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FS KKR Capital Corp - Quarter Report: 2015 September (Form 10-Q)

FS Investment Corp - Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

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 SEPTEMBER 30, 2015

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 814-00757

 

 

FS Investment Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-1630040
(State of Incorporation)  

(I.R.S. Employer

Identification Number)

201 Rouse Boulevard
Philadelphia, Pennsylvania
  19112
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (215) 495-1150

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 242,847,016 shares of the registrant’s common stock outstanding as of November 6, 2015.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I—FINANCIAL INFORMATION

  

ITEM 1.

  

FINANCIAL STATEMENTS

     1   
  

Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014

     1   
  

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014

     2   
  

Unaudited Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2015 and 2014

     3   
  

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

     4   
  

Consolidated Schedules of Investments as of September 30, 2015 (Unaudited) and December 31, 2014

     5   
  

Notes to Unaudited Consolidated Financial Statements

     23   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     58   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     85   

ITEM 4.

  

CONTROLS AND PROCEDURES

     86   

PART II—OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

     87   

ITEM 1A.

  

RISK FACTORS

     87   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     87   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     87   

ITEM 4.

  

MINE SAFETY DISCLOSURES

     87   

ITEM 5.

  

OTHER INFORMATION

     87   

ITEM 6.

  

EXHIBITS

     88   
  

SIGNATURES

     92   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

FS Investment Corporation

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

    September 30, 2015     December 31,  
    (Unaudited)     2014  

Assets

   

Investments, at fair value—unaffiliated (amortized cost—$4,059,093 and $4,164,166, respectively)

  $ 3,975,021      $ 4,168,654   

Investments, at fair value—affiliated (amortized cost—$91,581 and $17,931, respectively)

    125,058        14,793   

Cash

    85,609        95,205   

Foreign currency, at fair value (cost—$325 and $1,661, respectively)

    326        1,639   

Receivable for investments sold and repaid

    24,221        8,976   

Interest receivable

    50,419        51,814   

Deferred financing costs

    3,281        13,097   

Prepaid expenses and other assets

    969        708   
 

 

 

   

 

 

 

Total assets

  $ 4,264,904      $ 4,354,886   
 

 

 

   

 

 

 

Liabilities

   

Payable for investments purchased

  $ —        $ 28,095   

Credit facilities payable

    31,812        188,827   

Unsecured notes payable

    989,159        725,000   

Repurchase agreement payable(1)

    800,000        950,000   

Stockholder distributions payable

    53,965        17,885   

Management fees payable

    18,845        19,560   

Accrued capital gains incentive fees(2)

    2,657        21,075   

Subordinated income incentive fees payable(2)

    12,490        13,089   

Administrative services expense payable

    401        1,410   

Interest payable

    18,417        15,850   

Directors’ fees payable

    219        296   

Deferred financing costs payable

    —          473   

Other accrued expenses and liabilities

    980        6,340   
 

 

 

   

 

 

 

Total liabilities

    1,928,945        1,987,900   
 

 

 

   

 

 

 

Commitments and contingencies(3)

    —          —     

Stockholders’ equity

   

Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding

    —          —     

Common stock, $0.001 par value, 450,000,000 shares authorized, 242,274,372 and 240,896,559 shares issued and outstanding, respectively

    242        241   

Capital in excess of par value

    2,272,178        2,258,548   

Accumulated undistributed net realized gain/loss on investments and gain/loss on foreign currency(4)

    (43,105     33,758   

Accumulated undistributed (distributions in excess of) net investment income(4)

    150,183        68,658   

Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency

    (43,539     5,781   
 

 

 

   

 

 

 

Total stockholders’ equity

    2,335,959        2,366,986   
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 4,264,904      $ 4,354,886   
 

 

 

   

 

 

 

Net asset value per share of common stock at period end

  $ 9.64      $ 9.83   

  

 

(1) See Note 8 for a discussion of the Company’s repurchase transaction.

 

(2) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees.

 

(3) See Note 9 for a discussion of the Company’s commitments and contingencies.

 

(4) See Note 5 for a discussion of the sources of distributions paid by the Company.

See notes to unaudited consolidated financial statements.

 

1


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2015     2014     2015     2014  

Investment income

        

Interest income—unaffiliated

   $ 99,468      $ 104,823      $ 319,180      $ 311,630   

Interest income—affiliated

     910        —          1,628        —     

Fee income—unaffiliated

     3,290        10,606        33,707        39,141   

Dividend income—unaffiliated

     —          488        5,519        663   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     103,668        115,917        360,034        351,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Management fees(1)

     18,852        20,000        56,993        65,066   

Capital gains incentive fees(2)

     (13,811     (910     (18,418     6,194   

Subordinated income incentive fees(2)

     12,485        14,794        47,661        45,033   

Administrative services expenses

     900        1,202        2,773        3,591   

Stock transfer agent fees

     30        4        140        1,001   

Accounting and administrative fees

     261        172        822        824   

Interest expense

     19,352        18,940        55,699        45,769   

Directors’ fees

     232        266        688        795   

Listing advisory fees

     —          —          —          5,043   

Other general and administrative expenses

     1,601        1,346        4,737        7,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     39,902        55,814        151,095        180,318   

Management fee waiver(1)

     —          —          —          (2,837
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     39,902        55,814        151,095        177,481   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     63,766        60,103        208,939        173,953   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gain/loss

        

Net realized gain (loss) on investments—unaffiliated

     (21,246     5,421        (42,135     25,959   

Net realized gain (loss) on foreign currency

     266        (338     (631     (243

Net change in unrealized appreciation (depreciation) on investments—unaffiliated

     (74,848     (8,901     (88,560     6,140   

Net change in unrealized appreciation (depreciation) on investments—affiliated

     27,220        (747     36,615        (1,046

Net change in unrealized gain (loss) on foreign currency

     (437     61        2,625        207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss) on investments

     (69,045     (4,504     (92,086     31,017   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ (5,279   $ 55,599      $ 116,853      $ 204,970   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share information—basic and diluted

        

Net increase (decrease) in net assets resulting from operations (Earnings per Share)

   $ (0.02   $ 0.23      $ 0.48      $ 0.81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     242,227,762        239,548,922        241,659,230        251,603,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 4 for a discussion of the waiver by FB Income Advisor, LLC, the Company’s investment adviser, of certain management fees to which it was otherwise entitled during the nine months ended September 30, 2014.

 

(2) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees.

See notes to unaudited consolidated financial statements.

 

2


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FS Investment Corporation

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

 

 

 

     Nine Months Ended  
     September 30,  
     2015     2014  

Operations

    

Net investment income (loss)

   $ 208,939      $ 173,953   

Net realized gain (loss) on investments and foreign currency

     (42,766     25,716   

Net change in unrealized appreciation (depreciation) on investments

     (51,945     5,094   

Net change in unrealized gain (loss) on foreign currency

     2,625        207   
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     116,853        204,970   
  

 

 

   

 

 

 

Stockholder distributions(1)

    

Distributions from net investment income

     (127,414     (118,620

Distributions from net realized gain on investments

     (34,097     (71,629
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (161,511     (190,249
  

 

 

   

 

 

 

Capital share transactions(2)

    

Reinvestment of stockholder distributions

     13,631        48,974   

Repurchases of common stock

     —          (258,903
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital share transactions

     13,631        (209,929
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     (31,027     (195,208

Net assets at beginning of period

     2,366,986        2,640,992   
  

 

 

   

 

 

 

Net assets at end of period

   $ 2,335,959      $ 2,445,784   
  

 

 

   

 

 

 

Accumulated undistributed (distributions in excess of) net investment income(1)

   $ 150,183      $ 90,655   
  

 

 

   

 

 

 

 

(1) See Note 5 for a discussion of the sources of distributions paid by the Company.

 

(2) See Note 3 for a discussion of the Company’s capital share transactions.

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

     Nine Months Ended  
     September 30,  
     2015     2014  

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $ 116,853      $ 204,970   

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Purchases of investments

     (1,084,274     (1,641,221

Paid-in-kind interest

     (15,236     (10,376

Proceeds from sales and repayments of investments

     1,114,231        1,523,890   

Net realized (gain) loss on investments

     42,135        (25,959

Net change in unrealized (appreciation) depreciation on investments

     51,945        (5,094

Accretion of discount

     (25,433     (20,183

Amortization of deferred financing costs and discount

     2,788        4,464   

Unrealized (gain)/loss on borrowings in foreign currency

     (2,804     —     

(Increase) decrease in receivable for investments sold and repaid

     (15,245     17,220   

(Increase) decrease in interest receivable

     1,395        (5,028

(Increase) decrease in prepaid expenses and other assets

     (261     (877

Increase (decrease) in payable for investments purchased

     (28,095     82,002   

Increase (decrease) in management fees payable

     (715     (2,691

Increase (decrease) in accrued capital gains incentive fees

     (18,418     4,604   

Increase (decrease) in subordinated income incentive fees payable

     (599     491   

Increase (decrease) in administrative services expense payable

     (1,009     (165

Increase (decrease) in interest payable

     2,567        2,238   

Increase (decrease) in directors’ fees payable

     (77     38   

Increase (decrease) in other accrued expenses and liabilities

     (5,360     (4,991
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     134,388        123,332   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Reinvestment of stockholder distributions

     13,631        48,974   

Repurchases of common stock

     —          (258,903

Stockholder distributions

     (125,431     (191,101

Borrowings under credit facilities(1)

     114,200        288,686   

Borrowings under unsecured notes(1)

     275,000        400,000   

Repayments of credit facilities(1)

     (268,411     (448,074

Repayments under repurchase agreement(2)

     (150,000     —     

Deferred financing costs paid

     (4,286     (10,258
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (145,297     (170,676
  

 

 

   

 

 

 

Total increase (decrease) in cash

     (10,909     (47,344

Cash and foreign currency at beginning of period

     96,844        227,328   
  

 

 

   

 

 

 

Cash and foreign currency at end of period

   $ 85,935      $ 179,984   
  

 

 

   

 

 

 

Supplemental disclosure

    

Local and excise taxes paid

   $ 5,638      $ 5,407   
  

 

 

   

 

 

 

 

(1) See Note 8 for a discussion of the Company’s credit facilities and unsecured notes. During the nine months ended September 30, 2015 and 2014, the Company paid $27,851 and $15,653, respectively, in interest expense on the credit facilities and unsecured notes.

 

(2) See Note 8 for a discussion of the Company’s repurchase transaction. During the nine months ended September 30, 2015 and 2014, the Company paid $22,493 and $23,414, respectively, in interest expense pursuant to the repurchase agreement.

See notes to unaudited consolidated financial statements.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

Senior Secured Loans—First Lien—83.0%

               

A.P. Plasman Inc.

  (e)(f)(g)(h)   Capital Goods   L+775   1.0%   12/29/19   $ 171,584      $ 171,584      $ 172,871   

Allen Systems Group, Inc.

  (e)(g)(p)   Software & Services   L+789, 1.2% PIK
(1.2% Max PIK)
  1.0%   4/30/20     37,826        37,826        38,204   

Altus Power America, Inc.

  (g)   Energy   L+750   1.5%   10/10/21     1,474        1,474        1,489   

Altus Power America, Inc.

  (g)(m)   Energy   L+750   1.5%   10/10/21     1,651        1,651        1,667   

American Racing and Entertainment, LLC

  (e)   Consumer Services   L+800   1.0%   7/1/18     5,750        5,750        5,793   

AP Exhaust Acquisition, LLC

  (f)(g)   Automobiles & Components   L+775   1.5%   1/16/21     15,811        15,811        15,811   

Aspect Software, Inc.

  (g)   Software & Services   L+550   1.8%   5/7/16     1,161        1,153        1,138   

Atlas Aerospace LLC

  (g)   Capital Goods   L+807   1.0%   5/8/19     20,000        20,000        19,900   

Atlas Aerospace LLC

  (g)(m)   Capital Goods   L+750   1.0%   5/8/19     7,619        7,619        7,581   

BenefitMall Holdings, Inc.

  (g)   Commercial & Professional Services   L+725   1.0%   11/24/20     14,888        14,888        14,888   

BenefitMall Holdings, Inc.

  (g)(m)   Commercial & Professional Services   L+725   1.0%   11/24/20     5,455        5,455        5,455   

Blue Coat Holdings, Inc.

  (g)(m)   Technology Hardware & Equipment   L+350   1.0%   5/20/20     2,136        2,136        2,103   

Blueprint Sub, Inc.

  (e)   Software & Services   L+750   1.0%   5/7/21     26,954        26,954        26,954   

Blueprint Sub, Inc.

  (g)(m)   Software & Services   L+750   1.0%   5/7/21     3,509        3,509        3,509   

Blueprint Sub, Inc.

  (g)(m)   Software & Services   L+450   1.0%   5/7/21     1,404        1,404        1,404   

Cadence Aerospace Finance, Inc.

  (g)   Capital Goods   L+525   1.3%   5/9/18     76        76        75   

Caesars Entertainment Operating Co., Inc.

  (e)(g)(h)(j)   Consumer Services   L+575     3/1/17     12,621        12,141        11,192   

Caesars Entertainment Operating Co., Inc.

  (e)(h)(j)   Consumer Services   L+675     3/1/17     2,363        2,298        2,117   

Caesars Entertainment Operating Co., Inc.

  (e)(f)(g)(h)(j)   Consumer Services   L+875   1.0%   3/1/17     84,594        84,135        72,689   

Caesars Entertainment Resort Properties, LLC

  (e)(g)   Consumer Services   L+600   1.0%   10/11/20     22,125        21,086        20,726   

Corel Corp.

  (e)(f)(g)(h)   Software & Services   L+825     6/7/19     135,933        135,933        137,462   

Corel Corp.

  (g)(h)(m)   Software & Services   Prime+725     6/7/18     10,000        10,000        10,000   

Corner Investment PropCo, LLC

  (e)(g)   Consumer Services   L+975   1.3%   11/2/19     43,062        43,208        42,416   

CoSentry.Net, LLC

  (e)(g)   Software & Services   L+800   1.3%   12/31/19     62,490        62,490        62,881   

Crestwood Holdings LLC

  (g)   Energy   L+600   1.0%   6/19/19     5,235        5,219        4,685   

Eastman Kodak Co.

  (g)   Consumer Durables & Apparel   L+625   1.0%   9/3/19     10,664        10,512        10,261   

Flanders Corp.

  (e)(g)   Capital Goods   L+950   1.5%   5/14/18     34,493        34,032        35,355   

Fronton Holdings, LLC

  (e)   Consumer Services   15.0%     4/30/19     3,736        3,706        3,736   

Greystone Bridge Manager LLC

  (g)(h)   Diversified Financials   L+1050     5/1/20     2,101        2,101        2,080   

Greystone Bridge Manager LLC

  (g)(h)(m)   Diversified Financials   L+1050     5/1/20     1,855        1,855        1,837   

Gruden Acquisition, Inc.

  (g)   Transportation   L+475   1.0%   8/18/22     3,545        3,510        3,504   

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

H.M. Dunn Co., Inc.

  (g)   Capital Goods   L+809   1.0%   3/26/21   $ 1,000      $ 1,000      $ 1,000   

H.M. Dunn Co., Inc.

  (g)(m)   Capital Goods   L+725   1.0%   3/26/21     357        357        357   

Imagine Communications Corp.

  (e)(f)(g)   Media   L+825   1.0%   4/29/20     105,782        105,782        105,782   

Imagine Communications Corp.

  (g)(m)   Media   L+825   1.0%   4/29/20     30,000        30,000        30,000   

Industrial Group Intermediate Holdings, LLC

  (g)   Materials   L+800   1.3%   5/31/20     13,572        13,572        13,572   

Industry City TI Lessor, L.P.

  (g)   Consumer Services   5.0%, 5.3% PIK

(5.3% Max PIK)

    6/30/26     25,466        25,466        27,121   

JSS Holdings, Inc.

  (g)   Capital Goods   L+650   1.0%   8/31/21     2,000        1,861        1,970   

JW Aluminum Co.

  (g)   Materials   L+750   1.0%   5/15/17     1,160        1,160        1,160   

Latham Pool Products, Inc.

  (e)   Commercial & Professional Services   L+775   1.0%   6/29/21     70,000        70,000        69,300   

Leading Edge Aviation Services, Inc.

  (e)(f)(g)   Capital Goods   L+875   1.5%   6/30/19     32,415        32,167        31,929   

LEAS Acquisition Co Ltd.

  (g)(h)   Capital Goods   L+875   1.5%   6/30/19   28,125        38,505        30,922   

LEAS Acquisition Co Ltd.

  (f)(h)   Capital Goods   L+875   1.5%   6/30/19   $ 10,219        10,219        10,065   

MB Precision Holdings LLC

  (g)   Capital Goods   L+725   1.3%   1/23/20     12,889        12,889        12,760   

Micronics, Inc.

  (e)(g)   Capital Goods   L+800   1.3%   12/11/19     64,272        63,986        64,272   

Micronics, Inc.

  (g)(m)   Capital Goods   L+800   1.3%   12/11/19     13,500        13,500        13,500   

MMM Holdings, Inc.

  (g)   Health Care Equipment & Services   L+825   1.5%   12/12/17     8,414        8,331        6,408   

MSO of Puerto Rico, Inc.

  (g)   Health Care Equipment & Services   L+825   1.5%   12/12/17     6,117        6,056        4,658   

New Star Metals Inc.

  (e)(g)   Capital Goods   L+800   1.3%   3/20/20     36,275        36,275        35,912   

Nobel Learning Communities, Inc.

  (g)   Consumer Services   L+845   1.0%   4/27/21     1,056        1,056        1,052   

Nobel Learning Communities, Inc.

  (g)(m)   Consumer Services   L+450   1.0%   4/27/20     140        140        140   

Nova Wildcat Amerock, LLC

  (g)   Consumer Durables & Apparel   L+316, 5.4% PIK
(5.4% Max PIK)
  1.3%   9/10/19     18,580        18,580        16,536   

PHRC License, LLC

  (f)(g)   Consumer Services   L+900   1.5%   8/14/20     44,689        44,689        44,689   

Polymer Additives, Inc.

  (g)   Materials   L+838   1.0%   12/20/21     10,511        10,511        10,643   

Reddy Ice Corp.

  (g)   Food, Beverage & Tobacco   L+550   1.3%   5/1/19     1,161        1,153        968   

Roadrunner Intermediate Acquisition Co., LLC

  (e)(f)(g)   Health Care Equipment & Services   L+800   1.0%   9/22/21     37,000        37,000        37,000   

Rogue Wave Software, Inc.

  (e)(f)(g)   Software & Services   L+857   1.0%   9/25/21     31,313        31,313        31,313   

Safariland, LLC

  (e)(g)   Capital Goods   L+800   1.3%   9/20/19     172,976        172,976        177,300   

Shell Topco L.P.

  (g)   Materials   L+750   1.5%   9/28/18     30,000        29,750        30,150   

Smile Brands Group Inc.

  (g)   Health Care Equipment & Services   L+625   1.3%   8/16/19     20,090        19,777        14,121   

Sorenson Communications, Inc.

  (e)(g)   Telecommunication Services   L+575   2.3%   4/30/20     92,795        92,426        93,259   

Southcross Holdings Borrower LP

  (g)   Energy   L+500   1.0%   8/4/21     313        312        238   

 

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity     Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

Spencer Gifts LLC

  (g)   Retailing   L+425   1.0%     7/16/21      $ 998      $ 993      $ 985   

Sports Authority, Inc.

  (g)   Retailing   L+600   1.5%     11/16/17        6,318        6,321        4,848   

Stallion Oilfield Holdings, Inc.

  (g)   Energy   L+675   1.3%     6/19/18        4,773        4,745        3,476   

SunGard Availability Services Capital, Inc.

  (g)   Software & Services   L+500   1.0%     3/29/19        4,424        4,159        3,777   

Sunnova Asset Portfolio 5 Holdings, LLC

  (g)   Energy   12.0% PIK
(12.0% Max PIK)
      11/14/21        6,814        6,814        6,814   

Sunnova Asset Portfolio 5 Holdings, LLC

  (g)(m)   Energy   12.0% PIK
(12.0% Max PIK)
      11/14/21        517        517        517   

Swiss Watch International, Inc.

