Franklin BSP Lending Corp - Quarter Report: 2011 June (Form 10-Q)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2011
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934

Maryland		27-2614444
(State or other  jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
405 Park Avenue, 15th Floor New York, NY		10022
(Address of principal executive offices)		(Zip Code)

(212) 415-6500

(Registrant’s telephone number, including area code)

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x	(Do not check if a smaller reporting company)	Smaller reporting company ¨

PART I	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010	1
	Consolidated Statements of Operations for the three and six months ended June 30, 2011, for the period from May 5, 2010 (date of inception) to June 30, 2010 and for the period from May 5, 2010 to June 30, 2011 (Unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the period from May 5, 2010 (date of inception) to June 30, 2011 (Unaudited)	3
	Consolidated Statements of Cash Flows for the six months ended June 30, 2011, for the period from May 5, 2010 (date of inception) to June 30, 2011 and for the period from May 5, 2010 to June 30, 2010 (Unaudited)	4
	Notes to Consolidated Financial Statements as of June 30, 2011 (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4.	Controls and Procedures	13
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 1A.	Risk Factors	14
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3.	Defaults upon Senior Securities	14
Item 4.	Reserved	14
Item 5.	Other Information	14
Item 6.	Exhibits	14
Signatures		15

		June 30,				December 31,
		2011				2010
ASSETS		(Unaudited)
Cash		$	26			$	754
Prepaid expenses and other assets			38,417				—
Deferred financing costs, net			75,000				—
Deferred offering costs			2,768,921				1,175,806
Total assets		$	2,882,364			$	1,176,560
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities		$	2,865,407			$	984,439
Preferred stock, $0.001 par value, 50,000,000 and  none authorized at June 30, 2011 and December 31, 2010, respectively, none issued and outstanding			—				—
Common stock, $0.001 par value, 450,000,000 and 100,000,000 shares authorized at June 30, 2011 and December 31, 2010, respectively, and 22,222 shares issued and outstanding at June 30, 2011 and December 31, 2010			22				22
Additional paid-in capital			199,978				199,978
Accumulated deficit during the development stage			(183,043	)			(7,879	)
Total stockholders’ equity			16,957				192,121
Total liabilities and stockholders’ equity		$	2,882,364			$	1,176,560

		Three Months Ended June 30, 2011				Six Months Ended June 30, 2011				For the Period from May 5, 2010 (date of inception) to June 30, 2010				For the Period from May 5, 2010 (date of inception) to June 30, 2011
Revenues		$	—			$	—			$	—			$	—
Expenses:
General and administrative			99,951				150,164				—				158,043
Total operating expenses			99,951				150,164				—				158,043
Operating loss			(99,951	)			(150,164	)			—				(158,043	)
Interest expense			(12,500	)			(25,000	)			—				(25,000	)
Net loss		$	(112,451	)		$	(175,164	)		$	—			$	(183,043	)

		Common stock								Additional				Accumulated
		Shares				Amount				Paid-in Capital				Deficit				Total
Balance, May 5, 2010 (date of inception)			—			$	—			$	—			$	—			$	—
Issuance of common stock			22,222				22				199,978				—				200,000
Net loss			—				—				—				(7,879	)			(7,879	)
Balance, December 31, 2010			22,222				22				199,978				(7,879	)			192,121
Net loss			—				—				—				(175,164	)			(175,164	)
Balance, June 30, 2011			22,222			$	22			$	199,978			$	(183,043	)		$	16,957

 

		Six Months Ended June 30, 2011				For the Period from May 5, 2010 (date of inception) to June 30, 2011				For the Period from May 5, 2010 (date of inception) to June 30, 2010
Cash flows from operating activities:
Net loss		$	(175,164	)		$	—			$	(183,043	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred financing costs			25,000				—				25,000
Changes in assets and liabilities:
Increase in prepaid expenses and other assets			(38,417	)			—				(38,417	)
Increase in accounts payable and accrued liabilities			39,901				—				47,725
Net cash used in operating activities			(148,680	)			—				(148,735	)
Cash flows from financing activities:
Proceeds from issuance of common stock			—				—				200,000
Proceeds from affiliate, net			788,080								788,080
Payments of deferred offering costs			(640,128	)			—				(839,319	)
Net cash provided by financing activities			147,952				—				148,761
Net change in cash			(728	)			—				26
Cash, beginning of period			754				—				—
Cash, end of period		$	26			$	—			$	26

 

 

 

 

 

•

Our initial public offering of common stock (the “IPO”), which commenced on January 25, 2011, is a blind pool offering. We have not identified specific investments that we will make with the proceeds of the IPO, and, therefore, you will not have the opportunity to evaluate our investments prior to purchasing shares of our common stock.

•

We are a new company and have no operating history and are subject to the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objective.

•

Current market conditions have adversely affected the capital markets and have reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. These conditions may make it more difficult for us to achieve our investment objective.

•

The amount of any distributions we pay is uncertain. Our distributions to our stockholders may exceed our earnings, particularly during the period before we have substantially invested the net proceeds from our IPO. Therefore, portions of the distributions that we pay may represent a return of capital.

•

A significant portion of our portfolio will be recorded at fair value as determined in good faith by our board of directors and, as a result, there will be uncertainty as to the value of our portfolio investments.

•

Our board of directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

•

Our Adviser and its respective affiliates face conflicts of interest as a result of compensation arrangements, time constraints and competition for investments, which they will attempt to resolve in a fair and equitable manner but which may result in actions that are not in your best interests.

