may vote for such a proposal if there exists compelling long-termreasons to do so.
The proxy voting decisions of the Adviser are made by the senior officers who are responsible for monitoring each of its clients' investments. To ensure that its vote is not the product of a conflict of interest, the Adviser requires that: (i) anyone involved in the decision-makingprocess disclose to the Adviser's Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision-makingprocess or vote administration are prohibited from revealing how the Adviser intends to vote on a proposal in order to reduce any attempted influence from interested parties.
Proxy Voting Records
You may obtain information, without charge, regarding how the Adviser voted proxies with respect to the Fund's portfolio securities by making a written request for proxy voting information to: Chief Compliance Officer, Flat Rock Enhanced Income Fund, 680 S Cache Street, Suite 100, P.O. Box 7403, Jackson, WY 83001.
Item 13. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) Registrant's Portfolio Managers as of December 31, 2024 are:
|
Name |
Title |
Length of |
Business Experience 5 Years |
|
Robert K. Grunewald |
Portfolio Manager |
Since January 2023 |
President and Chief Executive Officer of Flat Rock Enhanced Income Fund (since 2022); President and Chief Executive Officer of Flat Rock Core Income Fund (since 2020); President and Chief Executive Officer of Flat Rock Opportunity Fund (since 2018); President and Chief Executive Officer of Flat Rock Capital Corp. (2017 to 2020); Chief Executive Officer of Flat Rock Global (since 2016); President and Chief Investment Officer of Business Development Corp. of America (BDCA) (2011 to 2015). |
|
Shiloh Bates |
Portfolio Manager |
Since January 2023 |
Chief Investment Officer of Flat Rock Enhanced Income Fund (since 2022); Managing Director of Flat Rock Global (since 2018); Chief Investment Officer of Flat Rock Opportunity Fund (since 2018); Managing Director, Benefit Street Partners (2016 to 2018); Managing Director, BDCA Adviser (2012 to 2016). |
(a)(2) Other accounts managed by the Registrant's Portfolio Managers as of December 31, 2024:
|
Name |
Other Accounts Managed |
Other Accounts for which |
|||
|
Account Type |
Number of |
Total Assets |
Number of |
Total Assets |
|
|
Robert K. Grunewald |
Registered Investment Companies |
2 |
$855M |
0 |
$0 |
|
Other Pooled Investment Vehicles |
0 |
$0 |
0 |
$0 |
|
|
Other Accounts |
0 |
$0 |
0 |
$0 |
|
|
Shiloh Bates |
Registered Investment Companies |
2 |
$855M |
0 |
$0 |
|
Other Pooled Investment Vehicles |
0 |
$0 |
0 |
$0 |
|
|
Other Accounts |
0 |
$0 |
0 |
$0 |
|
We have entered into an Investment Advisory Agreement with Flat Rock Global. Certain of the executive officers, directors/trustees and finance professionals of Flat Rock Global who perform services for us on behalf of Flat Rock Global may also serve as officers, directors/trustees, managers, and/or key professionals of affiliates of Flat Rock Global, including Flat Rock Opportunity Fund and Flat Rock Core Income Fund. Further, Flat Rock Global and certain of its affiliates are currently, and plan in the future to continue to be, involved with activities which are unrelated to us. As a result of these activities, Flat Rock Global, its personnel and certain of its affiliates will have conflicts of interest in allocating management time, investment opportunities, services and functions among us and any other business ventures in which they or any of their key personnel, as applicable, are or may become involved. This could result in actions that are more favorable to other affiliated entities than to us.
However, Flat Rock Global has policies and procedures in place designed to manage the conflicts of interest between Flat Rock Global's fiduciary obligations to us and its similar obligations to other clients. Such policies and procedures are designed to ensure that investment opportunities are allocated on an alternating basis that is fair and equitable among us and Flat Rock Global's other clients.
(a)(3) Portfolio Manager compensation as of December 31, 2024:
Mr. Shiloh Bates is a Portfolio Manager of the Fund. Mr. Bates holds an equity ownership interest in the Adviser and his compensation is determined by the Adviser's Compensation Committee. His compensation includes a fixed salary in an amount subject to periodic review; an annual variable discretionary bonus based on the profitability of the Adviser and the performance of the Fund, including consideration of portfolio performance relative to any benchmark, fee waiver, total assets under management and revenues.
Mr. Grunewald is a Portfolio Manager of the Fund. Mr. Grunewald holds an equity ownership interest in the Adviser and his compensation is determined by the Adviser's Compensation Committee. His compensation includes a fixed salary in an amount subject to periodic review; an annual variable discretionary bonus based on the profitability of the Adviser and the performance of the Fund, including consideration of portfolio performance relative to any benchmark, fee waiver, total assets under management and revenues.
(a)(4) Dollar range of securities owned by the Registrant's Portfolio Managers as of December 31, 2024:
|
Name of Portfolio Manager |
Dollar Range of Equity Securities in the Fund(1)(2)(3) |
|
Robert K. Grunewald |
$100,001 - $500,000 |
|
Shiloh Bates |
None |
(1) Dollar ranges are as follows: None, $1 - $10,000, $10,001 - $50,000, $50,001 - $100,000, $100,001 - $500,000, $500,001 - $1,000,000 or over $1,000,000
(2) Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) under the Exchange Act (17 CFR 240.16a-1(a)(2)).
(3) The dollar range of equity beneficially owned is based on the closing price of $21.69 per share on December 31, 2024.
Item 14. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to Registrant.
Item 15. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees
Item 16. Controls and Procedures.
(a) The Registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) No changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Item 17. Disclosure of Securities Lending Activities for Closed-End Investment Companies.
Not applicable to the Registrant.
Item 18. Recovery of Erroneously Awarded Compensation.
None.
Item 19. Exhibits.
|
(a) |
File the exhibits listed below as part of this Form. |
|||
|
(1) |
The code of ethics that applies to the registrant's principal executive officer and principal financial officer is attached hereto as Exhibit 19(a)(1). |
|||
|
(2) |
The certifications required by Rule 30a-2(a) under the 1940 Act, as amended, are attached hereto as EX99.Cert. |
|||
|
(3) |
None. |
|||
|
(4) |
Not applicable. |
|||
|
(5) |
Not applicable. |
|||
|
(b) |
The certifications by the Registrant's principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto as Ex99.906Cert. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
(Registrant) |
Flat Rock Enhanced Income Fund |
|
By |
/s/ Robert K. Grunewald |
|||
|
Robert K. Grunewald
President and Chief Executive Officer |
|
Date |
3/7/2025 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
By |
/s/ Robert K. Grunewald |
|||
|
Robert K. Grunewald
President and Chief Executive Officer |
|
Date |
3/7/2025 |
|
By |
/s/ Ryan Ripp |
|||
|
Ryan Ripp Chief Financial Officer (Principal Financial Officer) |
|
Date |
3/7/2025 |
Flat Rock Enhanced Income Fund published this content on March 07, 2025, and is solely responsible for the information contained herein. Distributed via SEC EDGAR on March 07, 2025 at 20:32 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]