  (e)(g)   Consumer Durables & Apparel   L+725   1.3%     11/8/18        41,375        40,890        35,169   

Transplace Texas, LP

  (e)(f)   Transportation   L+747   1.0%     9/16/21        20,000        20,000        20,000   

U.S. Xpress Enterprises, Inc.

  (e)(f)   Transportation   L+1000, 0.0% PIK
(1.5% Max PIK)
  1.5%     5/30/19        68,082        68,082        68,422   

Vertellus Performance Chemicals LLC

  (f)(g)   Materials   L+950   1.0%     1/30/20        38,000        38,000        37,210   

VPG Group Holdings LLC

  (e)(g)   Materials   L+900   1.0%     10/4/18        73,945        73,695        73,483   

Warren Resources, Inc.

  (f)(g)   Energy   L+850   1.0%     5/22/20        3,157        3,157        2,904   

Warren Resources, Inc.

  (g)(m)   Energy   L+850   1.0%     5/22/20        431        431        397   

Waste Pro USA, Inc.

  (e)(f)(g)   Commercial & Professional Services   L+750   1.0%     10/15/20        86,237        86,237        87,531   

Waste Pro USA, Inc.

  (g)(m)   Commercial & Professional Services   L+750   1.0%     10/15/20        9,444        9,444        9,586   

Weight Watchers International, Inc.

  (g)(h)   Consumer Services   L+300       4/2/16        5,786        5,268        5,257   

Zeta Interactive Holdings Corp.

  (g)   Software & Services   L+750   1.0%     7/9/21        8,000        8,000        7,985   

Zeta Interactive Holdings Corp.

  (g)(m)   Software & Services   L+750   1.0%     7/9/21        4,571        4,571        4,563   
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                2,061,649        2,030,804   

Unfunded Loan Commitments

                (92,589     (92,589
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                1,969,060        1,938,215   
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—37.8%

             

AdvancePierre Foods, Inc.

  (e)(f)(g)   Food, Beverage & Tobacco   L+825   1.3%     10/10/17        17,556        17,418        17,578   

Affordable Care, Inc.

  (e)(f)(g)   Health Care Equipment & Services   L+925   1.3%     12/26/19        34,314        34,018        33,971   

Alison US LLC

  (g)(h)   Capital Goods   L+850   1.0%     8/29/22        4,444        4,282        3,837   

American Racing and Entertainment, LLC

  (f)   Consumer Services   12.0%       7/1/18        5,800        5,679        5,844   

AP Exhaust Acquisition, LLC

  (f)   Automobiles & Components   12.0%       9/28/21        3,243        3,243        3,243   

Arena Energy, LP

  (g)   Energy   L+900   1.0%     1/24/21        5,000        5,000        4,816   

 

See notes to unaudited consolidated financial statements.

 

7


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

Ascent Resources - Utica, LLC

  (e)(f)(g)   Energy   L+950, 2.0% PIK
(2.0% Max PIK)
  1.5%   9/30/18   $ 182,161      $ 181,334      $ 172,142   

Brock Holdings III, Inc.

  (g)   Energy   L+825   1.8%   3/16/18     6,923        6,869        6,490   

Byrider Finance, LLC

  (f)(g)   Automobiles & Components   L+1000   1.3%   8/22/20     10,000        10,000        9,800   

Compuware Corp.

  (g)   Software & Services   L+825   1.0%   12/15/22     6,550        5,871        5,928   

DEI Sales, Inc.

  (e)(f)   Consumer Durables & Apparel   L+900   1.5%   1/15/18     57,500        57,084        54,266   

EagleView Technology Corp.

  (g)   Software & Services   L+825   1.0%   7/14/23     11,538        11,368        11,135   

Eastman Kodak Co.

  (e)(f)   Consumer Durables & Apparel   L+950   1.3%   9/3/20     50,000        49,023        48,375   

FullBeauty Brands, Inc.

  (e)(f)(g)   Consumer Durables & Apparel   L+800   1.3%   9/17/21     165,000        165,000        165,000   

Gruden Acquisition, Inc.

  (g)   Transportation   L+850   1.0%   8/18/23     15,000        14,259        14,325   

National Surgical Hospitals, Inc.

  (e)   Health Care Equipment & Services   L+900   1.0%   6/1/23     30,000        30,000        29,489   

Nielsen & Bainbridge, LLC

  (g)   Consumer Durables & Apparel   L+925   1.0%   8/15/21     16,675        16,443        16,425   

Paw Luxco II Sarl

  (f)(h)   Consumer Durables & Apparel   EURIBOR+950     1/29/19   16,364        20,448        13,950   

PSAV Acquisition Corp.

  (e)(g)   Technology Hardware & Equipment   L+825   1.0%   1/24/22   $ 80,000        78,979        80,000   

Sequential Brands Group, Inc.

  (e)(h)   Consumer Durables & Apparel   L+900   1.0%   4/8/21     60,124        60,124        60,124   

Spencer Gifts LLC

  (e)(g)   Retailing   L+825   1.0%   6/29/22     60,000        59,712        59,100   

Stadium Management Corp.

  (e)   Consumer Services   L+825   1.0%   2/27/21     57,500        57,500        57,788   

Stardust Finance Holdings, Inc.

  (g)(h)   Materials   L+950   1.0%   3/13/23     9,875        9,834        9,814   
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                903,488        883,440   
             

 

 

   

 

 

 

Senior Secured Bonds—14.1%

             

Advanced Lighting Technologies, Inc.

  (f)(g)   Materials   10.5%     6/1/19     78,500        77,314        49,455   

Aspect Software, Inc.

  (f)(g)   Software & Services   10.6%     5/15/17     8,500        8,412        7,480   

Avaya Inc.

  (e)(f)(g)   Technology Hardware & Equipment   10.5%     3/1/21     49,800        45,435        23,033   

Caesars Entertainment Resort Properties, LLC

  (e)(g)   Consumer Services   11.0%     10/1/21     29,248        28,992        26,725   

FourPoint Energy, LLC

  (e)(f)   Energy   8.0%     12/31/20     92,531        89,646        81,428   

FourPoint Energy, LLC

  (f)(m)   Energy   8.0%     12/31/20     5,906        5,877        5,198   

Global A&T Electronics Ltd.

  (g)(h)   Semiconductors & Semiconductor Equipment   10.0%     2/1/19     7,000        6,932        5,635   

JW Aluminum Co.

  (e)(f)(g)   Materials   11.5%, 1.0% PIK
(1.0% Max PIK)
    11/15/17     70,462        70,193        65,617   

Lightstream Resources Ltd.

  (f)(h)   Energy   9.9%     6/15/19     2,112        2,112        1,811   

Logan’s Roadhouse, Inc.

  (f)(g)   Consumer Services   10.8%     10/15/17     56,294        48,926        39,089   

 

See notes to unaudited consolidated financial statements.

 

8


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

SandRidge Energy, Inc.

  (g)   Energy   8.8%     6/1/20   $ 19,500      $ 19,455      $ 11,919   

Sorenson Communications, Inc.

  (f)   Telecommunication Services   9.0%     10/31/20     19,898        19,223        19,202   
             

 

 

   

 

 

 

Total Senior Secured Bonds

                422,517        336,592   

Unfunded Bond Commitments

                (5,877     (5,877
             

 

 

   

 

 

 

Net Senior Secured Bonds

                416,640        330,715   
             

 

 

   

 

 

 

Subordinated Debt—19.0%

             

Alta Mesa Holdings, LP

  (g)   Energy   9.6%     10/15/18     11,165        11,099        5,923   

Aurora Diagnostics, LLC

  (e)(f)   Health Care Equipment & Services   10.8%     1/15/18     18,065        18,089        14,271   

Bellatrix Exploration Ltd.

  (g)(h)   Energy   8.5%     5/15/20     5,000        4,906        3,881   

Brooklyn Basketball Holdings, LLC

  (f)(g)   Consumer Services   L+725     10/25/19     19,873        19,873        19,773   

CEC Entertainment, Inc.

  (f)   Consumer Services   8.0%     2/15/22     5,000        5,012        4,950   

Ceridian Corp.

  (f)(g)   Commercial & Professional Services   11.0%     3/15/21     10,800        11,377        9,896   

EV Energy Partners, L.P.

  (f)(h)   Energy   8.0%     4/15/19     265        236        184   

Flanders Corp.

  (e)(f)   Capital Goods   13.8% PIK
(13.8% Max PIK)
    5/14/18     24,785        24,680        23,236   

Flanders Corp.

  (f)(g)   Capital Goods   17.5% PIK
(17.5% Max PIK)
    5/14/18     24,636        23,320        25,437   

Frontier Communications Corp.

  (g)(h)   Telecommunication Services   11.0%     9/15/25     5,250        5,250        5,083   

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0%, 0.0% PIK
(15.0% Max PIK)
    1/30/25     620        620        620   

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0%, 0.0% PIK
(15.0% Max PIK)
    4/30/25     4,826        4,826        4,826   

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0%, 0.0% PIK
(15.0% Max PIK)
    9/3/25     875        875        875   

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0%, 0.0% PIK
(15.0% Max PIK)
    9/29/25     999        999        999   

Imagine Communications Corp.

  (g)   Media   12.5% PIK
(12.5% Max PIK)
    8/4/18     501        501        501   

Jupiter Resources Inc.

  (f)(g)(h)   Energy   8.5%     10/1/22     6,425        5,377        3,831   

KODA Distribution Group, Inc.

  (e)   Materials   11.3%     9/30/19     49,500        48,714        49,809   

Mood Media Corp.

  (f)(g)(h)   Media   9.3%     10/15/20     43,135        42,225        31,165   

Navistar International Corp.

  (f)(h)   Capital Goods   8.3%     11/1/21     8,345        8,158        6,676   

 

See notes to unaudited consolidated financial statements.

 

9


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

NewStar Financial, Inc.

  (g)(h)   Diversified Financials   8.3%, 0.0% PIK
(8.8% Max PIK)
    12/4/24   $ 62,500      $ 48,052      $ 46,875   

P.F. Chang’s China Bistro, Inc.

  (f)(g)   Consumer Services   10.3%     6/30/20     11,433        11,829        11,462   

PriSo Acquisition Corp.

  (g)   Capital Goods   9.0%     5/15/23     6,000        5,941        5,910   

Sequel Industrial Products Holdings, LLC

  (f)   Commercial & Professional Services   12.0%, 2.5% PIK
(2.5% Max PIK)
    9/30/19     7,000        6,922        7,175   

Sorenson Communications, Inc.

  (f)   Telecommunication Services   13.0%     10/31/21     15,122        14,173        15,727   

SunGard Availability Services Capital, Inc.

  (f)(g)   Software & Services   8.8%     4/1/22     10,750        8,020        6,880   

ThermaSys Corp.

  (e)(f)   Capital Goods   9.0%, 1.8% PIK
(5.0% Max PIK)
    5/3/20     135,072        135,072        132,033   

VPG Group Holdings LLC

  (e)   Materials   11.0%, 2.0% PIK
(2.0% Max PIK)
    7/15/19     5,221        5,221        5,044   
             

 

 

   

 

 

 

Total Subordinated Debt

                471,367        443,042   
             

 

 

   

 

 

 

Collateralized Securities—4.4%

             

ACASC 2013-2A Class Subord. B

  (f)(g)(h)   Diversified Financials   9.8%     10/25/25     30,500        22,393        21,211   

Dryden CDO 23A Class Subord.

  (g)(h)   Diversified Financials   22.5%     7/17/23     10,000        4,913        5,849   

JPMorgan Chase Bank, N.A. Credit-Linked Notes

  (f)(h)   Diversified Financials   14.0%     12/20/21     16,740        16,705        16,531   

NewStar Clarendon 2014-1A Class D

  (g)(h)   Diversified Financials   L+435     1/25/27     1,560        1,461        1,454   

NewStar Clarendon 2014-1A Class Subord. B

  (g)(h)   Diversified Financials   13.4%     1/25/27     17,900        16,948        16,219   

Rampart CLO 2007 1A Class Subord.

  (g)(h)   Diversified Financials   30.4%     10/25/21     10,000        2,609        4,276   

Stone Tower CLO VI Class Subord.

  (f)(h)   Diversified Financials   36.2%     4/17/21     5,000        1,878        3,151   

Wind River CLO Ltd. 2012 1A Class Subord. B

  (g)(h)   Diversified Financials   14.7%     1/15/24     42,504        31,171        34,370   
             

 

 

   

 

 

 

Total Collateralized Securities

                98,078        103,061   
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

10


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

   Number of
Shares
     Amortized
Cost
     Fair
Value(d)
 

Equity/Other—17.2%(i)

                  

Allen Systems Group, Inc., Common Equity

  (g)(j)(p)   Software & Services            1,689,767       $ 36,422       $ 68,774   

Altus Power America Holdings, LLC, Preferred Equity

  (g)(j)   Energy            491,425         491         885   

Amaya Inc., Warrants, 5/15/2024

  (g)(h)(j)   Consumer Services            2,000,000         16,832         24,560   

AP Exhaust Holdings, LLC, Common Equity

  (g)(j)(l)   Automobiles & Components            811         811         584   

Aquilex Corp., Common Equity, Class A Shares

  (e)   Commercial & Professional Services            15,128         1,088         4,050   

Aquilex Corp., Common Equity, Class B Shares

  (e)(f)   Commercial & Professional Services            32,637         1,690         8,737   

Ascent Resources Utica Holdings, LLC, Common Equity

  (g)(j)(k)   Energy            10,192,939         9,700         6,625   

Burleigh Point, Ltd., Warrants, 7/16/2020

  (g)(h)(j)   Retailing            17,256,081         1,898         3,624   

CoSentry.Net, LLC, Preferred Equity

  (f)(j)   Software & Services            2,632         2,500         4,424   

Eastman Kodak Co., Common Equity

  (e)(g)(j)   Consumer Durables & Apparel            61,859         1,202         966   

Flanders Corp., Common Equity

  (f)(j)   Capital Goods            6,829,973         7,183         8,196   

FourPoint Energy, LLC, Common Equity, Class C Units

  (g)(j)(l)   Energy            21,000         21,000         25,515   

FourPoint Energy, LLC, Common Equity, Class D Units

  (g)(j)(l)   Energy            3,937         2,601         4,823   

Fronton Investor Holdings, LLC, Class B Units

  (g)(j)(l)(p)   Consumer Services            14,943         17,333         18,080   

Global Jet Capital Holdings, LP, Preferred Equity

  (g)(j)   Commercial & Professional Services            3,137,062         3,137         3,137   

Imagine Communications Corp., Common Equity, Class A Units

  (g)(j)   Media            33,034         3,783         4,562   

Industrial Group Intermediate Holdings, LLC, Common Equity

  (g)(j)(l)   Materials            347,107         347         538   

JW Aluminum Co., Common Equity

  (f)(j)   Materials            37,500         3,225         —     

Leading Edge Aviation Services, Inc., Common Equity

  (f)(j)   Capital Goods            4,401         464         22   

Leading Edge Aviation Services, Inc., Preferred Equity

  (f)(j)   Capital Goods            1,303         1,303         1,303   

MB Precision Investment Holdings LLC, Class A-2 Units

  (f)(j)   Capital Goods            490,213         490         319   

Micronics, Inc., Common Equity

  (g)(j)   Capital Goods            53,073         553         791   

Micronics, Inc., Preferred Equity

  (g)(j)   Capital Goods            55         553         689   

Milagro Holdings, LLC, Common Equity

  (f)(j)   Energy            12,057         50         —     

Milagro Holdings, LLC, Preferred Equity

  (g)(j)   Energy            283,947         11,181         —     

New Star Metals Inc., Common Equity

  (g)   Capital Goods            741,082         750         815   

NewStar Financial, Inc., Warrants, 11/4/2024

  (g)(h)(j)(n)   Diversified Financials            3,000,000         15,058         14,640   

Plains Offshore Operations Inc., Preferred Equity

  (e)(f)   Energy            52,666         64,732         71,417   

Plains Offshore Operations Inc., Warrants, 11/18/2019

  (e)(f)(j)   Energy            1,067,481         1,722         —     

PSAV Holdings LLC, Common Equity

  (f)   Technology Hardware & Equipment            10,000         10,000         26,500   

Safariland, LLC, Common Equity

  (f)(j)   Capital Goods            25,000         2,500         15,458   

Safariland, LLC, Preferred Equity

  (f)   Capital Goods            2,042         23,409         24,695   

Safariland, LLC, Warrants, 7/27/2018

  (f)(j)   Capital Goods            2,263         246         1,399   

 

See notes to unaudited consolidated financial statements.

 

11


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

   Number of
Shares
     Amortized
Cost
     Fair
Value(d)
 

Safariland, LLC, Warrants, 9/20/2019

  (f)(j)   Capital Goods            2,273       $ 227       $ 1,406   

Sequel Industrial Products Holdings, LLC, Common Equity

  (f)(g)(j)   Commercial & Professional Services            33,306         3,400         8,307   

Sequel Industrial Products Holdings, LLC, Preferred Equity

  (f)(g)   Commercial & Professional Services            8,000         10,823         10,831   

Sequel Industrial Products Holdings, LLC, Warrants, 9/28/2022

  (g)(j)   Commercial & Professional Services            1,293         1         166   

Sequel Industrial Products Holdings, LLC, Warrants, 5/10/2022

  (f)(j)   Commercial & Professional Services            19,388         12         2,897   

Sequential Brands Group, Inc., Common Equity

  (g)(h)(j)   Consumer Durables & Apparel            206,664         2,790         2,598   

Sorenson Communications, Inc., Common Equity

  (f)(j)   Telecommunication Services            46,163                 25,381   

ThermaSys Corp., Common Equity

  (f)(j)   Capital Goods            51,813         1           

ThermaSys Corp., Preferred Equity

  (f)(j)   Capital Goods            51,813         5,181         2,435   

VPG Group Holdings LLC, Class A-2 Units

  (f)(j)   Materials            3,637,500         3,638         2,183   

Zeta Interactive Holdings Corp., Preferred Equity

  (g)(j)   Software & Services            215,662         1,714         1,714   
               

 

 

    

 

 

 

Total Equity/Other

                  292,041         404,046   
               

 

 

    

Unfunded Contingent Warrant Commitment

  (o)                    (2,440
                  

 

 

 

Net Equity/Other

                     401,606   
               

 

 

    

 

 

 

TOTAL INVESTMENTS—175.5%

                $ 4,150,674         4,100,079   
               

 

 

    

LIABILITIES IN EXCESS OF OTHER ASSETS—(75.5%)

                     (1,764,120
                  

 

 

 

NET ASSETS—100%

                   $ 2,335,959   
                  

 

 

 

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

 

(b) Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of September 30, 2015, the three-month London Interbank Offered Rate, or LIBOR, was 0.33%, the Euro Interbank Offered Rate, or EURIBOR, was (0.04)% and the U.S. Prime Lending Rate, or Prime, was 3.25%.

 

(c) Denominated in U.S. dollars unless otherwise noted.

 

(d) Fair value determined by the Company’s board of directors (see Note 7).

 

(e) Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(f) Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8).

 

(g) Security or portion thereof is pledged as collateral supporting the amounts outstanding under the revolving credit facility with ING Capital LLC (see Note 8).

 

See notes to unaudited consolidated financial statements.

 

12


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

 

 

(h) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of September 30, 2015, 81.2% of the Company’s total assets represented qualifying assets.

 

(i) Listed investments may be treated as debt for GAAP or tax purposes.

 

(j) Security is non-income producing.

 

(k) Security held within IC American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

 

(l) Security held within FSIC Investments, Inc., a wholly-owned subsidiary of the Company.

 

(m) Security is an unfunded commitment.