•

The potential for our Adviser to earn incentive fees may create an incentive for our Adviser to enter into investments that are riskier or more speculative than would otherwise be the case, and our Adviser may have an incentive to increase portfolio leverage in order to earn higher management fees.

•

We may borrow funds to make investments. As a result, we would be exposed to the risks of borrowing, also known as leverage, which may be considered a speculative investment technique. Leverage increases the volatility of investments by magnifying the potential for gain and loss on amounts invested, therefore, increasing the risks associated with investing in our securities. Moreover, any assets we may acquire with leverage will be subject to management fees payable to our Adviser.

 

 

•

We intend to invest primarily in senior secured term loans, second lien loans and mezzanine debt and selected equity investments issued by private companies. For our senior secured and second lien loans, the collateral securing these investments may decrease in value or lose its entire value over time or may fluctuate based on the performance of the portfolio company which may lead to a loss in principal. Mezzanine debt investments are typically unsecured, and investing in mezzanine debt may involve a heightened level of risk, including a loss of principal or the loss of the entire investment.

•

Because there is no public trading market for shares of our common stock and we are not obligated to effectuate a liquidity event by a specified date, it will be difficult for you to sell your shares.

•

Our investments, especially until we raise significant capital from our IPO, may be concentrated in over-the-counter debt securities of a limited number of issuers which will likely carry lower yields than those we will seek in future customized financings, which could result in a lower distribution than we have estimated and magnify the effect of any losses suffered by a few of these investments.

•

We will be subject to financial market risks, including changes in interest rates, which may have a substantial negative impact on our investments.

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As a result of the annual distribution requirement to qualify as a regulated investment company (“RIC”), we will likely need to continually raise cash or make borrowings to fund new investments. At times, these sources of funding may not be available to us on acceptable terms, if at all.

•

We intend to qualify as a RIC but may fail to do so. Such failure would subject us to U.S. federal income tax on all of our income, which would have a material adverse effect on our financial performance.

•

We established the offering price for our shares of common stock on an arbitrary basis, and the offering price may not accurately reflect the value of our assets.

•

After meeting the minimum offering requirement, the purchase price for our shares will be determined at each closing date. As a result, the purchase price may be higher than the prior closing price per share, and, therefore, you may receive a smaller number of shares than if you had subscribed at the prior closing price.

•

Our IPO is on a “reasonable best efforts” basis and if we are unable to raise substantial funds then we will be more limited in the number and type of investments we may make.

•

One of our potential exit strategies is to list our shares for trading on a national exchange, and shares of publicly traded closed-end investment companies frequently trade at a discount to their net asset value. In such case, we would not be able to predict whether our common stock would trade above, at or below net asset value. This risk is separate and distinct from the risk that our net asset value per share may decline.

•

Our regulatory structure and tax treatment may affect our ability to operate as a business development company and a regulated investment company.

 

1.	Each portfolio company or investment will be valued by the Adviser, potentially with assistance from one or more independent valuation firms engaged by our Board of Directors;

2.	The independent valuation firm, if involved, will conduct independent appraisals and make an independent assessment of the value of each investment;

3.	The Audit Committee of our Board of Directors will review and discuss the preliminary valuation prepared by our Adviser and that of the independent valuation firm, if any; and

4.	The Board of Directors will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of our Adviser, the independent valuation firm, if any, and the Audit Committee.

Investments will be valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors. 

 

		As of June 30, 2011 and for the Period from May 5, 2010 (date of inception) to June 30, 2011
Balance sheet data:
Cash		$	26
Prepaid expenses and other assets			38,417
Deferred financing costs, net			75,000
Deferred offering costs			2,768,921
Total assets			2,882,364
Accounts payable and accrued liabilities			2,865,407
Total stockholders’ equity			16,957
Other data:
Net loss			(183,043	)
Cash flow provided by financing activities			148,761

 

The impact of inflation on our portfolio depends on the type of securities we will hold. When inflation occurs, the value of our equity securities may fall in the short term.  However in the long term, a company’s revenue and earnings and therefore the value of the equity investment, should at least increase at the same pace as inflation. The effect of inflation on debt securities is more immediate and direct as inflation may decrease the value of fixed rate debt securities. However, not all debt securities are affected equally, the longer the term of the debt security, the more volatile the value of the investment. The process through which we will value the investments in our portfolio on a quarterly basis, market quotations and our multi-step valuation process as described in our significant accounting policies, will take the effect of inflation into account.

 

		Business Development Corporation of America
		By:		/s/ Nicholas S. Schorsch
				Nicholas S. Schorsch
				Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)
		By:		/s/ Brian S. Block
				Brian S. Block
				Executive  Vice President, Chief Financial Officer  (Principal Financial Officer)

 

Exhibit No.

Description

3.1	Articles of Incorporation of the Registrant (previously filed as Exhibit 3.1 to the Company’s Form 10-K filed on March 31, 2011 and herein incorporated by reference).
3.2	Form of Articles of Amendment and Restatement (previously filed as Exhibit 3.2 to the Company’s Form 10-K filed on March 31, 2011 and herein incorporated by reference).
3.3	Bylaws (previously filed as Exhibit 3.3 to the Company’s Form 10-K filed on March 31, 2011 and herein incorporated by reference)
3.4	Articles of Amendment and Restatement (previously filed as Exhibit 3.1 to the Company’s Form 8-K filed on July 8, 2011 and herein incorporated by reference).
10.1	Amended and Restated Investment Advisory and Management Services Agreement (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on June 23, 2011 and herein incorporated by reference).
31.1	Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2	Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32	Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).