 

(n) Includes 500,000 NewStar Financial, Inc., or NewStar, warrants, which is the maximum number of warrants that the Company will forfeit in the event that the Company declines to fund additional subordinated debt investments in NewStar in an amount not to exceed $12,500, upon the request of NewStar.

 

(o) Represents the maximum number of NewStar warrants that the Company will forfeit in the event the Company declines to fund additional subordinated debt investments in NewStar in an amount not to exceed $12,500, upon the request of NewStar.

 

(p) Under the 1940 Act, the Company generally is deemed to be an “affiliated person” of a portfolio company if it owns 5% or more of the portfolio company’s voting securities and generally is deemed to “control” a portfolio company if it owns 25% or more of the portfolio company’s voting securities or it has the power to exercise control over the management or policies of such portfolio company. As of September 30, 2015, the Company held investments in two portfolio companies of which it is deemed to be an “affiliated person” but would not be deemed to “control”. The following table presents certain financial information with respect to such portfolio companies for the nine months ended September 30, 2015:

 

Portfolio Company

   Purchases      Sales and
Repayments
     Interest Income      Dividend Income      Net Realized Gain (Loss)      Net Change in Unrealized
Appreciation (Depreciation)
 

Senior Secured Loans—First Lien

        

Allen Systems Group, Inc.

   $ 37,634         —         $ 1,628         —           —         $ 378   

Equity/Other

        

Allen Systems Group, Inc., Common Equity

   $ 36,422         —           —           —           —         $ 32,352   

Fronton Investor Holdings, LLC, Class B Units

     —           —           —           —           —         $ 3,885   

 

See notes to unaudited consolidated financial statements.

 

13


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

Senior Secured Loans—First Lien—93.2%

               

A.P. Plasman Inc.

  (f)(g)(h)(i)(k)   Capital Goods   L+775   1.0%   12/29/19   $ 137,875      $ 137,875      $ 137,875   

A.P. Plasman Inc.

  (i)(k)(p)   Capital Goods   L+775   1.0%   12/29/19     36,919        36,919        36,919   

AccentCare, Inc.

  (i)   Health Care Equipment & Services   L+500   1.5%   12/22/16     1,954        1,855        1,712   

Allen Systems Group, Inc.

  (f)(i)   Software & Services   L+1,425   1.0%   12/14/17     1,539        1,718        1,897   

Allen Systems Group, Inc.

  (f)(i)   Software & Services   L+1,625   1.0%   12/14/17     36,832        41,114        45,410   

Altus Power America, Inc.

  (i)   Energy   L+750   1.5%   10/10/21     762        762        762   

Altus Power America, Inc.

  (i)(p)   Energy   L+750   1.5%   10/10/21     2,363        2,363        2,363   

American Racing and Entertainment, LLC

  (f)   Consumer Services   L+700     7/1/15     12,500        12,500        12,484   

American Racing and Entertainment, LLC

  (f)   Consumer Services   9.0%     7/1/15     7,750        7,750        7,769   

American Racing and Entertainment, LLC

  (f)   Consumer Services   L+800   1.0%   7/1/18     5,495        5,495        5,516   

American Racing and Entertainment, LLC

  (f)(p)   Consumer Services   L+800   1.0%   7/1/18     1,005        1,005        1,009   

AP Exhaust Acquisition, LLC

  (h)   Automobiles & Components   L+775   1.5%   1/16/21     14,595        14,595        14,157   

Aspect Software, Inc.

  (i)   Software & Services   L+550   1.8%   5/7/16     1,172        1,158        1,149   

Azure Midstream Energy LLC

  (i)   Energy   L+550   1.0%   11/15/18     327        323        294   

BenefitMall Holdings, Inc.

  (h)   Commercial & Professional Services   L+725   1.0%   11/24/20     15,000        15,000        15,000   

BenefitMall Holdings, Inc.

  (i)(p)   Commercial & Professional Services   L+725   1.0%   11/24/20     5,455        5,455        5,455   

Boomerang Tube, LLC

  (i)   Energy   L+950   1.5%   10/11/17     17,864        17,521        15,497   

Cadillac Jack, Inc.

  (f)(h)(i)(k)   Consumer Services   L+850   1.0%   5/15/19     74,450        73,320        76,590   

Caesars Entertainment Operating Co., Inc.

  (e)(f)(k)   Consumer Services   L+575     3/1/17     12,621        11,822        11,073   

Caesars Entertainment Operating Co., Inc.

  (f)(k)   Consumer Services   L+675     3/1/17     2,363        2,266        2,077   

Caesars Entertainment Operating Co., Inc.

  (e)(f)(g)(i)(k)   Consumer Services   L+875   1.0%   1/28/18     84,594        84,032        73,738   

Caesars Entertainment Resort Properties, LLC

  (e)(f)(i)   Consumer Services   L+600   1.0%   10/11/20     72,178        68,410        67,727   

Corel Corp.

  (f)(g)(h)(i)(k)   Software & Services   L+825     6/7/19     151,063        151,063        151,063   

Corel Corp.

  (i)(k)(p)   Software & Services   Prime+725     6/7/18     10,000        10,000        10,000   

Corner Investment PropCo, LLC

  (f)(i)   Consumer Services   L+975   1.3%   11/2/19     44,723        44,878        44,500   

CoSentry.Net, LLC

  (f)(h)(i)   Software & Services   L+800   1.3%   12/31/19     57,945        57,945        58,235   

Crestwood Holdings LLC

  (i)   Energy   L+600   1.0%   6/19/19     5,452        5,432        5,176   

Dent Wizard International Corp.

  (f)(h)(i)   Commercial & Professional Services   L+800     4/25/19     123,165        122,252        125,320   

Dent Wizard International Corp.

  (i)(p)   Commercial & Professional Services   Prime+325     4/25/19     5,000        5,000        5,000   

Eastman Kodak Co.

  (i)   Consumer Durables & Apparel   L+625   1.0%   9/3/19     10,745        10,572        10,777   

Flanders Corp.

  (f)(h)   Capital Goods   L+950   1.5%   5/14/18     35,993        35,444        36,218   

 

See notes to unaudited consolidated financial statements.

 

14


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

Fronton Holdings, LLC

  (f)   Consumer Services   15.0%     4/30/19   $ 3,736      $ 3,703      $ 3,736   

HBC Solutions, Inc.

  (f)(g)(i)   Media   L+875   1.5%   2/4/18     84,990        84,990        84,990   

Industrial Group Intermediate Holdings, LLC

  (h)   Materials   L+800   1.3%   5/31/20     13,894        13,894        13,894   

Industry City TI Lessor, L.P.

  (i)   Consumer Services   5.0%, 5.3% PIK
(5.3% Max PIK)
    6/30/26     24,885        24,885        24,512   

Infiltrator Systems, Inc.

  (f)(g)(h)(i)   Capital Goods   L+841   1.3%   6/27/18     226,000        225,860        224,870   

Intralinks, Inc.

  (f)(i)(k)   Software & Services   L+525   2.0%   2/24/19     9,900        9,817        9,776   

Lantiq Deutschland GmbH

  (f)(i)(k)   Software & Services   L+900   2.0%   11/16/15     7,968        7,781        7,928   

Larchmont Resources, LLC

  (h)   Energy   L+725   1.0%   8/7/19     5,988        5,940        5,824   

Leading Edge Aviation Services, Inc.

  (f)(g)(h)(i)   Capital Goods   L+875   1.5%   6/30/19     33,799        33,485        33,292   

LEAS Acquisition Co Ltd.

  (i)(k)   Capital Goods   L+875   1.5%   6/30/19   29,250        40,045        34,864   

LEAS Acquisition Co Ltd.

  (g)(k)   Capital Goods   L+875   1.5%   6/30/19   $ 10,628        10,628        10,468   

Maritime Telecommunications Network, Inc.

  (f)   Telecommunication Services   L+600   1.5%   3/4/16     3,242        3,230        3,161   

MB Precision Holdings LLC

  (h)   Capital Goods   L+725   1.3%   1/23/20     13,365        13,365        13,231   

Micronics, Inc.

  (f)(h)(i)   Capital Goods   L+800   1.3%   3/28/19     43,228        42,893        43,228   

MMM Holdings, Inc.

  (h)(i)   Health Care Equipment & Services   L+825   1.5%   12/12/17     8,956        8,841        8,687   

MModal Inc.

  (i)   Health Care Equipment & Services   L+775   1.3%   1/31/20     4,322        4,302        4,241   

Mood Media Corp.

  (i)(k)   Media   L+600   1.0%   5/1/19     698        692        685   

MSO of Puerto Rico, Inc.

  (h)(i)   Health Care Equipment & Services   L+825   1.5%   12/12/17     6,511        6,427        6,316   

New Star Metals Inc.

  (f)(h)(i)   Capital Goods   L+800   1.3%   3/20/20     36,575        36,575        36,575   

Nova Wildcat Amerock, LLC

  (h)(i)   Consumer Durables & Apparel   L+798   1.3%   9/10/19     20,000        20,000        19,600   

Panda Sherman Power, LLC

  (f)   Energy   L+750   1.5%   9/14/18     496        500        493   

Panda Temple Power, LLC (TLA)

  (f)   Energy   L+700   1.5%   7/17/18     2,583        2,582        2,619   

PHRC License, LLC

  (g)(h)(i)   Consumer Services   L+900   1.5%   8/14/20     45,000        45,000        44,550   

Polymer Additives, Inc.

  (i)   Materials   L+838   1.0%   12/20/21     10,511        10,510        10,511   

Production Resource Group, LLC

  (h)(i)   Media   L+750   1.0%   7/23/19     32,500        32,500        32,663   

PRV Aerospace, LLC

  (i)   Capital Goods   L+525   1.3%   5/9/18     80        80        79   

Reddy Ice Holdings, Inc.

  (i)   Food & Staples Retailing   L+550   1.3%   5/1/19     1,170        1,160        1,032   

Safariland, LLC

  (f)(h)(i)   Capital Goods   L+800   1.3%   9/20/19     150,400        150,400        152,656   

Shell Topco L.P.

  (h)(i)   Materials   L+750   1.5%   9/28/18     30,000        29,698        30,525   

Smile Brands Group Inc.

  (i)   Health Care Equipment & Services   L+625   1.3%   8/16/19     20,243        19,878        19,383   

Sorenson Communications, Inc.

  (e)(f)(h)(i)   Telecommunication Services   L+575   2.3%   4/30/20     93,500        93,081        94,435   

Southcross Holdings Borrower LP

  (i)   Energy   L+500   1.0%   8/4/21     316        314        283   

 

See notes to unaudited consolidated financial statements.

 

15


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

Sports Authority, Inc.

  (h)   Consumer Durables & Apparel   L+600   1.5%   11/16/17   $ 6,318      $ 6,321      $ 5,607   

Stallion Oilfield Holdings, Inc.

  (h)   Energy   L+675   1.3%   6/19/18     4,810        4,775        4,119   

SunGard Availability Services Capital, Inc.

  (e)   Software & Services   L+500   1.0%   3/29/19     4,975        4,623        4,455   

Sunnova Asset Portfolio 5 Holdings, LLC.

  (i)   Energy   12.0% PIK
(12.0% Max PIK)
    11/14/21     1,803        1,803        1,803   

Sunnova Asset Portfolio 5 Holdings, LLC.

  (i)(p)   Energy   12.0% PIK
(12.0% Max PIK)
    11/14/21     3,200        3,200        3,200   

Swiss Watch International, Inc.

  (f)(h)(i)   Consumer Durables & Apparel   L+725   1.3%   11/8/18     47,000        46,359        45,355   

U.S. Xpress Enterprises, Inc.

  (f)(g)   Transportation   L+850, 1.5% PIK
(1.5% Max PIK)
  1.5%   5/30/19     74,813        74,813        74,813   

Virtual Radiologic Corp.

  (i)   Health Care Equipment & Services   L+550   1.8%   12/22/16     3,484        3,452        2,645   

VPG Group Holdings LLC

  (f)(h)(i)   Materials   L+900   1.0%   10/4/16     79,195        78,764        79,393   

Waste Pro USA, Inc.

  (f)(g)(h)   Commercial & Professional Services   L+750   1.0%   10/15/20     86,889        86,889        86,889   

Waste Pro USA, Inc.

  (i)(p)   Commercial & Professional Services   L+750   1.0%   10/15/20     9,444        9,444        9,444   
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                2,289,343        2,279,592   

Unfunded Loan Commitments

                (73,386     (73,386
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                2,215,957        2,206,206   
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—29.9%

               

Advance Pierre Foods, Inc.

  (e)(f)(g)   Food & Staples Retailing   L+825   1.3%   10/10/17     17,556        17,379        17,292   

Affordable Care, Inc.

  (f)(g)(i)   Health Care Equipment & Services   L+925   1.3%   12/26/19     44,314        43,893        43,871   

Alison US LLC

  (i)(k)   Capital Goods   L+850   1.0%   8/29/22     4,444        4,273        4,161   

American Energy - Utica, LLC

  (f)   Energy   L+400, 5.5% PIK
(5.5% Max PIK)
  1.5%   9/30/18     79,987        79,987        78,387   

American Energy - Utica, LLC

  (g)   Energy   L+400, 5.5% PIK
(5.5% Max PIK)
  1.5%   9/30/18     54,324        54,324        53,238   

American Racing and Entertainment, LLC

  (g)   Consumer Services   12.0%     7/1/18     16,800        16,380        16,800   

BPA Laboratories, Inc.

  (i)   Pharmaceuticals, Biotechnology & Life Sciences   2.5%     7/3/17     593        475        526   

Brasa (Holdings) Inc.

  (f)   Consumer Services   L+950   1.5%   1/20/20     6,211        6,031        6,149   

Brock Holdings III, Inc.

  (i)   Energy   L+825   1.8%   3/16/18     6,923        6,855        5,573   

Byrider Finance, LLC

  (g)(i)   Automobiles & Components   L+1000   1.3%   8/22/20     10,000        10,000        10,000   

Compuware Corp.

  (e)(i)(j)   Software & Services   L+825   1.0%   12/9/22     10,000        8,700        9,250   

Consolidated Precision Products Corp.

  (f)   Capital Goods   L+775   1.0%   4/30/21     10,925        10,877        10,434   

 

See notes to unaudited consolidated financial statements.

 

16


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

DEI Sales, Inc.

  (f)(g)   Commercial & Professional Services   L+900   1.5%   1/15/18   $ 57,500      $ 56,978      $ 55,991   

Eastman Kodak Co.

  (f)(g)   Consumer Durables & Apparel   L+950   1.3%   9/3/20     50,000        48,918        50,000   

Nielsen & Bainbridge, LLC

  (i)   Consumer Services   L+925   1.0%   8/15/21     15,000        14,786        14,775   

OSP Group, Inc.

  (f)(g)(i)   Consumer Durables & Apparel   L+800   1.3%   7/31/20     145,000        145,000        144,275   

Paw Luxco II Sarl

  (g)(k)   Consumer Durables & Apparel   EURIBOR+950     1/29/19   16,364        20,200        17,203   

Pelican Products, Inc.

  (i)   Capital Goods   L+825   1.0%   4/9/21   $ 4,222        4,194        4,169   

PSAV Acquisition Corp.

  (f)(i)   Technology Hardware & Equipment   L+825   1.0%   1/24/22     80,000        78,898        80,500   

Sensus USA Inc.

  (i)   Capital Goods   L+725   1.3%   5/9/18     3,000        3,027        2,873   

Sequential Brands Group, Inc.

  (f)   Consumer Durables & Apparel   L+800   1.0%   8/15/20     25,000        25,000        25,000   

Stadium Management Corp.

  (f)   Consumer Services   L+825   1.0%   2/15/22     57,500        57,500        57,788   
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                713,675        708,255   
             

 

 

   

 

 

 

Senior Secured Bonds—15.2%

               

Advanced Lighting Technologies, Inc.

  (f)(g)   Materials   10.5%     6/1/19     78,500        77,139        52,203   

Allen Systems Group, Inc.

  (f)(g)(i)(m)(q)   Software & Services   10.5%     11/15/16     38,448        31,201        13,457   

Aspect Software, Inc.

  (e)   Software & Services   10.6%     5/15/17     6,000        5,991        5,700   

Avaya Inc.

  (e)(f)(g)   Technology Hardware & Equipment   10.5%     3/1/21     39,250        36,194        33,853   

Caesars Entertainment Resort Properties, LLC

  (e)(f)(g)   Consumer Services   11.0%     10/1/21     60,138        59,854        55,026   

FourPoint Energy, LLC

  (f)(g)   Energy   8.0%     12/31/20     70,875        67,690        62,370   

FourPoint Energy, LLC

  (f)(g)(p)   Energy   8.0%     12/31/20     27,563        27,563        24,255   

Global A&T Electronics Ltd.

  (i)(k)   Technology Hardware & Equipment   10.0%     2/1/19     9,000        9,000        8,118   

JW Aluminum Co.

  (f)(g)(i)   Materials   11.5%, 1.0% PIK
(1.0% Max PIK)
    11/15/17     66,297        65,818        66,297   

Logan’s Roadhouse Inc.

  (e)(g)   Consumer Services   10.8%     10/15/17     56,294        46,855        41,728   

Sorenson Communications, Inc.

  (g)   Telecommunication Services   9.0%     10/31/20     19,898        19,158        18,903   

Speedy Cash Intermediate Holdings Corp.

  (f)   Diversified Financials   10.8%     5/15/18     5,000        5,061        4,928   
             

 

 

   

 

 

 

Total Senior Secured Bonds

                451,524        386,838   

Unfunded Bond Commitments

                (27,563     (27,563
             

 

 

   

 

 

 

Net Senior Secured Bonds

                423,961        359,275   
             

 

 

   

 

 

 

Subordinated Debt—19.6%

               

Alta Mesa Holdings, L.P.

  (e)   Energy   9.6%     10/15/18     11,165        11,084        9,468   

Aurora Diagnostics, LLC

  (f)(g)   Pharmaceuticals, Biotechnology & Life Sciences   10.8%     1/15/18     18,065        18,099        15,717   

 

See notes to unaudited consolidated financial statements.

 

17


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

Brooklyn Basketball Holdings, LLC

  (g)(i)   Consumer Services   L+800     10/15/19   $ 19,873      $ 19,873      $ 19,674   

Cadillac Jack, Inc.

  (g)(k)   Consumer Services   6.0%, 7.0% PIK
(7.0% Max PIK)
    5/15/20     52,268        36,561        54,947   

Comstock Resources, Inc.

  (f)(k)   Energy   9.5%     6/15/20     7,500        7,232        5,063   

Flanders Corp.

  (f)(g)   Capital Goods   13.8% PIK
(13.8% Max PIK)
    5/14/18     22,344        22,217        19,495   

Flanders Corp.

  (g)(i)   Capital Goods   17.5% PIK
(17.5% Max PIK)
    5/14/18     21,595        20,227        21,325   

Global Jet Capital, Inc.

  (i)   Commercial & Professional Services   8.0% PIK (8.0%
Max PIK)
    1/30/15     313        313        313   

HBC Solutions, Inc.

  (i)   Media   12.5% PIK
(12.5% Max PIK)
    8/4/18     303        303        303   

HBC Solutions, Inc.

  (i)(p)   Media   12.5% PIK
(12.5% Max PIK)
    8/4/18     150        150        150   

Jupiter Resources, Inc.

  (e)(g)(k)   Energy   8.5%     10/1/22     6,425        5,306        4,819   

Kinetic Concepts, Inc.

  (e)(f)   Health Care Equipment & Services   12.5%     11/1/19     15,000        14,256        16,500   

KODA Distribution Group, Inc.

  (f)   Materials   11.3%     9/30/19     35,000        34,440        35,000   

Lightstream Resources, Ltd.

  (g)(k)   Energy   8.6%     2/1/20     1,650        1,290        1,163   

Mood Media Corp.

  (e)(f)(g)(k)   Media   9.3%     10/15/20     43,135        42,124        35,263   

NewStar Financial, Inc.

  (f)(i)(k)   Diversified Financials   8.3%, 0.0% PIK
(8.8% Max PIK)
    12/4/24     50,000        34,997        37,500   

P.F. Chang’s China Bistro, Inc.

  (e)   Consumer Services   10.3%     6/30/20     1,390        1,384        1,397   

RKI Exploration & Production, LLC

  (e)(g)   Energy   8.5%     8/1/21     12,550        12,362        10,229   

Samson Investment Co.

  (e)(f)(g)(i)   Energy   9.8%     2/15/20     14,200        13,397        5,964   

Sandridge Energy, Inc.

  (e)(i)(k)   Energy   8.8%     1/5/20     7,500        6,321        5,119   

Sequel Industrial Products Holdings, LLC

  (g)   Energy   12.0%, 2.5% PIK
(2.5% Max PIK)
    5/10/18     7,000        6,909        7,245   

Sidewinder Drilling Inc.

  (f)   Energy   9.8%     11/15/19     4,328        4,328        2,532   

Sorenson Communications, Inc.

  (g)   Telecommunication Services   13.0%     10/31/21     15,122        14,112        15,425   

Talos Production, LLC

  (g)   Energy   9.8%     2/15/18     1,500        1,364        1,358   

ThermaSys Corp.

  (f)(g)   Capital Goods   9.0%, 1.8% PIK
(5.0% Max PIK)
    5/3/20     133,295        133,295        132,628   

 

See notes to unaudited consolidated financial statements.

 

18


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal
Amount(c)
    Amortized
Cost
    Fair
Value(d)
 

VPG Group Holdings LLC

  (f)   Materials   11.0%, 2.0% PIK
(2.0% Max PIK)
    7/15/19   $ 5,142      $ 5,142      $ 5,232   

Warren Resources, Inc.

  (g)   Energy   9.0%     8/1/22     1,000        709        625   
             

 

 

   

 

 

 

Total Subordinated Debt

                467,795        464,454   

Unfunded Debt Commitments

                (150     (150
             

 

 

   

 

 

 

Net Subordinated Debt

                467,645        464,304   
             

 

 

   

 

 

 

Collateralized Securities—5.2%

               

ACASC 2013-2A B

  (g)(i)(k)   Diversified Financials   8.1%     10/15/23     30,500        25,488        25,338   

Dryden CDO 23A Class Subord.

  (i)(k)   Diversified Financials   19.1%     7/17/23     10,000        5,810        7,967   

JPMorgan Chase Bank, N.A. Credit-Linked Notes

  (g)(k)   Diversified Financials   14.3%     12/20/21     16,740        16,594        17,284   

Lightpoint CLO 2006 V Class D

  (g)(k)   Diversified Financials   L+365     8/5/19     6,500        4,087        6,361   

NewStar Clarendon 2014-1A Class D

  (i)(j)(k)   Diversified Financials   L+435     1/25/27     1,560        1,461        1,461   

NewStar Clarendon 2014-1A Sub B

  (i)(j)(k)   Diversified Financials   12.5%     1/25/27     17,900        17,713        17,713   

Rampart CLO 2007 1A Class Subord.

  (i)(k)   Diversified Financials   24.2%     10/25/21     10,000        2,943        4,997   

Stone Tower CLO VI Class Subord.

  (g)(k)   Diversified Financials   32.6%     4/17/21     5,000        2,225        3,936   

Wind River CLO Ltd. 2012 1A Class Sub B

  (i)(k)   Diversified Financials   18.8%     1/15/24     42,504        34,041        38,863   
             

 

 

   

 

 

 

Total Collateralized Securities

                110,362        123,920   
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

19


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

      Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Equity/Other—13.6%(l)

           

Altus Power America, Inc., Preferred Equity

  (i)(m)   Energy           253,925      $ 254      $ 254   

Amaya Gaming Group Inc., Warrants

  (i)(k)(m)   Consumer Services           2,000,000        16,832        35,180   

American Energy Appalachia Holdings, LLC

  (i)(m)(n)   Energy           9,700,000        9,700        9,700   

AP Exhaust Holdings, LLC, Common Equity

  (i)(m)(o)   Automobiles & Components           811        811        580   

Aquilex Corp., Common Equity, Class A Shares

  (f)   Energy           15,128        1,088        4,295   

Aquilex Corp., Common Equity, Class B Shares

  (f)(g)   Energy           32,637        1,690        9,266   

BPA Laboratories, Inc., Series A Warrants

  (i)(m)   Pharmaceuticals, Biotechnology & Life Sciences           1,979        —          —     

BPA Laboratories, Inc., Series B Warrants

  (i)(m)   Pharmaceuticals, Biotechnology & Life Sciences           3,173        —          —     

Burleigh Point, Ltd., Warrants

  (i)(k)(m)   Retailing           17,256,081        1,898        5,004   

CoSentry.Net, LLC, Preferred Equity

  (g)(m)   Software & Services           2,632        2,500        4,185   

Eastman Kodak Co., Common Equity

  (f)(i)(m)   Consumer Durables & Apparel           61,859        1,202        1,343   

ERC Ireland Holdings Ltd., Common Equity

  (g)(i)(j)(k)(m)   Telecommunication Services           37,547        5,219        5,950   

ERC Ireland Holdings Ltd., Warrants

  (i)(k)(m)   Telecommunication Services           15,809        2,288        2,505   

Flanders Corp., Common Equity

  (g)(m)   Capital Goods           6,177,490        6,531        1,853   

FourPoint Energy, LLC, Class C Units

  (i)(m)(o)   Energy           21,000        21,000        26,775   

FourPoint Energy, LLC, Class D Units

  (i)(m)(o)   Energy           3,937        2,601        5,059   

Fronton Investor Holdings, LLC, Class B Units

  (i)(m)(o)(s)   Consumer Services           14,943        17,931        14,793   

HBC Solutions, Inc., Common Equity, Class A Units

  (i)(m)   Media           26,774        3,027        3,539   

Industrial Group Intermediate Holdings, LLC, Common Equity

  (i)(m)(o)   Materials           347,107        347        486   

JW Aluminum Co., Common Equity

  (g)(m)   Materials           37,500        3,225        —     

Leading Edge Aviation Services, Inc., Common Equity

  (g)(m)   Capital Goods           4,401        464        92   

Leading Edge Aviation Services, Inc., Preferred Equity

  (g)(m)   Capital Goods           1,303        1,303        1,303   

MB Precision Investment Holdings LLC, Class A-2 Units

  (g)(m)   Capital Goods           490,213        490        490   

Micronics, Inc., Common Equity

  (i)(m)   Capital Goods           53,073        553        918   

Micronics, Inc., Preferred Equity

  (i)(m)   Capital Goods           55        553        553   

Milagro Holdings, LLC, Common Equity

  (g)(m)   Energy           12,057        50        —     

Milagro Holdings, LLC, Preferred Equity

  (i)(m)   Energy           283,947        11,180        525   

MModal Inc., Common Equity

  (i)(m)   Health Care Equipment & Services           56,529        933        850   

New Star Metals Inc., Common Equity

  (i)   Capital Goods           741,082        750        963   

NewStar Financial, Inc., Warrants

  (i)(k)(m)   Diversified Financials           2,375,000        15,058        15,675   

Plains Offshore Operations Inc., Preferred Equity

  (f)(g)   Energy           50,000        61,722        66,778   

Plains Offshore Operations Inc., Warrants

  (f)(g)(m)   Energy           1,067,481        1,722        2,028   

PSAV Holdings LLC, Common Equity

  (g)(m)   Technology Hardware & Equipment           10,000        10,000        15,000   

 

See notes to unaudited consolidated financial statements.

 

20


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

      Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Safariland, LLC, Common Equity

  (g)(m)   Capital Goods           25,000      $ 2,500      $ 10,220   

Safariland, LLC, Preferred Equity

  (g)   Capital Goods           2,042        22,284        22,578   

Safariland, LLC, Warrants

  (g)(m)   Capital Goods           4,536        473        1,854   

Sequel Industrial Products Holdings, LLC, Common Equity

  (g)(i)(m)   Energy           33,306        3,400        9,272   

Sequel Industrial Products Holdings, LLC, Preferred Equity

  (g)(i)   Energy           8,000        10,085        10,094   

Sequel Industrial Products Holdings, LLC, Warrants

  (i)(m)(r)   Energy           1,293        1        204   

Sequel Industrial Products Holdings, LLC, Warrants

  (g)(m)(r)   Energy           19,388        12        3,459   

Sorenson Communications, Inc., Common Equity

  (g)(m)   Telecommunication Services           46,163        —          21,572   

ThermaSys Corp., Common Equity

  (g)(m)   Capital Goods           51,813        1          —     

ThermaSys Corp., Preferred Equity

  (g)   Capital Goods           51,813        5,181        5,129   

VPG Group Holdings LLC, Class A-2 Units

  (g)(m)   Materials           3,637,500        3,638        3,638   
             

 

 

   

 

 

 

Total Equity/Other

                250,497        323,962   
             

 

 

   

Unfunded Contingent Warrant Commitment

                  (2,475
               

 

 

 

Net Equity/Other

                  321,487   
             

 

 

   

 

 

 

TOTAL INVESTMENTS—176.7%

              $ 4,182,097        4,183,447   
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(76.7%)

                  (1,816,461
               

 

 

 

NET ASSETS—100%

                $ 2,366,986   
               

 

 

 

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

 

(b) Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of December 31, 2014, the three-month London Interbank Offered Rate, or LIBOR, was 0.26%, EURIBOR was 0.08% and Prime was 3.25%.

 

(c) Denominated in U.S. dollars unless otherwise noted.

 

(d) Fair value determined by the Company’s board of directors (see Note 7).

 

(e) Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

 

(f) Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(g) Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8).

 

See notes to unaudited consolidated financial statements.

 

21


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

 

 

(h) Security or portion thereof held within Walnut Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8). As of January 16, 2015, all such securities held within Walnut Street Funding LLC were sold or transferred to FS Investment Corporation.

 

(i) Security or portion thereof is pledged as collateral supporting the amounts outstanding under the revolving credit facility with ING Capital LLC (see Note 8).

 

(j) Position or portion thereof unsettled as of December 31, 2014.

 

(k) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of December 31, 2014, 78.7% of the Company’s total assets represented qualifying assets.

 

(l) Listed investments may be treated as debt for GAAP or tax purposes.

 

(m) Security is non-income producing.

 

(n) Security held within IC American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

 

(o) Security held within FSIC Investments, Inc., a wholly-owned subsidiary of the Company.

 

(p) Security is an unfunded loan commitment.

 

(q) Security was on non-accrual status as of December 31, 2014.

 

(r) Warrants expire on September 28, 2022 and May 10, 2022 and the strike prices are $121.00 and $100.00 per share, respectively.

 

(s) Under the Investment Company Act of 1940, as amended, the Company generally is deemed to be an “affiliated person” of a portfolio company if it owns 5% or more of the portfolio company’s voting securities and generally is deemed to “control” a portfolio company if it owns 25% or more of the portfolio company’s voting securities or it has the power to exercise control over the management or policies of such portfolio company. During the year ended December 31, 2014, the Company made an investment in and, in connection with such investment is deemed to be an “affiliated person” of (but would not be deemed to “control”), the following portfolio company:

 

Portfolio Company

   Purchases      Sales and
Repayments
     Interest Income      Dividend Income      Fee Income      Net Realized
Gain (Loss)
     Net Change in Unrealized
Appreciation (Depreciation)
 

Equity/Other

              

Fronton Investor Holdings, LLC, Class B Units

   $ 17,931         —           —         $ 299         —           —         $ (3,138

 

See notes to unaudited consolidated financial statements.

 

22


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

 

Note 1. Principal Business and Organization

FS Investment Corporation (NYSE: FSIC), or the Company, was incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and formally commenced investment operations on January 2, 2009. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, the Company has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of September 30, 2015, the Company had three wholly-owned financing subsidiaries and three wholly-owned subsidiaries through which it holds equity interests in non-controlled portfolio companies. The consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of September 30, 2015. All significant intercompany transactions have been eliminated in consolidation.

The Company’s investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation by investing primarily in senior secured loans and second lien secured loans of private U.S. companies. The Company seeks to generate superior risk-adjusted returns by focusing on debt investments in a broad array of private U.S. companies, including middle market companies, which the Company defines as companies with annual revenues of $50 million to $2.5 billion at the time of investment. The Company may purchase interests in loans or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the “over-the-counter” market or directly from the Company’s target companies as primary market or directly originated investments. In connection with the Company’s debt investments, the Company may on occasion receive equity interests such as warrants or options as additional consideration. The Company may also purchase or otherwise acquire minority interests in target companies, in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity, the cash value of common stock or other equity. Any such minority interests are generally acquired in conjunction with one of the Company’s debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of the Company’s portfolio may be comprised of corporate bonds, collateralized loan obligations, or CLOs, other debt securities and derivatives, including total return swaps and credit default swaps.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2014 included in the Company’s annual report on Form 10-K for the year ended December 31, 2014. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The December 31, 2014 consolidated balance sheet and consolidated schedule of investments are derived from the Company’s audited consolidated financial statements as of and for the year ended December 31, 2014. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the U.S. Securities and Exchange Commission, or the SEC.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

Use of Estimates: The preparation of the unaudited consolidated financial statements in conformity with GAAP 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.

Capital Gains Incentive Fee: At the Company’s 2013 annual meeting of stockholders, the Company received stockholder approval to amend and restate the investment advisory and administrative services agreement, dated February 12, 2008 (as amended on August 5, 2008), or the 2008 investment advisory and administrative services agreement, by and between the Company and FB Income Advisor, LLC, or FB Advisor, effective upon a listing of the Company’s shares of common stock on a national securities exchange. The Company’s shares of common stock were listed and commenced trading on the New York Stock Exchange, or the NYSE, on April 16, 2014. On April 16, 2014, the Company entered into an amended and restated investment advisory agreement, or the April 2014 investment advisory agreement, with FB Advisor. Also on April 16, 2014, the Company entered into an administration agreement with FB Advisor, or the administration agreement, which governs the administrative services provided to the Company by FB Advisor that had previously been addressed in the 2008 investment advisory and administrative services agreement.

At a special meeting of stockholders of the Company that was adjourned on June 23, 2014 and reconvened on July 17, 2014, the Company received stockholder approval to amend and restate the April 2014 investment advisory agreement. On July 17, 2014, the Company entered into an amended and restated investment advisory agreement, or the July 2014 investment advisory agreement, with FB Advisor.

Pursuant to the terms of each of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of the Company’s incentive fee capital gains (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While none of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement or the July 2014 investment advisory agreement include or contemplate the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, the Company changed its methodology for accruing for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FB Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Subordinated Income Incentive Fee: Pursuant to the terms of each of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

advisory agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the 2008 investment advisory and administrative services agreement, which was calculated and payable quarterly in arrears, equaled 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter and was subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the 2008 investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor did not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeded the hurdle rate of 2.0%. Once the Company’s pre-incentive fee net investment income in any quarter exceeded the hurdle rate, FB Advisor was entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equaled 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor received 20.0% of pre-incentive fee net investment income. Under the April 2014 investment advisory agreement, the subordinated incentive fee on income was calculated in the same manner, except that the hurdle rate used to compute the subordinated incentive fee on income was based on the value of the Company’s net assets rather than adjusted capital.

Under the July 2014 investment advisory agreement, the hurdle rate, expressed as a rate of return on the value of the Company’s net assets, was reduced from 2.0% to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FB Advisor will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of net assets. Thereafter, FB Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

Under both the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the subordinated incentive fee on income is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the applicable quarterly hurdle rate, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate.

Reclassifications: Certain amounts in the unaudited consolidated financial statements for the three and nine months ended September 30, 2014 and the audited consolidated financial statements for the year ended

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

December 31, 2014 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three and nine months ended September 30, 2015. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Note 3. Share Transactions

Below is a summary of transactions with respect to shares of the Company’s common stock during the nine months ended September 30, 2015 and 2014:

 

     Nine Months Ended September 30,  
     2015      2014  
     Shares      Amount      Shares     Amount  

Reinvestment of Distributions

     1,377,813       $ 13,631         4,779,843      $ 48,974   

Share Repurchase Program

     —           —           (872,865     (8,903

Fractional Share Round Up

     —           —           30,533        —     

Listing Tender Offer

     —           —           (23,255,813     (250,000
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Proceeds from Share Transactions

     1,377,813       $ 13,631         (19,318,302   $ (209,929
  

 

 

    

 

 

    

 

 

   

 

 

 

In connection with the listing of its shares of common stock on the NYSE, the Company terminated its previous distribution reinvestment plan, or the old DRP. The final distribution reinvestment under the old DRP was made in connection with the regular monthly cash distribution paid on March 31, 2014 to stockholders of record as of the close of business on March 28, 2014. On May 23, 2014, the Company adopted a new distribution reinvestment plan, or the new DRP, which became effective on June 2, 2014. The new DRP was first implemented in connection with the regular monthly cash distribution paid on July 2, 2014 to stockholders of record as of the close of business on June 24, 2014. During the nine months ended September 30, 2015 and 2014, the Company issued 1,377,813 and 4,779,843 shares of common stock pursuant to its distribution reinvestment plan in effect on the applicable date of issuance for gross proceeds of $13,631 and $48,974 at an average price per share of $9.89 and $10.25, respectively. During the period from October 1, 2015 to November 6, 2015, the Company issued 572,644 shares of common stock pursuant to the new DRP for gross proceeds of $5,532 at an average price per share of $9.66. For additional information regarding the terms of the new DRP, see Note 5.

Listing and Fractional Shares

The Company’s shares of common stock were listed and commenced trading on the NYSE on April 16, 2014. The Company eliminated any outstanding fractional shares of its common stock in connection with the listing, as permitted by the Maryland General Corporation Law. The Company eliminated all outstanding fractional shares by rounding up the number of fractional shares held by each of the Company’s stockholders to the nearest whole number of shares as of April 4, 2014. As a result of the fractional share round up, the number of then outstanding shares was increased by 30,533 shares.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 3. Share Transactions (continued)

 

Share Repurchase Program

Historically, the Company conducted quarterly tender offers pursuant to its former share repurchase program to provide limited liquidity to its stockholders. In anticipation of the listing of the Company’s shares of common stock on the NYSE, the Company’s board of directors terminated its share repurchase program effective March 21, 2014. The listing has provided liquidity to the Company’s stockholders, and therefore the Company does not expect to implement a new share repurchase program in the future.

The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program during the nine months ended September 30, 2014:

 

For the Three Months Ended

   Repurchase Date      Shares
Repurchased
     Percentage
of
Shares
Tendered
That Were
Repurchased
    Repurchase
Price Per
Share
     Aggregate
Consideration
for
Repurchased
Shares
 

Fiscal 2014

        

December 31, 2013

     January 2, 2014         872,865         100   $ 10.20       $ 8,903   

Listing Tender Offer

On April 16, 2014, the Company commenced a modified “Dutch auction” tender offer, or the listing tender offer, to purchase for cash up to $250,000 in value of the Company’s shares of common stock from stockholders. In accordance with the terms of the listing tender offer, the Company selected the lowest price, not greater than $11.00 per share or less than $10.35 per share, net to the tendering stockholder in cash, less any applicable withholding taxes and without interest, that enabled the Company to purchase the maximum number of shares of common stock properly tendered in the listing tender offer and not properly withdrawn having an aggregate purchase price of up to $250,000.

The listing tender offer expired on May 28, 2014. Due to the oversubscription of the listing tender offer, on June 4, 2014, the Company accepted for purchase on a pro rata basis 23,255,813 shares of common stock, or approximately 96.6% of the shares tendered at a purchase price of $10.75 per share, for an aggregate cost of approximately $250,000, excluding fees and expenses relating to the listing tender offer. The 23,255,813 shares of common stock accepted for purchase in the listing tender offer represented approximately 8.9% of the Company’s issued and outstanding shares of common stock as of June 4, 2014. The Company used available cash and borrowings under its senior secured revolving credit facility with ING Capital LLC, or ING, as administrative agent, and the lenders party thereto, or the ING credit facility, to fund the purchase of shares of common stock in the listing tender offer and to pay for all related fees and expenses.

Note 4. Related Party Transactions

Compensation of the Investment Adviser

Pursuant to the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, FB Advisor is entitled to an annual base management fee based on the average value of the Company’s gross assets and an incentive fee based on the

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 4. Related Party Transactions (continued)

 

Company’s performance. The Company commenced accruing fees under the 2008 investment advisory and administrative services agreement on January 2, 2009, upon commencement of the Company’s investment operations. Base management fees are paid on a quarterly basis in arrears. The annual base management fees under the 2008 investment advisory and administrative services agreement and the April 2014 investment advisory agreement were equal to 2.0% of the average value of the Company’s gross assets.

In anticipation of the listing of the Company’s shares of common stock on the NYSE, FB Advisor recommended that the April 2014 investment advisory agreement be further amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on the Company’s net assets, from 8% to 7.5% and (ii) assuming the reduction to the hurdle rate was approved, reduce the base management fee from 2.0% to 1.75% of the average value of the Company’s gross assets. At a special meeting of stockholders that was adjourned on June 23, 2014 and reconvened on July 17, 2014, the Company received stockholder approval to amend and restate the April 2014 investment advisory agreement to reflect the amendments approved by the Company’s stockholders. On July 17, 2014, the Company entered into the July 2014 investment advisory agreement. While stockholder approval of the proposal was pending, FB Advisor agreed, effective April 1, 2014, to waive a portion of the base management fee to which it was entitled under the April 2014 investment advisory agreement so that the fee received equaled 1.75% of the average value of the Company’s gross assets.

The incentive fee consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter. Under the 2008 investment advisory and administrative services agreement, the subordinated incentive fee on income was subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the 2008 investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor did not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeded the hurdle rate of 2.0%. Once the Company’s pre-incentive fee net investment income in any quarter exceeded the hurdle rate, FB Advisor was entitled to a “catch-up” fee equal to the amount of the pre- incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equaled 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor received 20.0% of pre-incentive fee net investment income. Under the April 2014 investment advisory agreement, the subordinated incentive fee on income was calculated in the same manner, except that the hurdle rate used to compute the subordinated incentive fee on income was based on the value of the Company’s net assets rather than adjusted capital.

Under the July 2014 investment advisory agreement, the hurdle rate, expressed as a rate of return on the value of the Company’s net assets, was reduced from 2.0% to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FB Advisor will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of the value of the Company’s net assets. Thereafter, FB Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 4. Related Party Transactions (continued)

 

Under both the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the subordinated incentive fee on income is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the applicable quarterly hurdle rate, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the July 2014 investment advisory agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equal the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the incentive fee based on net realized and unrealized gains; however, the fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. The methodology for calculating the capital gains incentive fee is identical under the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement.

Pursuant to the 2008 investment advisory and administrative services agreement, the Company reimbursed FB Advisor for expenses necessary to perform services related to the Company’s administration and operations. The amount of this reimbursement was set at the lesser of (1) FB Advisor’s actual costs incurred in providing such services and (2) the amount that the Company estimated it would be required to pay alternative service providers for comparable services in the same geographic location. FB Advisor was required to allocate the cost of such services to the Company based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors then assessed the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Company’s board of directors considered whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company’s board of directors compared the total amount paid to FB Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 4. Related Party Transactions (continued)

 

Pursuant to the administration agreement, the Company reimburses FB Advisor for expenses necessary to perform services related to the Company’s administration and operations, including FB Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings, L.P., or Franklin Square Holdings, providing administrative services to the Company on behalf of FB Advisor. The Company reimburses FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities under the administration agreement. FB Advisor allocates the cost of such services to the Company based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors reviews the methodology employed in determining how the expenses are allocated to the Company and the proposed allocation of administrative expenses among the Company and certain affiliates of FB Advisor. The Company’s board of directors then assesses the reasonableness of such reimbursements for expenses allocated to the Company based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party service providers known to be available. In addition, the Company’s board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company’s board of directors compares the total amount paid to FB Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 4. Related Party Transactions (continued)

 

The following table describes the fees and expenses accrued under the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement, the July 2014 investment advisory agreement and the administration agreement, as applicable, during the three and nine months ended September 30, 2015 and 2014:

 

            Three Months Ended     Nine Months Ended  

Related Party

          September 30,     September 30,  
 

Source Agreement

 

Description

  2015     2014     2015     2014  

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and July 2014 Investment Advisory Agreement   Base Management Fee(1)   $ 18,852      $ 20,000      $ 56,993      $ 62,229   

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and July 2014 Investment Advisory Agreement   Capital Gains Incentive Fee(2)   $ (13,811   $ (910   $ (18,418   $ 6,194   

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and July 2014 Investment Advisory Agreement   Subordinated Incentive Fee on Income(3)   $ 12,485      $ 14,794      $ 47,661      $ 45,033   

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and Administration Agreement   Administrative Services Expenses(4)   $ 900      $ 1,202      $ 2,773      $ 3,591   

 

(1) FB Advisor agreed, effective April 1, 2014, to waive a portion of the base management fee to which it was entitled under the April 2014 investment advisory agreement so that the fee received equaled 1.75% of the average value of the Company’s gross assets. For the nine months ended September 30, 2014, amounts shown are net of waivers of $2,837. During the nine months ended September 30, 2015 and 2014, $57,708 and $64,920, respectively, in base management fees were paid to FB Advisor. As of September 30, 2015, $18,845 in base management fees were payable to FB Advisor.
(2) During the nine months ended September 30, 2015 and 2014, the Company accrued capital gains incentive fees of $(18,418) and $6,194, respectively, based on the performance of its portfolio. As of September 30, 2015 and December 31, 2014, the Company had accrued $2,657 and $21,075, respectively, in capital gains incentive fees, all of which were based on unrealized gains, and none of which is payable unless and until those gains are actually realized. The Company paid FB Advisor no capital gains incentive fees during the nine months ended September 30, 2015.

 

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Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 4. Related Party Transactions (continued)

 

(3) During the nine months ended September 30, 2015 and 2014, $48,260 and $44,542, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of September 30, 2015, a subordinated incentive fee on income of $12,490 was payable to FB Advisor.
(4) During the nine months ended September 30, 2015 and 2014, $2,318 and $2,739, respectively, of administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FB Advisor and the remainder related to other reimbursable expenses. The Company paid $3,782 and $3,756, respectively, in administrative services expenses to FB Advisor during the nine months ended September 30, 2015 and 2014.

Potential Conflicts of Interest

FB Advisor’s senior management team is comprised of substantially the same personnel as the senior management teams of FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC and FS Global Advisor, LLC, the investment advisers to certain other BDCs and a closed-end management investment company affiliated with Franklin Square Holdings. As a result, such personnel provide investment advisory services to the Company and each of FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV and FS Global Credit Opportunities Fund. While none of FB Advisor, FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC or FS Global Advisor, LLC, is currently making private corporate debt investments for clients other than the Company, FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FB Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FB Advisor or its management team. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV and/or FS Global Credit Opportunities Fund rather than to the Company.

Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of FB Advisor. Pursuant to this relief, the Company may currently co-invest with FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV and any future BDCs that are advised by FB Advisor or its affiliated investment advisers, or collectively the Company’s co-investment affiliates. The Company believes this relief has and may continue to enhance its ability to further its investment objectives and strategy. The Company believes this relief may also increase favorable investment opportunities for the Company, in part, by allowing it to participate in larger investments, together with the Company’s co-investment affiliates, than would be available to it if it had not obtained such relief. Because the Company did not seek exemptive relief to engage in co-investment transactions with its investment sub-adviser, GSO / Blackstone Debt Funds Management LLC, or GDFM, and its affiliates, it will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.

Trademark License Agreement

On April 16, 2014, in connection with the listing of its common stock on the NYSE, the Company entered into a trademark license agreement, or the trademark license agreement, with Franklin Square Holdings. Pursuant

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 4. Related Party Transactions (continued)

 

to the trademark license agreement, Franklin Square Holdings granted the Company a non-exclusive, nontransferable, royalty-free right and license to use the name “FS Investment Corporation” and certain other trademarks, or the licensed marks, as a component of the Company’s name (and in connection with marketing the investment advisory and other services that FB Advisor may provide to the Company). Other than with respect to this limited license, the Company has no other rights to the licensed marks. The trademark license agreement may be terminated by Franklin Square Holdings or the Company on sixty days’ prior written notice and expires if FB Advisor or one of Franklin Square Holdings’ affiliates ceases to serve as investment adviser to the Company. Furthermore, Franklin Square Holdings may terminate the trademark license agreement at any time and in its sole discretion in the event that Franklin Square Holdings or the Company receives notice of any third-party claim arising out of the Company’s use of the licensed marks or if the Company attempts to assign or sublicense the trademark license agreement or any of the Company’s rights or duties under the trademark license agreement without the prior written consent of Franklin Square Holdings. FB Advisor is a third-party beneficiary of the trademark license agreement.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company has declared on its common stock during the nine months ended September 30, 2015 and 2014:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2014

     

March 31, 2014

   $ 0.2160       $ 56,237   

June 30, 2014

   $ 0.2228       $ 56,696   

September 30, 2014(1)

   $ 0.3228       $ 77,316   

Fiscal 2015

     

March 31, 2015

   $ 0.2228       $ 53,706   

June 30, 2015

   $ 0.2228       $ 53,839   

September 30, 2015

   $ 0.2228       $ 53,966   

 

(1) On July 1, 2014, the board of directors of the Company declared a special cash distribution of $0.10 per share, which was paid on August 15, 2014 to stockholders of record as of the close of business on July 31, 2014.

On October 29, 2015, the Company’s board of directors declared a regular quarterly cash distribution of $0.22275 per share, which will be paid on or about January 5, 2016 to stockholders of record on December 22, 2015. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

Historically, the Company had an “opt in” distribution reinvestment plan for its stockholders, which terminated upon the listing of the Company’s shares of common stock on the NYSE. The final distribution reinvestment under the old DRP was made in connection with the regular monthly cash distribution paid on March 31, 2014 to stockholders of record as of the close of business on March 28, 2014. Under the old DRP, if the Company made a cash distribution, its stockholders received distributions in cash unless they specifically “opted in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock. On May 23, 2014, the Company adopted an “opt out” distribution reinvestment plan, which was effective June 2, 2014. The new DRP was first implemented in connection with the regular monthly cash distribution paid on July 2, 2014 to stockholders of record as of the close of business on

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 5. Distributions (continued)

 

June 24, 2014. Pursuant to the new DRP, the Company will reinvest all cash dividends or distributions declared by the Company’s board of directors on behalf of stockholders who do not elect to receive their distributions in cash. As a result, if the Company’s board of directors declares a distribution, then stockholders who have not elected to “opt out” of the new DRP will have their distributions automatically reinvested in additional shares of the Company’s common stock.

With respect to each distribution pursuant to the new DRP, the Company reserves the right to either issue new shares of common stock or purchase shares of common stock in the open market in connection with implementation of the new DRP. Unless the Company, in its sole discretion, otherwise directs the plan administrator, (A) if the per share market price (as defined in the new DRP) is equal to or greater than the estimated net asset value per share (rounded up to the nearest whole cent) of the Company’s common stock on the payment date for the distribution, then the Company will issue shares of common stock at the greater of (i) net asset value per share of common stock or (ii) 95% of the market price; or (B) if the market price is less than the net asset value per share, then, in the sole discretion of the Company, (i) shares of common stock will be purchased in open market transactions for the accounts of participants to the extent practicable, or (ii) the Company will issue shares of common stock at net asset value per share. Pursuant to the terms of the new DRP, the number of shares of common stock to be issued to a participant will be determined by dividing the total dollar amount of the distribution payable to a participant by the price per share at which the Company issues such shares; provided, however, that shares purchased in open market transactions by the plan administrator will be allocated to a participant based on the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market.

If a stockholder receives distributions in the form of common stock pursuant to the new DRP, such stockholder generally will be subject to the same federal, state and local tax consequences as if it elected to receive distributions in cash. If the Company’s common stock is trading at or below net asset value, a stockholder receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of cash that they would have received if they had elected to receive the distribution in cash. If the Company’s common stock is trading above net asset value, a stockholder receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of the fair market value of the Company’s common stock. The stockholder’s basis for determining gain or loss upon the sale of common stock received in a distribution will be equal to the total dollar amount of the distribution payable to the stockholder. Any stock received in a distribution will have a holding period for tax purposes commencing on the day following the day on which the shares of common stock are credited to the stockholder’s account.

The Company may fund its cash distributions to stockholders from any sources of funds legally available to it, including proceeds from the sale of shares of the Company’s common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies. The Company has not established limits on the amount of funds it may use from available sources to make distributions. During certain periods, the Company’s distributions may exceed its earnings. As a result, it is possible that a portion of the distributions the Company makes may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from the Company’s investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of capital, which is a nontaxable distribution) will be mailed to the Company’s stockholders. There can be no assurance that the Company will be able to pay distributions at a specific rate or at all.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 5. Distributions (continued)

 

The following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common stock during the nine months ended September 30, 2015 and 2014:

 

     Nine Months Ended September 30,  
     2015     2014  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     127,414         79     118,620         62

Short-term capital gains proceeds from the sale of assets

     —           —          39,835         21

Long-term capital gains proceeds from the sale of assets

     34,097         21     31,794         17

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Distributions on account of preferred and common equity

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 161,511         100   $ 190,249         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the nine months ended September 30, 2015 and 2014, 93.6% and 91.3%, respectively, of the Company’s gross investment income was attributable to cash income earned, 2.2% and 5.7%, respectively, was attributable to non-cash accretion of discount and 4.2% and 3.0%, respectively, was attributable to paid-in-kind, or PIK, interest.

The Company’s net investment income on a tax basis for the nine months ended September 30, 2015 and 2014 was $164,390 and $168,913, respectively. As of September 30, 2015, the Company had $155,002 undistributed net investment income and $14,506 of accumulated capital losses on a tax basis. As of December 31, 2014, the Company had $152,123 of undistributed net investment income and realized gains on a tax basis.

The Company’s undistributed net investment income on a tax basis as of December 31, 2014 was adjusted following the filing of the Company’s 2014 tax return in September 2015. The adjustment was primarily due to tax-basis income received by the Company during the year ended December 31, 2014 exceeding GAAP-basis income on account of certain collateralized securities and interests in partnerships, and the reclassification of realized gains and losses upon the sale of certain collateralized securities held in its investment portfolio during such period. The tax notices for such collateralized securities and interests in partnerships were received by the Company subsequent to the filing of the Company’s annual report on Form 10-K for the year ended December 31, 2014.

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is primarily due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company and the reclassification of unamortized original issue discount and prepayment fees recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 5. Distributions (continued)

 

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the nine months ended September 30, 2015 and 2014:

 

     Nine Months Ended
September 30,
 
     2015     2014  

GAAP-basis net investment income

   $ 208,939      $ 173,953   

Reversal of incentive fee accrual on unrealized gains

     (18,418     3,480   

Reclassification of unamortized original issue discount and prepayment fees

     (30,001     (9,141

Other miscellaneous differences

     3,870        621   
  

 

 

   

 

 

 

Tax-basis net investment income

   $ 164,390      $ 168,913   
  

 

 

   

 

 

 

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.

As of September 30, 2015 and December 31, 2014, the components of accumulated earnings on a tax basis were as follows:

 

     September 30, 2015     December 31,  
     (Unaudited)     2014  

Distributable ordinary income (income and short-term capital gains)

   $ 155,002      $ 118,026   

Distributable realized gains (accumulated capital losses)

     (14,506     34,097   

Incentive fee accrual on unrealized gains

     (2,657     (21,075

Unamortized organization costs

     (354     (386

Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(1)

     (69,957     (22,465
  

 

 

   

 

 

 

Total

   $ 67,528      $ 108,197   
  

 

 

   

 

 

 

 

(1) As of September 30, 2015 and December 31, 2014, the gross unrealized appreciation on the Company’s investments and gain on foreign currency was $146,163 and $137,042, respectively. As of September 30, 2015 and December 31, 2014, the gross unrealized depreciation on the Company’s investments and loss on foreign currency was $216,120 and $159,507, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $4,177,092 and $4,210,343 as of September 30, 2015 and December 31, 2014, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $(69,957) and $(22,465) as of September 30, 2015 and December 31, 2014, respectively.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of September 30, 2015 and December 31, 2014:

 

    September 30, 2015                    
    (Unaudited)     December 31, 2014  
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
 

Senior Secured Loans—First Lien

  $ 1,969,060      $ 1,938,215        47   $ 2,215,957      $ 2,206,206        53

Senior Secured Loans—Second Lien

    903,488        883,440        22     713,675        708,255        17

Senior Secured Bonds

    416,640        330,715        8     423,961        359,275        8

Subordinated Debt

    471,367        443,042        11     467,645        464,304        11

Collateralized Securities

    98,078        103,061        2     110,362        123,920        3

Equity/Other

    292,041        401,606        10     250,497        321,487        8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,150,674      $ 4,100,079        100   $ 4,182,097      $ 4,183,447        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

As of September 30, 2015, except for Allen Systems Group, Inc., in which the Company has a senior secured loan investment and an equity/other investment, and Fronton Investor Holdings, LLC, in which the Company has an equity/other investment, the Company was not an “affiliated person” of any of its portfolio companies, as defined in the 1940 Act. As of September 30, 2015, the Company did not “control” any of its portfolio companies, as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities.

The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of September 30, 2015, the Company had seventeen unfunded debt investments with aggregate unfunded commitments of $98,466 and one unfunded commitment to purchase up to $550 in shares of preferred stock of Altus Power America Holdings, LLC. As of December 31, 2014, the Company had ten unfunded debt investments with aggregate unfunded commitments of $101,099 and one unfunded commitment to purchase up to $788 in shares of preferred stock of Altus Power America Holdings, LLC. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise. For additional details regarding the Company’s unfunded debt investments, see the Company’s unaudited consolidated schedule of investments as of September 30, 2015 and the Company’s audited consolidated schedule of investments as of December 31, 2014.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 6. Investment Portfolio (continued)

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015               
     (Unaudited)     December 31, 2014  

Industry Classification

   Fair
Value
     Percentage of
Portfolio
    Fair
Value
     Percentage of
Portfolio
 

Automobiles & Components

   $ 29,438         1   $ 24,737         1

Capital Goods

     848,950         21     964,394         23

Commercial & Professional Services

     234,377         6     283,513         7

Consumer Durables & Apparel

     423,670         10     319,160         8

Consumer Services

     445,059         11     692,533         17

Diversified Financials

     164,198         4     179,548         4

Energy

     420,599         10     434,424         10

Food & Staples Retailing

     —                   18,324         0

Food, Beverage & Tobacco

     18,546         0     —              

Health Care Equipment & Services

     139,918         3     104,205         3

Materials

     348,678         9     297,179         7

Media

     142,010         3     157,443         4

Pharmaceuticals, Biotechnology & Life Sciences

     —                   16,243         0

Retailing

     68,557         2     5,004         0

Semiconductors & Semiconductor Equipment

     5,635         0     —              

Software & Services

     416,041         10     312,505         7

Technology Hardware & Equipment

     129,500         3     137,471         3

Telecommunication Services

     158,652         4     161,951         4

Transportation

     106,251         3     74,813         2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,100,079         100   $ 4,183,447         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 7. Fair Value of Financial Instruments

Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3: Inputs that are unobservable for an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of September 30, 2015 and December 31, 2014, the Company’s investments were categorized as follows in the fair value hierarchy:

 

     September 30, 2015      December 31,
2014
 

Valuation Inputs

   (Unaudited)     

Level 1—Price quotations in active markets

   $ 966       $ 1,343   

Level 2—Significant other observable inputs

     —           —     

Level 3—Significant unobservable inputs

     4,099,113         4,182,104   
  

 

 

    

 

 

 
   $ 4,100,079       $ 4,183,447   
  

 

 

    

 

 

 

The Company’s investments as of September 30, 2015 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-three senior secured loan investments, two senior secured bond investments, thirteen subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features and other relevant terms of the debt. Except as described below, all of the Company’s equity/other investments were also valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One equity investment, which is traded on an active public market, was valued at its closing price as of September 30, 2015. Two senior secured loan investments, which were newly issued and purchased near September 30, 2015, were valued at cost as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. Except as described above, the Company valued its other investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

The Company’s investments as of December 31, 2014 consisted primarily of debt investments that were acquired directly from the issuer. Forty-one senior secured loan investments, one senior secured bond investment, eleven subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features and other relevant terms of the debt. Except as described below, all of the Company’s equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One equity investment, which is traded on an active public market, was valued at its closing price as of December 31, 2014. One senior secured loan investment and two collateralized loan securities, which were newly issued and purchased near December 31, 2014, were valued at cost as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. Except as described above, the Company valued its other investments, including three equity/other investments, by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.

The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers, as applicable, against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the Company’s board of directors otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firms against the actual prices at which the Company purchases and sells its investments. The valuation committee of the Company’s board of directors, or the valuation committee, and the board of directors, reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation policy.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

The following is a reconciliation for the nine months ended September 30, 2015 and 2014 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Nine Months Ended September 30, 2015  
    Senior  Secured
Loans—First
Lien
    Senior  Secured
Loans—Second
Lien
    Senior
Secured
Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/Other     Total  

Fair value at beginning of period

  $ 2,206,206      $ 708,255      $ 359,275      $ 464,304      $ 123,920      $ 320,144      $ 4,182,104   

Accretion of discount (amortization of premium)

    4,020        1,306        3,046        16,922        66        73        25,433   

Net realized gain (loss)

    (7,021     145        (22,527     (20,618     2,283        5,603        (42,135

Net change in unrealized appreciation (depreciation)

    (21,094     (14,628     (21,239     (24,984     (8,575     38,952        (51,568

Purchases

    606,200        235,903        62,576        128,091        462        51,042        1,084,274   

Paid-in-kind interest

    1,819        2,661        665        8,300        —          1,791        15,236   

Sales and redemptions

    (851,915     (50,202     (51,081     (128,973     (15,095     (16,965     (1,114,231

Net transfers in or out of Level 3

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 1,938,215      $ 883,440      $ 330,715      $ 443,042      $ 103,061      $ 400,640      $ 4,099,113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

  $ (16,253   $ (14,895   $ (47,757   $ (18,922   $ (6,303   $ 42,036      $ (62,094
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Nine Months Ended September 30, 2014  
    Senior  Secured
Loans—First
Lien
    Senior  Secured
Loans—Second
Lien
    Senior
Secured
Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/Other     Total  

Fair value at beginning of period

  $ 2,123,608      $ 897,845      $ 385,548      $ 426,728      $ 140,508      $ 161,197      $ 4,135,434   

Accretion of discount (amortization of premium)

    9,050        5,625        3,467        1,634        344        63        20,183   

Net realized gain (loss)

    2,506        7,911        (2,938     6,228        6,581        5,671        25,959   

Net change in unrealized appreciation (depreciation)

    (29,484     (13,791     (1,075     9,397        (5,036     45,871        5,882   

Purchases

    1,002,647        311,229        103,878        146,863        8,519        68,085        1,641,221   

Paid-in-kind interest

    586        4,471        —          3,994        —          1,325        10,376   

Sales and redemptions

    (783,907     (426,255     (142,225     (124,678     (41,733     (5,092     (1,523,890

Net transfers in or out of Level 3

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,325,006      $ 787,035      $ 346,655      $ 470,166      $ 109,183      $ 277,120      $ 4,315,165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

  $ (6,583   $ 3,577      $ (4,858   $ 14,293      $ 201      $ 49,948      $ 56,578   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

41


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of September 30, 2015 and December 31, 2014 were as follows:

 

Type of Investment

  Fair Value at
September  30, 2015
(Unaudited)
   

Valuation

Technique(1)

 

Unobservable

Input

   Range   Weighted
Average

Senior Secured Loans—First Lien

  $ 1,654,421      Market Comparables   Market Yield (%)    2.8% - 16.8%   9.1%
      EBITDA Multiples (x)    5.8x - 8.3x   7.5x
    215,481      Market Quotes   Indicative Dealer Quotes    69.7% - 100.0%   89.2%
    68,313      Cost   Cost    100.0% - 100.0%   100.0%

Senior Secured Loans—Second Lien

    419,723      Market Comparables   Market Yield (%)    5.7% - 15.5%   12.7%
    463,717      Market Quotes   Indicative Dealer Quotes    75.4% - 101.0%   98.7%

Senior Secured Bonds

    82,560      Market Comparables   Market Yield (%)    10.8% - 15.3%   11.1%
    248,155      Market Quotes   Indicative Dealer Quotes    46.0% - 97.0%   77.1%

Subordinated Debt

    309,884      Market Comparables   Market Yield (%)    8.5% - 16.5%   12.3%
      EBITDA Multiples (x)    6.5x - 7.0x   6.8x
    7,320      Other(2)   Other(2)    N/A   N/A
    125,838      Market Quotes   Indicative Dealer Quotes    52.5% - 104.5%   83.2%

Collateralized Securities

    16,531      Market Comparables   Market Yield (%)    12.2% - 12.2%   12.2%
    86,530      Market Quotes   Indicative Dealer Quotes    42.8% - 93.2%   76.1%

Equity/Other

    324,372      Market Comparables   Market Yield (%)    11.3% - 11.8%   11.5%
      EBITDA Multiples (x)    5.5x - 12.0x   9.0x
      Production Multiples (Mboe/d)    $62,500.0 - $67,500.0   $65,000.0
      Proved Reserves Multiples (Mmboe)    $9.5 - $12.0   $10.2
      PV-10 Multiples (x)    1.5x - 1.6x   1.6x
      Capacity Multiple ($/kW)    $2,000.0 - $2,500.0   $2,250.0
    Option Valuation Model   Volatility (%)    40.0% - 57.0%   49.4%
    76,268      Other(2)   Other(2)    N/A   N/A
 

 

 

          

Total

  $ 4,099,113            
 

 

 

          

 

(1) Investments using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

 

(2) Fair value based on expected outcome of proposed corporate transactions or other various factors.

 

42


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 7. Fair Value of Financial Instruments (continued)

Type of Investment

  Fair Value at
December 31, 2014
   

Valuation

Technique(1)

 

Unobservable

Input

   Range   Weighted
Average

Senior Secured Loans—First Lien

  $ 1,700,237      Market Comparables   Market Yield (%)    4.8% - 12.3%   9.0%
      EBITDA Multiples (x)    7.8x - 7.8x   7.8x
    47,307      Other   Other    N/A   N/A
    448,151      Market Quotes   Indicative Dealer Quotes    74.9% - 102.1%   95.3%
    10,511      Cost   Cost    100.0% - 100.0%   100.0%

Senior Secured Loans—Second Lien

    319,917      Market Comparables   Market Yield (%)    8.8% - 12.3%   10.9%
    388,338      Market Quotes   Indicative Dealer Quotes    79.5% - 101.0%   98.3%

Senior Secured Bonds

    59,062      Market Comparables   Market Yield (%)    10.5% - 11.0%   10.8%
    300,213      Market Quotes   Indicative Dealer Quotes    34.0% - 101.0%   83.9%

Subordinated Debt

    333,351      Market Comparables   Market Yield (%)    8.8% - 18.3%   11.7%
      EBITDA Multiples (x)    7.8x - 8.3x   8.0x
    313      Other   Other    N/A   N/A
    130,640      Market Quotes   Indicative Dealer Quotes    41.5% - 110.5%   85.0%

Collateralized Securities

    17,284      Market Comparables   Market Yield (%)    11.3% - 11.3%   11.3%
    87,462      Market Quotes   Indicative Dealer Quotes    50.0% - 97.9%   85.5%
    19,174      Cost   Cost    93.7% - 99.0%   98.6%

Equity/Other

    310,839      Market Comparables   Market Yield (%)    13.0% - 15.8%   14.9%
      EBITDA Multiples (x)    5.3x - 12.0x   7.8x
      Production Multiples (Mboe/d)    $32,500.0 - $70,256.0   $46,915.4
      Proved Reserves Multiples (Mmboe)    $7.0 - $12.0   $11.0
      PV-10 Multiples (x)    0.5x - 1.8x   1.7x
    Discounted Cash Flow   Discount Rate (%)    17.3% - 17.3%   17.3%
    Option Valuation Model   Volatility (%)    37.5% - 55.5%   51.1%
    9,305      Market Quotes   Indicative Dealer Quotes    $13.8 - $132.7   $120.4
 

 

 

          

Total

  $ 4,182,104            
 

 

 

          

 

(1) For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

 

43


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements

The following table presents summary information with respect to the Company’s outstanding financing arrangements as of September 30, 2015. For additional information regarding these financing arrangements, please see the notes to the Company’s audited consolidated financial statements contained in its annual report on Form 10-K for the year ended December 31, 2014 and the additional disclosure set forth in this Note 8.

 

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
    Maturity Date

Broad Street Credit Facility

  Revolving Credit Facility   L+1.50%     —        $ 125,000      December 18, 2015

ING Credit Facility

  Revolving Credit Facility   L+2.50%   $ 31,812 (1)    $ 268,188      April 3, 2018

JPM Facility

  Repurchase Agreement   3.25%   $ 800,000        —        April 15, 2017

4.000% Notes due 2019

  Unsecured Notes   4.00%   $ 400,000        —        July 15, 2019

4.250% Notes due 2020

  Unsecured Notes   4.25%   $ 325,000        —        January 15, 2020

4.750% Notes due 2022

  Unsecured Notes   4.75%   $ 275,000        —        May 15, 2022

 

(1) Amount includes borrowing in U.S. dollars and Euros. Euro balance outstanding of €28,500 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.12 as of September 30, 2015 to reflect total amount outstanding in U.S. dollars.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the nine months ended September 30, 2015 were $1,882,772 and 3.71%, respectively. As of September 30, 2015, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.96%.

Arch Street Credit Facility

On July 14, 2014, Arch Street Funding LLC, or Arch Street, the Company’s wholly-owned, special purpose financing subsidiary, repaid the revolving credit facility, or the Arch Street credit facility, with Citibank, N.A., as administrative agent, and the financial institutions and other lenders from time to time party thereto. The Arch Street credit facility provided for borrowings in an aggregate principal amount up to $350,000 on a committed basis. Prior to the termination of the Arch Street credit facility, borrowings under the Arch Street credit facility accrued interest at a rate equal to three-month LIBOR plus 2.05% per annum. Beginning November 27, 2012, Arch Street became required to pay a non-usage fee of 0.50% to the extent the aggregate principal amount available under the facility was not borrowed.

As of September 30, 2015 and December 31, 2014, no amounts remained outstanding under the Arch Street credit facility.

For the three and nine months ended September 30, 2014, the components of total interest expense for the Arch Street credit facility were as follows:

 

     Three Months Ended
September 30, 2014
     Nine Months Ended
September 30, 2014
 

Direct interest expense

   $ 289       $ 4,173   

Non-usage fees

     —           220   

Amortization of deferred financing costs

     2,270         2,896   
  

 

 

    

 

 

 

Total interest expense

   $ 2,559       $ 7,289   
  

 

 

    

 

 

 

 

44


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the nine months ended September 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Arch Street credit facility were as follows:

 

     Nine Months Ended
September 30, 2014
 

Cash paid for interest expense(1)

   $ 6,464   

Average borrowings under the facility

   $ 360,986   

Effective interest rate on borrowings (including the effect of non-usage fees)

     —     

Weighted average interest rate (including the effect of non-usage fees)

     2.24

 

(1) Interest under the Arch Street credit facility was paid quarterly in arrears.

Borrowings of Arch Street were considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

Broad Street Credit Facility

On January 28, 2011, Broad Street Funding LLC, or Broad Street, the Company’s wholly-owned, special-purpose financing subsidiary, Deutsche Bank AG, New York Branch, or Deutsche Bank, and the other lenders party thereto entered into an amended and restated multi-lender, syndicated revolving credit facility, or the Broad Street credit facility, which amended and restated the revolving credit facility that Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto. On March 23, 2012, Broad Street and Deutsche Bank entered into an amendment to the Broad Street credit facility which extended the maturity date of the facility to March 23, 2013, increased the aggregate amount which could be borrowed under the facility to $380,000 and reduced the interest rate for all borrowings under the facility to a rate of LIBOR, for an interest period equal to the weighted average LIBOR interest period of debt securities owned by Broad Street, plus 1.50% per annum. On December 13, 2012, Broad Street repaid $140,000 of borrowings under the facility, thereby reducing the amount which could be borrowed under the facility to $240,000. On March 22, 2013, Broad Street and Deutsche Bank entered into an amendment to the facility to extend the maturity date of the facility to December 22, 2013. On December 20, 2013, Broad Street and Deutsche Bank entered into an amendment to the facility that extended the maturity date to December 20, 2014 and reduced the maximum amount which could be borrowed under the facility to $125,000. On December 18, 2014, Broad Street and Deutsche Bank entered into a further amendment to the facility which extended the maturity date to December 18, 2015, incorporated a commitment fee of 1.50% payable on unused amounts (triggered after five consecutive business days of Broad Street utilizing less than 33% of the maximum commitment), and gave Broad Street the right to reduce the maximum commitment upon three (3) days’ notice to the administrative agent. The Broad Street credit facility provides for borrowings of up to $125,000 at a rate of LIBOR, for an interest period equal to the weighted average LIBOR interest period of debt securities owned by Broad Street, plus 1.50% per annum. Deutsche Bank is a lender and serves as administrative agent under the facility.

Under the Broad Street credit facility, the Company transfers debt securities to Broad Street from time to time as a contribution to capital and retains a residual interest in the contributed debt securities through its ownership of Broad Street. The obligations of Broad Street under the facility are non-recourse to the Company and its exposure under the facility is limited to the value of its investment in Broad Street.

 

45


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

As of September 30, 2015 and December 31, 2014, $0 and $65,808, respectively, was outstanding under the Broad Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $2,566 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2015, all of the deferred financing costs have been amortized to interest expense.

For the three and nine months ended September 30, 2015 and 2014, the components of total interest expense for the Broad Street credit facility were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
         2015              2014              2015              2014      

Direct interest expense

     —         $ 437       $ 406       $ 1,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     —         $ 437       $ 406       $ 1,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the nine months ended September 30, 2015 and 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Broad Street credit facility were as follows:

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash paid for interest expense(1)

   $ 635      $ 1,396   

Average borrowings under the facility(2)

   $ 69,063      $ 112,154   

Effective interest rate on borrowings

     —          1.73

Weighted average interest rate

     1.76     1.73

 

(1) Interest under the Broad Street credit facility is paid quarterly in arrears.

 

(2) The average borrowings under the Broad Street credit facility are calculated for the period the Company had borrowings outstanding under the facility.

Borrowings of Broad Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

ING Credit Facility

On April 3, 2014, the Company entered into the ING credit facility. The ING credit facility provides for borrowings in U.S. dollars and certain agreed upon foreign currencies in an initial aggregate amount of up to $300,000, with an option for the Company to request, at one or more times after closing, that existing or new lenders, at their election, provide up to $100,000 of additional commitments. The ING credit facility provides for the issuance of letters of credit in an aggregate face amount not to exceed $25,000. The Company’s obligations under the ING credit facility are guaranteed by all of the Company’s subsidiaries, other than its special-purpose financing subsidiaries. The Company’s obligations under the ING credit facility are secured by a first priority security interest in substantially all of the assets of the Company and the subsidiary guarantors thereunder other than the equity interests of its special-purpose financing subsidiaries.

 

46


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

As of September 30, 2015 and December 31, 2014, $31,812 and $123,019, respectively, was outstanding under the ING credit facility, which includes borrowings in Euro in an aggregate amount of €28,500 and €29,625, respectively. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $3,406 in connection with obtaining the ING credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2015, $1,705 of such deferred financing costs had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2015 and 2014, the components of total interest expense for the ING credit facility were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Direct interest expense

   $ 164       $ 1,766       $ 2,057       $ 2,231   

Non-usage fees

     686         40         996         574   

Amortization of deferred financing costs

     285         285         846         570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 1,135       $ 2,091       $ 3,899       $ 3,375   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the nine months ended September 30, 2015 and 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the ING credit facility were as follows:

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash paid for interest expense(1)

   $ 2,654      $ 2,257   

Average borrowings under the facility

   $ 102,506      $ 247,353   

Effective interest rate on borrowings (including the effect of non-usage fees)

     11.51     2.71

Weighted average interest rate (including the effect of non-usage fees)

     3.93     2.26

 

(1) Interest under the ING credit facility is paid at the end of each interest period in arrears for borrowings in Euro and quarterly in arrears for base rate borrowings.

JPM Financing

On July 21, 2011, through its two wholly-owned, special-purpose financing subsidiaries, Locust Street Funding LLC, or Locust Street, and Race Street Funding LLC, or Race Street, the Company entered into a debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which has been subsequently amended from time to time. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements. The Company and JPM most recently amended the financing arrangement on May 8, 2015 to, among other things, reduce the amount of outstanding available debt financing from $950,000 to $800,000.

Pursuant to the financing arrangement, the assets held by Locust Street secure the obligations of Locust Street under certain Class A Floating Rate Notes, or the Class A Notes, issued by Locust Street to Race Street

 

47


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

pursuant to the Amended and Restated Indenture, dated as of September 26, 2012 and as supplemented by Supplemental Indenture No. 1, dated April 23, 2013, and Supplemental Indenture No. 2, dated May 8, 2015, in each case, with Citibank N.A., as trustee, or the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes issued by Locust Street is $960,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of April 15, 2024. Race Street has purchased all of the Class A Notes issued by Locust Street at a purchase price equal to their par value.

Race Street, in turn, has entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of May 8, 2015, or, collectively, the JPM Facility. Pursuant to the JPM Facility, JPM purchased the $960,000 of Class A Notes held by Race Street for a purchase price equal to $800,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than April 15, 2017. The repurchase price paid by Race Street to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing April 15, 2015, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, are subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

Pursuant to the financing arrangement, the assets held by Race Street secure the obligations of Race Street under the JPM Facility.

As of September 30, 2015 and December 31, 2014, Class A Notes in the aggregate principal amount of $960,000 and $1,140,000, respectively, had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $800,000 and $950,000, respectively. The carrying amount outstanding under the JPM Facility approximates its fair value. The Company funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of September 30, 2015 and December 31, 2014, Race Street’s liability under the JPM Facility was $800,000 and $950,000, plus $5,633 and $6,690, respectively, of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on the Company’s financial statements.

As of September 30, 2015 and December 31, 2014, the fair value of assets held by Locust Street was $1,669,315 and $1,832,095, respectively, which included assets purchased by Locust Street with proceeds from the issuance of Class A Notes. As of September 30, 2015 and December 31, 2014, the fair value of assets held by Race Street was $858,034 and $855,341, respectively.

The Company incurred costs of $425 in connection with obtaining the JPM Facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the JPM Facility. As of September 30, 2015, all of the deferred financing costs have been amortized to interest expense.

 

48


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the three and nine months ended September 30, 2015 and 2014, the components of total interest expense for the JPM Facility were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Direct interest expense

   $ 6,644       $ 7,891       $ 21,436       $ 23,414   

Amortization of deferred financing costs

     9         33         61         85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 6,653       $ 7,924       $ 21,497       $ 23,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the nine months ended September 30, 2015 and 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM Facility were as follows:

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash paid for interest expense(1)

   $ 22,493      $ 23,414   

Average borrowings under the facility

   $ 869,780      $ 950,000   

Effective interest rate on borrowings

     3.25     3.25

Weighted average interest rate

     3.25     3.25

 

(1) Interest under the JPM Facility is paid quarterly in arrears.

Amounts outstanding under the JPM Facility will be considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

Walnut Street Credit Facility

On December 3, 2014, Walnut Street Funding LLC, or Walnut Street, the Company’s wholly-owned, special purpose financing subsidiary, repaid and terminated the revolving credit facility, or the Walnut Street credit facility, with Wells Fargo Bank, National Association. Wells Fargo Securities, LLC served as the administrative agent and Wells Fargo Bank, National Association was the sole lender, collateral agent, account bank and collateral custodian under the facility. The Walnut Street credit facility provided for borrowings in an aggregate principal amount up to $250,000 on a committed basis. Prior to the termination of the Walnut Street credit facility, borrowings under the Walnut Street credit facility accrued interest at a rate equal to three-month LIBOR, plus a spread ranging between 1.50% and 2.50% per annum, depending on the composition of the portfolio of debt securities for the relevant period. Beginning on September 17, 2012, Walnut Street became subject to a non-usage fee of 0.50% to the extent the aggregate principal amount available under the Walnut Street credit facility was not borrowed.

As of September 30, 2015 and December 31, 2014, no amounts remained outstanding under the Walnut Street credit facility.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the three and nine months ended September 30, 2014, the components of total interest expense for the Walnut Street credit facility were as follows:

 

     Three Months Ended
September 30, 2014
     Nine Months Ended
September 30, 2014
 

Direct interest expense

   $ 1,774       $ 5,247   

Non-usage fees

     218         490   

Amortization of deferred financing costs

     209         648   
  

 

 

    

 

 

 

Total interest expense

   $ 2,201       $ 6,385   
  

 

 

    

 

 

 

For the nine months ended September 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Walnut Street credit facility were as follows:

 

     Nine Months Ended
September 30, 2014
 

Cash paid for interest expense(1)

   $ 5,536   

Average borrowings under the facility

   $ 238,274   

Effective interest rate on borrowings (including the effect of non-usage fees)

     3.55

Weighted average interest rate (including the effect of non-usage fees)

     3.18

 

(1) Interest under the Walnut Street credit facility was paid quarterly in arrears.

Borrowings of Walnut Street were considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

4.000% Notes due 2019

On July 14, 2014, the Company and U.S. Bank National Association, or U.S. Bank, entered into an indenture, or the base indenture, and a first supplemental indenture thereto, or together with the base indenture and any supplemental indentures thereto, the indenture, relating to the Company’s issuance of $400,000 aggregate principal amount of its 4.000% notes due 2019, or the 4.000% notes.

The 4.000% notes will mature on July 15, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time at the applicable redemption price set forth in the indenture. The 4.000% notes bear interest at a rate of 4.000% per year, payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2015. The 4.000% notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 4.000% notes and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.

In addition, on the occurrence of a “change of control repurchase event,” as defined in the indenture, the Company will generally be required to make an offer to purchase the outstanding 4.000% notes at a price equal to 100% of the principal amount of such notes plus accrued and unpaid interest to the repurchase date.

The indenture contains certain covenants, including covenants requiring the Company to comply with the asset coverage requirements of Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of the

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

4.000% notes and U.S. Bank if the Company is no longer subject to the reporting requirements under the Exchange Act of 1934, as amended, or the Exchange Act. These covenants are subject to limitations and exceptions that are described in the indenture.

As of September 30, 2015 and December 31, 2014, $400,000 of the 4.000% notes was outstanding. As of September 30, 2015, the fair value of the 4.000% notes was approximately $403,700. The Company incurred costs of $569 in connection with issuing the 4.000% notes, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the 4.000% notes. As of September 30, 2015, $424 of such deferred financing costs had yet to be amortized to interest expense. The Company also incurred $5,608 of discount in connection with issuing the 4.000% notes, which the Company has charged against the carrying amount of the 4.000% notes. As of September 30, 2015, $4,247 of such discount had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2015, the components of total interest expense for the 4.000% notes were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Direct interest expense

   $ 4,021       $ 3,463       $ 11,992       $ 3,463   

Amortization of deferred financing costs and discount

     311         265         930         265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 4,332       $ 3,728       $ 12,922       $ 3,728   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the nine months ended September 30, 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the 4.000% notes were as follows:

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash paid for interest expense(1)

   $ 16,044        —     

Average borrowings under the 4.000% notes(2)

   $ 400,000      $ 400,000   

Effective interest rate on borrowings

     4.00     4.00

Weighted average interest rate

     4.00     4.00

 

(1) Interest under the 4.000% notes is paid semi-annually in arrears.

 

(2) For the nine months ended September 30, 2014, average borrowings under the 4.000% notes are calculated for the period since the date of issuance to September 30, 2014.

4.250% Notes due 2020

On December 3, 2014, the Company and U.S. Bank entered into a second supplemental indenture to the base indenture relating to the Company’s issuance of $325,000 aggregate principal amount of its 4.250% notes due 2020, or the 4.250% notes.

The 4.250% notes will mature on January 15, 2020 and may be redeemed in whole or in part at the Company’s option at any time or from time to time at the applicable redemption price set forth in the indenture.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

The 4.250% notes bear interest at a rate of 4.250% per year, payable semi-annually on January 15 and July 15 of each year, commencing on July 15, 2015. The 4.250% notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 4.250% notes and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.

In addition, on the occurrence of a “change of control repurchase event,” as defined in the indenture, the Company will generally be required to make an offer to purchase the outstanding 4.250% notes at a price equal to 100% of the principal amount of such notes plus accrued and unpaid interest to the repurchase date.

The indenture contains certain covenants, including covenants requiring the Company to comply with the asset coverage requirements of Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of the 4.250% notes and U.S. Bank if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to limitations and exceptions that are described in the indenture.

As of September 30, 2015 and December 31, 2014, $325,000 of the 4.250% notes was outstanding. As of September 30, 2015, the fair value of the 4.250% notes was approximately $330,033. The Company incurred costs of $839 in connection with issuing the 4.250% notes, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the 4.250% notes. As of September 30, 2015, $704 of such deferred financing costs had yet to be amortized to interest expense. The Company also incurred $4,115 of discount in connection with issuing the 4.250% notes, which the Company has charged against the carrying amount of the 4.250% notes. As of September 30, 2015, $3,450 of such discount had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2015, the components of total interest expense for the 4.250% notes were as follows:

 

     Three Months Ended
September 30, 2015
     Nine Months Ended
September 30, 2015
 

Direct interest expense

   $ 3,515       $ 10,436   

Amortization of deferred financing costs and discount

     244         730   
  

 

 

    

 

 

 

Total interest expense

   $ 3,759       $ 11,166   
  

 

 

    

 

 

 

For the nine months ended September 30, 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the 4.250% notes were as follows:

 

     Nine Months Ended
September 30, 2015
 

Cash paid for interest expense(1)

   $ 8,518   

Average borrowings under the 4.250% notes

   $ 325,000   

Effective interest rate on borrowings

     4.25

Weighted average interest rate

     4.25

 

(1) Interest under the 4.250% notes is paid semi-annually in arrears.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

4.750% Notes due 2022

On April 30, 2015, the Company and U.S. Bank entered into a third supplemental indenture to the base indenture relating to the Company’s issuance of $275,000 aggregate principal amount of its 4.750% notes due 2022, or the 4.750% notes.

The 4.750% notes will mature on May 15, 2022 and may be redeemed in whole or in part at the Company’s option at any time or from time to time at the applicable redemption price set forth in the indenture. The 4.750% notes bear interest at a rate of 4.750% per year payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 2015. The 4.750% notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 4.750% notes and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.

In addition, on the occurrence of a “change of control repurchase event,” as defined in the indenture, the Company will generally be required to make an offer to purchase the outstanding 4.750% notes at a price equal to 100% of the principal amount of such notes plus accrued and unpaid interest to the repurchase date.

The indenture contains certain covenants, including covenants requiring the Company to comply with the asset coverage requirements of Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of the 4.750% notes and U.S. Bank if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to limitations and exceptions that are described in the indenture.

As of September 30, 2015, $275,000 of the 4.750% notes was outstanding. As of September 30, 2015, the fair value of the 4.750% notes was approximately $278,546. The Company incurred costs of $469 in connection with issuing the 4.750% notes, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the 4.750% notes. As of September 30, 2015, $448 of such deferred financing costs had yet to be amortized to interest expense. The Company also incurred $3,344 of discount in connection with issuing the 4.750% notes, which the Company has charged against the carrying amount of the 4.750% notes. As of September 30, 2015, $3,144 of such discount had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2015, the components of total interest expense for the 4.750% notes were as follows:

 

     Three Months Ended
September 30, 2015
     Nine Months Ended
September 30, 2015
 

Direct interest expense

   $ 3,338       $ 5,588   

Amortization of deferred financing costs and discount

     135         221   
  

 

 

    

 

 

 

Total interest expense

   $ 3,473       $ 5,809   
  

 

 

    

 

 

 

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the nine months ended September 30, 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the 4.750% notes were as follows:

 

     Nine Months Ended
September 30, 2015
 

Cash paid for interest expense(1)

     —     

Average borrowings under the 4.750% notes(2)

   $ 275,000   

Effective interest rate on borrowings

     4.75

Weighted average interest rate

     4.75

 

(1) Interest under the 4.750% notes is paid semi-annually in arrears.

 

(2) Average borrowings under the 4.750% notes are calculated for the period since the date of issuance to September 30, 2015.

Note 9. Commitments and Contingencies

The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management of FB Advisor has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.

The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material effect upon its financial condition or results of operations.

See Note 6 for a discussion of the Company’s unfunded commitments.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 10. Financial Highlights

The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2015 and the year ended December 31, 2014:

 

     Nine Months Ended
September 30, 2015
(Unaudited)
    Year Ended
December 31,
2014
 

Per Share Data:(1)

    

Net asset value, beginning of period

   $ 9.83      $ 10.18   

Results of operations(2)

    

Net investment income (loss)

     0.86        0.97   

Net realized and unrealized appreciation (depreciation) on investments and gain/loss on foreign currency

     (0.38     (0.19
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.48        0.78   
  

 

 

   

 

 

 

Stockholder distributions(3)

    

Distributions from net investment income

     (0.53     (0.79

Distributions from net realized gain on investments

     (0.14     (0.29
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (0.67     (1.08
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock(4)

     0.00        0.00   

Repurchases of common stock(5)

            (0.05
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital share transactions

     0.00        (0.05
  

 

 

   

 

 

 

Net asset value, end of period

   $ 9.64      $ 9.83   
  

 

 

   

 

 

 

Per share market value, end of period

   $ 9.32      $ 9.93   
  

 

 

   

 

 

 

Shares outstanding, end of period

     242,274,372        240,896,559   
  

 

 

   

 

 

 

Total return based on net asset value(6)

     4.88     7.17
  

 

 

   

 

 

 

Total return based on market value(7)

     0.60     5.35
  

 

 

   

 

 

 

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 2,335,959      $ 2,366,986   
  

 

 

   

 

 

 

Ratio of net investment income to average net assets(8)

     8.80     9.54
  

 

 

   

 

 

 

Ratio of total operating expenses to average net assets(8)

     6.36     8.90

Ratio of waived expenses to average net assets(8)

            (0.11 )% 
  

 

 

   

 

 

 

Ratio of net operating expenses to average net assets(8)

     6.36     8.79
  

 

 

   

 

 

 

Portfolio turnover(9)

     26.49     50.27
  

 

 

   

 

 

 

Total amount of senior securities outstanding, exclusive of treasury securities

   $ 1,831,812      $ 1,863,827   
  

 

 

   

 

 

 

Asset coverage per unit(10)

     2.28        2.27   

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 10. Financial Highlights (continued)

 

 

(1) Per share data may be rounded in order to recompute the ending net asset value per share.

 

(2) The per share data was derived by using the weighted average shares outstanding during the applicable period.

 

(3) The per share data for distributions reflect the actual amount of distributions paid per share during the applicable period.

 

(4) The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock, as applicable, pursuant to the Company’s distribution reinvestment plan. The issuance of common stock at a price that is greater than the net asset value per share results in an increase in net asset value per share.

 

(5) The listing tender offer and the purchase of shares of common stock pursuant thereto on June 4, 2014 resulted in a reduction to net asset value as a result of the Company repurchasing shares at a price greater than its net asset value per share.

 

(6) The total return based on net asset value for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share that were declared during the period and dividing the total by the net asset value per share at the beginning of the period. Total return based on net asset value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The historical calculation of total return based on net asset value in the table should not be considered a representation of the Company’s future total return based on net asset value, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.

 

(7)

The total return based on market value for the nine months ended September 30, 2015 was calculated by taking the closing price of the Company’s shares on the NYSE on September 30, 2015, adding the cash distributions per share that were declared during the nine months ended September 30, 2015 and dividing the total by $9.93, the closing price of the Company’s shares on the NYSE on December 31, 2014. The total return based on market value for the year ended December 31, 2014 was calculated by taking the closing price of the Company’s shares on the NYSE on December 31, 2014, adding the cash distributions per share that were declared during the period from April 16, 2014 to December 31, 2014 and dividing the total by $10.25, the closing price of the Company’s shares on the NYSE on April 16, 2014 (the first day the shares began trading on the NYSE). Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The historical calculation of total return based on market value in the table should not be considered a representation of the Company’s future total return based on market value, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 10. Financial Highlights (continued)

 

  of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets, general economic conditions and fluctuations in per share market value. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods.

 

(8) Weighted average net assets during the applicable period are used for this calculation. The following is a schedule of supplemental ratios for the nine months ended September 30, 2015 and year ended December 31, 2014:

 

     Nine Months Ended
September 30, 2015

(Unaudited)
    Year Ended
December 31, 2014
 
      

Ratio of accrued capital gains incentive fees to average net assets

     (0.78 )%      (0.37 )% 

Ratio of subordinated income incentive fees to average net assets

     2.01     2.29

Ratio of interest expense to average net assets

     2.34     2.56

Ratio of excise taxes to average net assets

     —          0.21

 

(9) Portfolio turnover for the nine months ended September 30, 2015 is not annualized.

 

(10) Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness.

Note 11. Recently Issued Accounting Standards

In April 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest, or ASU 2015-03, to simplify the presentation of debt issuance costs in the financial statements. Under existing guidance, debt issuance costs are recognized as a deferred charge and presented as an asset on the balance sheet. The amendments to the guidance require that debt issuance costs related to a recognized liability for indebtedness be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. In August 2015, the FASB issued Accounting Standards Update No. 2015-15, Interest—Imputation of Interest to update the guidance to include SEC staff views regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs is not affected by the amendments to the guidance. The amendments to the FASB codification guidance are to be applied retrospectively with applicable disclosures for a change in accounting principle upon transition. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2015. Early application by public entities is permitted. Management of the Company is currently assessing the impact of this guidance on the Company’s consolidated financial statements.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(in thousands, except share and per share amounts)

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us,” “our” and the “Company” refer to FS Investment Corporation.

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

 

   

our future operating results;

 

   

our business prospects and the prospects of the companies in which we may invest;

 

   

the impact of the investments that we expect to make;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our current and expected financings and investments;

 

   

receiving and maintaining corporate credit ratings and changes in the general interest rate environment;

 

   

the adequacy of our cash resources, financing sources and working capital;

 

   

the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;

 

   

our contractual arrangements and relationships with third parties;

 

   

actual and potential conflicts of interest with FB Advisor, FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC II Advisor, LLC, FS Investment Corporation II, FSIC III Advisor, LLC, FS Investment Corporation III, FSIC IV Advisor, LLC, FS Investment Corporation IV, FS Global Advisor, LLC, FS Global Credit Opportunities Fund, GDFM or any of their affiliates;

 

   

the dependence of our future success on the general economy and its effect on the industries in which we may invest;

 

   

our use of financial leverage;

 

   

the ability of FB Advisor to locate suitable investments for us and to monitor and administer our investments;

 

   

the ability of FB Advisor or its affiliates to attract and retain highly talented professionals;

 

   

our ability to maintain our qualification as a RIC and as a BDC;

 

   

the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, and the rules and regulations issued thereunder;

 

   

the effect of changes to tax legislation and our tax position; and

 

   

the tax status of the enterprises in which we may invest.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:

 

   

changes in the economy;

 

   

risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters;

 

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future changes in laws or regulations and conditions in our operating areas; and

 

   

the price at which shares of our common stock may trade on the NYSE.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act.

Overview

We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and formally commenced investment operations on January 2, 2009. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code.

On April 16, 2014, shares of our common stock began trading on the NYSE under the ticker symbol “FSIC”. This listing accomplished our goal of providing our stockholders with greatly enhanced liquidity.

Our investment activities are managed by FB Advisor and supervised by our board of directors, a majority of whom are independent. Under the July 2014 investment advisory agreement, we have agreed to pay FB Advisor an annual base management fee based on the average value of our gross assets and an incentive fee based on our performance. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and makes investment recommendations for approval by FB Advisor according to guidelines set by FB Advisor.

Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We have identified and intend to focus on the following investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.

Direct Originations: We intend to leverage our relationship with GDFM and its global sourcing and origination platform to directly source investment opportunities. Such investments are originated or structured for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not generally make equity investments independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may include event driven investments, anchor orders and CLOs.

 

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In the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the market’s apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company’s financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.

We may also invest in certain opportunities that are originated and then syndicated by a commercial or investment bank, but where we provide a capital commitment significantly above the average syndicate participant, i.e., an anchor order. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of FB Advisor and GDFM.

In addition, our relationship with GSO Capital Partners LP, the parent of GDFM, and one of the largest CLO managers in the world, allows us to opportunistically invest in CLOs. CLOs are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities.

Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.

Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the “over-the-counter” market or directly from our target companies as primary market or directly originated investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase or otherwise acquire minority interests in target companies, in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity, the cash value of common stock or other equity. Any such minority interests are generally acquired in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds, CLOs, other debt securities and derivatives, including total return swaps and credit default swaps. FB Advisor will seek to tailor our investment focus as market conditions evolve. Depending on market conditions, we may increase or decrease our exposure to less senior portions of the capital structure or otherwise make opportunistic investments.

The senior secured loans, second lien secured loans and senior secured bonds in which we invest generally have stated terms of three to seven years and subordinated debt investments that we make generally have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven

 

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years. However, there is no limit on the maturity or duration of any security in our portfolio. Our debt investments may be rated by a nationally recognized statistical rating organization and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service, Inc. or lower than “BBB-” by Standard & Poor’s Ratings Services). We also invest in non-rated debt securities.

Revenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.

We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we generate revenues in the form of non-recurring commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.

Expenses

Our primary operating expenses include the payment of management and incentive fees and other expenses under the July 2014 investment advisory agreement and the administration agreement, interest expense from financing facilities and other indebtedness, and other expenses necessary for our operations. The management and incentive fees compensate FB Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FB Advisor is responsible for compensating our investment sub-adviser.

FB Advisor oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FB Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, FB Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.

Pursuant to the administration agreement, we reimburse FB Advisor for expenses necessary to perform services related to our administration and operations, including FB Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings providing administrative services to us on behalf of FB Advisor. We reimburse FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities under the administration agreement. FB Advisor allocates the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors reviews the

 

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methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and certain affiliates of FB Advisor. Our board of directors then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to FB Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.

We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our quarterly report on Form 10-Q for the three months ended March 31, 2015.

In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FB Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.

Portfolio Investment Activity for the Three and Nine Months Ended September 30, 2015 and for the Year Ended December 31, 2014

During the nine months ended September 30, 2015, we made investments in portfolio companies totaling $1,084,274. During the same period, we sold investments for proceeds of $430,547 and received principal repayments of $683,684. As of September 30, 2015, our investment portfolio, with a total fair value of $4,100,079 (47% in first lien senior secured loans, 22% in second lien senior secured loans, 8% in senior secured bonds, 11% in subordinated debt, 2% in collateralized securities and 10% in equity/other), consisted of interests in 117 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $140.4 million. As of September 30, 2015, the debt investments in our portfolio were purchased at a weighted average price of 98.3% of par, and our estimated gross portfolio yield (which represents the expected annualized yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage, was 9.9% based upon the amortized cost of our investments. For the nine months ended September 30, 2015, our total return based on net asset value was 4.88% and our total return based on market value was 0.60%.

During the year ended December 31, 2014, we made investments in portfolio companies totaling $2,178,075. During the same period, we sold investments for proceeds of $1,246,624 and received principal repayments of $875,315. As of December 31, 2014, our investment portfolio, with a total fair value of $4,183,447 (53% in first lien senior secured loans, 17% in second lien senior secured loans, 8% in senior secured bonds, 11% in subordinated debt, 3% in collateralized securities and 8% in equity/other), consisted of interests in 118 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $155.2 million. As of December 31, 2014, the debt investments in our portfolio were purchased at a weighted average price of 97.4% of par, and our estimated gross portfolio yield, prior to leverage, was 10.0% based upon the amortized cost of our investments. For the year ended December 31, 2014, our total return based on net asset value was 7.17% and our total return based on market value was 5.35%.

Our estimated gross portfolio yield may be higher than an investor’s yield on an investment in shares of our common stock. Our estimated gross portfolio yield does not reflect operating expenses that may be incurred by us. In addition, our estimated gross portfolio yield and total return figures disclosed above do not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of our common stock. Our estimated gross portfolio yield and total return based on net asset value do not represent actual investment returns to stockholders. Our estimated gross portfolio yield and total return figures are subject to change and, in the future, may be greater or less than the rates set forth above. See footnotes 6 and 7 to the table included in Note 10 to our unaudited consolidated financial statements included herein for information regarding the calculation of our total return based on net asset value and total return based on market value, respectively.

 

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Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three and nine months ended September 30, 2015:

 

     For the Three Months Ended
September 30, 2015
    For the Nine Months Ended
September 30, 2015
 

Net Investment Activity

    

Purchases

   $ 283,968      $ 1,084,274   

Sales and Redemptions

     (129,667     (1,114,231
  

 

 

   

 

 

 

Net Portfolio Activity

   $ 154,301      $ (29,957
  

 

 

   

 

 

 

 

     For the Three Months Ended
September 30, 2015
    For the Nine Months Ended
September 30, 2015
 
    

New Investment Activity by Asset Class

   Purchases      Percentage     Purchases      Percentage  

Senior Secured Loans—First Lien

   $ 157,274         55   $ 606,200         56

Senior Secured Loans—Second Lien

     60,784         22     235,903         22

Senior Secured Bonds

     19,743         7     62,576         6

Subordinated Debt

     39,636         14     128,091         12

Collateralized Securities

     26         0     462         0

Equity/Other

     6,505         2     51,042         4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 283,968         100   $ 1,084,274         100
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the composition of our investment portfolio at cost and fair value as of September 30, 2015 and December 31, 2014:

 

    September 30, 2015                    
    (Unaudited)     December 31, 2014  
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
 

Senior Secured Loans—First Lien

  $ 1,969,060      $ 1,938,215        47   $ 2,215,957      $ 2,206,206        53

Senior Secured Loans—Second Lien

    903,488        883,440        22     713,675        708,255        17

Senior Secured Bonds

    416,640        330,715        8     423,961        359,275        8

Subordinated Debt

    471,367        443,042        11     467,645        464,304        11

Collateralized Securities

    98,078        103,061        2     110,362        123,920        3

Equity/Other

    292,041        401,606        10     250,497        321,487        8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,150,674      $ 4,100,079        100   $ 4,182,097      $ 4,183,447        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortized costs represent the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

 

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The following table presents certain selected information regarding the composition of our investment portfolio as of September 30, 2015 and December 31, 2014:

 

    September 30,
2015
    December 31,
2014
 

Number of Portfolio Companies

    117        118   

% Variable Rate (based on fair value)

    68.2     69.0

% Fixed Rate (based on fair value)

    22.0     23.3

% Income Producing Equity/Other Investments (based on fair value)

    3.6     2.9

% Non-Income Producing Equity/Other Investments (based on fair value)

    6.2     4.8

Average Annual EBITDA of Portfolio Companies

  $ 140,400      $ 155,200   

Weighted Average Purchase Price of Debt Investments (as a % of par)

    98.3     97.4

% of Investments on Non-Accrual (based on fair value)

    —          0.3

Gross Portfolio Yield Prior to Leverage (based on amortized cost)

    9.9     10.0

Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets

    10.4     10.4

Direct Originations

The following tables present certain selected information regarding our direct originations for the three and nine months ended September 30, 2015:

 

     For the
Three Months Ended

September 30, 2015
    For the
Nine Months Ended
September 30, 2015
 

New Direct Originations

    

Total Commitments (including unfunded commitments)

   $ 192,637      $ 879,941   

Exited Investments (including partial paydowns)

     (35,090     (804,721
  

 

 

   

 

 

 

Net Direct Originations

   $ 157,547      $ 75,220   
  

 

 

   

 

 

 

 

     For the Three Months Ended
September 30, 2015
    For the Nine Months Ended
September 30, 2015
 
    

New Direct Originations by Asset Class (including unfunded
commitments)

   Commitment
Amount
     Percentage     Commitment
Amount
     Percentage  

Senior Secured Loans—First Lien

   $ 131,977         69   $ 618,131         70

Senior Secured Loans—Second Lien

     38,868         20     180,231         21

Senior Secured Bonds

     2,112         1     2,112         0

Subordinated Debt

     14,374         7     33,997         4

Collateralized Securities

     —                   —              

Equity/Other

     5,306         3     45,470         5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 192,637         100   $ 879,941         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     For the
Three Months Ended
September 30, 2015
    For the
Nine Months Ended
September 30, 2015
 

Average New Direct Origination Commitment Amount

   $ 12,842      $ 21,999   

Weighted Average Maturity for New Direct Originations

     10/8/21        10/7/20   

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period

     9.0     9.3

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period—Excluding Non-Income Producing Assets

     9.3     9.8

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period

     10.8     10.3

 

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The following table presents certain selected information regarding our direct originations as of September 30, 2015 and December 31, 2014:

 

Characteristics of All Direct Originations held in Portfolio

   September 30, 2015     December 31, 2014  

Number of Portfolio Companies

     66        52   

Average Annual EBITDA of Portfolio Companies

   $ 67,100      $ 47,200   

Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities

     4.7x        4.6x   

% of Investments on Non-Accrual

     —          —     

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations

     9.5     9.7

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets

     10.1     10.1

Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015     December 31, 2014  

Portfolio Composition by Strategy

   Fair
Value
     Percentage of
Portfolio
    Fair
Value
     Percentage of
Portfolio
 

Direct Originations

   $ 3,252,741         79   $ 3,147,946         75

Opportunistic

     665,631         16     790,060         19

Broadly Syndicated/Other

     181,707         5     245,441         6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,100,079         100   $ 4,183,447         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015
(Unaudited)
    December 31, 2014  
      

Industry Classification

   Fair
Value
     Percentage of
Portfolio
    Fair
Value
     Percentage of
Portfolio
 

Automobiles & Components

   $ 29,438         1   $ 24,737         1

Capital Goods

     848,950         21     964,394         23

Commercial & Professional Services

     234,377         6     283,513         7

Consumer Durables & Apparel

     423,670         10     319,160         8

Consumer Services

     445,059         11     692,533         17

Diversified Financials

     164,198         4     179,548         4

Energy

     420,599         10     434,424         10

Food & Staples Retailing

     —                   18,324         0

Food, Beverage & Tobacco

     18,546         0     —              

Health Care Equipment & Services

     139,918         3     104,205         3

Materials

     348,678         9     297,179         7

Media

     142,010         3     157,443         4

Pharmaceuticals, Biotechnology & Life Sciences

     —                   16,243         0

Retailing

     68,557         2     5,004         0

Semiconductors & Semiconductor Equipment

     5,635         0     —              

Software & Services

     416,041         10     312,505         7

Technology Hardware & Equipment

     129,500         3     137,471         3

Telecommunication Services

     158,652         4     161,951         4

Transportation

     106,251         3     74,813         2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,100,079         100   $ 4,183,447         100
  

 

 

    

 

 

   

 

 

    

 

 

 

As of September 30, 2015, except for Allen Systems Group, Inc., in which we have a senior secured loan investment and an equity/other investment, and Fronton Investor Holdings, LLC, in which we have an equity/other investment, we were not an “affiliated person” of any of our portfolio companies, as defined in the 1940 Act. As of September 30, 2015, we did not “control” any of our portfolio companies, as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if we owned 5% or more of its voting securities.

Our investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of September 30, 2015, we had seventeen unfunded debt investments with aggregate unfunded commitments of $98,466 and one unfunded commitment to purchase up to $550 in shares of preferred stock of Altus Power America Holdings, LLC. As of December 31, 2014, we had ten unfunded debt investments with aggregate unfunded commitments of $101,099 and one unfunded commitment to purchase up to $788 in shares of preferred stock of Altus Power America Holdings, LLC. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise. For additional details regarding our unfunded debt investments, see our unaudited consolidated schedule of investments as of September 30, 2015 and audited consolidated schedule of investments as of December 31, 2014.

 

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Portfolio Asset Quality

In addition to various risk management and monitoring tools, FB Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FB Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

 

Investment
Rating

  

Summary Description

1

   Investment exceeding expectations and/or capital gain expected.

2

   Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.

3

   Performing investment requiring closer monitoring.

4

   Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment.

5

   Underperforming investment with expected loss of interest and some principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015     December 31, 2014  

Investment Rating

   Fair
Value
     Percentage  of
Portfolio
    Fair
Value
     Percentage  of
Portfolio
 

1

   $ 410,172         10   $ 484,332         12

2

     3,076,590         75     3,213,335         77

3

     594,771         15     434,620         10

4

     18,546         0     37,178         1

5

     0         0     13,982         0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,100,079         100   $ 4,183,447         100
  

 

 

    

 

 

   

 

 

    

 

 

 

The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

Results of Operations

Comparison of the Three Months Ended September 30, 2015 and September 30, 2014

Revenues

We generated investment income of $103,668 and $115,917 for the three months ended September 30, 2015 and 2014, respectively, in the form of interest and fees earned on senior secured loans (first and second lien), senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $96,746 and $105,937 of cash income earned as well as $6,922 and $9,980 in non-cash portions relating to accretion of discount and PIK interest, for the three months ended September 30, 2015 and 2014, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.

 

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During the three months ended September 30, 2015 and 2014, we generated $100,378 and $104,823, respectively, of interest income, which represented 96.8% and 90.4%, respectively, of total investment income. The level of interest income we receive is generally related to the balance of income-producing investments, multiplied by the weighted average yield of our investments.

The decrease in interest income during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was due primarily to the reversal of a portion of accrued interest on our Caesars Entertainment Operating Co., Inc., or CEOC, first lien senior secured loan investment resulting from our entering into a restructuring support agreement with CEOC and the other parties to the agreement during the three months ended September 30, 2015, pursuant to which holders of CEOC first lien senior secured loans agreed to accept an interest rate that was lower than what they were contractually entitled to under the terms of the loans.

During the three months ended September 30, 2015 and 2014, we generated $3,290 and $10,606, respectively, of fee income, which represented 3.2% and 9.1%, respectively, of total investment income. Fee income is transaction based, and typically consists of prepayment fees, structuring fees, amendment and consent fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of prepayments and other events at existing portfolio companies resulting in such fees.

The decrease in fee income during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was primarily due to reduced repayment and new direct origination activity during the three months ended September 30, 2015.

During the three months ended September 30, 2015 and 2014, we generated $0 and $488, respectively, of dividend income.

Expenses

Our net expenses were $39,902 and $55,814 for the three months ended September 30, 2015 and 2014, respectively. Our operating expenses include base management fees attributed to FB Advisor of $18,852 and $20,000, for the three months ended September 30, 2015 and 2014, respectively. Our expenses also include administrative services expenses attributed to FB Advisor of $900 and $1,202 for the three months ended September 30, 2015 and 2014, respectively.

FB Advisor is eligible to receive incentive fees based on our performance. During the three months ended September 30, 2015, we accrued a subordinated incentive fee on income of $12,485. As of September 30, 2015, a subordinated incentive fee on income of $12,490 was payable to FB Advisor. During the three months ended September 30, 2014, we accrued a subordinated incentive fee on income of $14,794. During the three months ended September 30, 2015 and 2014, we reversed capital gains incentive fees of $13,811 and $910, respectively, based on the performance of our portfolio. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for additional information about how the incentive fees are calculated.

We recorded interest expense of $19,352 and $18,940 for the three months ended September 30, 2015 and 2014, respectively, in connection with our financing arrangements. For the three months ended September 30, 2014, $2,226 of this amount related to the accelerated amortization of remaining deferred financing costs upon the termination of the Arch Street credit facility. The fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $261 and $172 for the three months ended September 30, 2015 and 2014, respectively. We incurred fees and expenses with our stock transfer agent of $30 and $4 for the three months ended September 30, 2015 and 2014, respectively. Fees for our board of directors were $232 and $266 for the three months ended September 30, 2015 and 2014, respectively.

 

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Our other general and administrative expenses totaled $1,601 and $1,346 for the three months ended September 30, 2015 and 2014, respectively, and consisted of the following:

 

     Three Months Ended
September 30,
 
         2015              2014      

Expenses associated with our independent audit and related fees

   $ 114       $ 102   

Compensation of our chief compliance officer(1)

     —           25   

Legal fees

     300         294   

Printing fees

     401         77   

Other

     786         848   
  

 

 

    

 

 

 

Total

   $ 1,601       $ 1,346   
  

 

 

    

 

 

 

 

(1) On April 1, 2015, James F. Volk was appointed as our chief compliance officer. Prior to that date, we had contracted with Vigilant Compliance, LLC to provide the services of Salvatore Faia as our chief compliance officer. Mr. Volk is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity.

During the three months ended September 30, 2015 and 2014, the ratio of our expenses to our average net assets was 1.69% and 2.28%, respectively. Our ratio of expenses to our average net assets during the three months ended September 30, 2015 and 2014 includes $19,352 and $18,940, respectively, related to interest expense and $(1,326) and $13,884, respectively, related to accruals for incentive fees. Without such expenses, our ratio of expenses to average net assets would have been 0.92% and 0.94% for the three months ended September 30, 2015 and 2014, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in amounts outstanding under our financing arrangements and benchmark interest rates such as LIBOR, among other factors. The lower ratio of expenses to average net assets, excluding incentive fees and interest expense, during the three months ended September 30, 2015, compared to the three months ended September 30, 2014, can primarily be attributed to a decline in management fees during the three months ended September 30, 2015.

Net Investment Income

Our net investment income totaled $63,766 ($0.26 per share) and $60,103 ($0.25 per share) for the three months ended September 30, 2015 and 2014, respectively. The increase in net investment income can be attributed to, among other things, the decrease in incentive fee accruals offsetting the reduction in investment income, for the three months ended September 30, 2015, in each case, as described above.

Net Realized Gains or Losses

We sold investments and received principal repayments of $91,014 and $38,653, respectively, during the three months ended September 30, 2015, from which we realized a net loss of $21,246, due primarily to the sale of one of our subordinated debt investments. We also realized a net gain of $266 from settlements on foreign currency during the three months ended September 30, 2015. We sold investments and received principal repayments of $18,846 and $329,512, respectively, during the three months ended September 30, 2014, from which we realized a net gain of $5,421. We also realized a loss of $338 from settlements on foreign currency during the three months ended September 30, 2014.

 

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Net Change in Unrealized Appreciation (Depreciation) on Investments and Unrealized Gain (Loss) on Foreign Currency

For the three months ended September 30, 2015, the net change in unrealized appreciation (depreciation) on investments totaled $(47,628) and the net change in unrealized gain (loss) on foreign currency totaled $(437). For the three months ended September 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $(9,648) and the net change in unrealized gain (loss) on foreign currency totaled $61.

The net change in unrealized depreciation during the three months ended September 30, 2015 was due primarily to unrealized depreciation in one of our senior secured bond investments and one of our warrant investments, as well as unrealized depreciation across the energy investments in our portfolio due primarily to market volatility. In addition, increased financial market volatility during the three months ended September 30, 2015 generally contributed to weaker secondary prices and wider clearing yields across the corporate credit markets, which in turn contributed to unrealized depreciation across our debt investments. This unrealized depreciation was partially offset by appreciation in our equity investments.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended September 30, 2015, the net decrease in net assets resulting from operations was $5,279 ($(0.02) per share) compared to a net increase in net assets resulting from operations of $55,599 ($0.23 per share) during the three months ended September 30, 2014.

Comparison of the Nine Months Ended September 30, 2015 and September 30, 2014

Revenues

We generated investment income of $360,034 and $351,434 for the nine months ended September 30, 2015 and 2014, respectively, in the form of interest and fees earned on senior secured loans (first and second lien), senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $336,840 and $320,875 of cash income earned as well as $23,194 and $30,559 in non-cash portions relating to accretion of discount and PIK interest, for the nine months ended September 30, 2015 and 2014, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.

During the nine months ended September 30, 2015 and 2014, we generated $320,808 and $311,630, respectively, of interest income, which represented 89.1% and 88.7%, respectively, of total investment income. The level of interest income we receive is generally related to the balance of income-producing investments, multiplied by the weighted average yield of our investments.

During the nine months ended September 30, 2015 and 2014, we generated $33,707 and $39,141, respectively, of fee income, which represented 9.4% and 11.1%, respectively, of total investment income. Fee income is transaction-based, and typically consists of prepayment fees, structuring fees, amendment and consent fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of prepayments and other events at existing portfolio companies resulting in such fees.

The increase in interest and fee income in the aggregate is due primarily to increased prepayment activity during the nine months ended September 30, 2015.

During the nine months ended September 30, 2015 and 2014, we generated $5,519 and $663, respectively, of dividend income. The increase in dividend income was due primarily to a one-time dividend paid in respect of one of our investments during the nine months ended September 30, 2015.

 

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Expenses

Our net expenses were $151,095 and $177,481 for the nine months ended September 30, 2015 and 2014, respectively. Our operating expenses include base management fees attributed to FB Advisor of $56,993 and $62,229, net of waivers by FB Advisor of base management fees to which it was otherwise entitled of $0 and $2,837, for the nine months ended September 30, 2015 and 2014, respectively. Our expenses also include administrative services expenses attributed to FB Advisor of $2,773 and $3,591 for the nine months ended September 30, 2015 and 2014, respectively.

FB Advisor is eligible to receive incentive fees based on our performance. During the nine months ended September 30, 2015, we accrued a subordinated incentive fee on income of $47,661. As of September 30, 2015, a subordinated incentive fee on income of $12,490 was payable to FB Advisor. During the nine months ended September 30, 2014, we accrued a subordinated incentive fee on income of $45,033. During the nine months ended September 30, 2015, we reversed capital gains incentive fees of $18,418 based on the performance of our portfolio. During the nine months ended September 30, 2014, we accrued capital gains incentive fees of $6,194 based on the performance of our portfolio, of which $2,714 was based on realized gains and $3,480 was based on unrealized gains. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for additional information about how the incentive fees are calculated.

We recorded interest expense of $55,699 and $45,769 for the nine months ended September 30, 2015 and 2014, respectively, in connection with our financing arrangements. For the nine months ended September 30, 2014, $2,226 of this amount related to the accelerated amortization of remaining deferred financing costs upon the termination of the Arch Street credit facility. The fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $822 and $824 for the nine months ended September 30, 2015 and 2014, respectively. We incurred fees and expenses with our stock transfer agent of $140 and $1,001 for the nine months ended September 30, 2015 and 2014, respectively. Fees for our board of directors were $688 and $795 for the nine months ended September 30, 2015 and 2014, respectively.

Our other general and administrative expenses totaled $4,737 and $7,002 for the nine months ended September 30, 2015 and 2014, respectively, and consisted of the following:

 

     Nine Months Ended
September 30,
 
         2015              2014      

Expenses associated with our independent audit and related fees

   $ 373       $ 415   

Compensation of our chief compliance officer(1)

     25         74   

Legal fees

     973         1,813   

Printing fees

     599         1,963   

Other

     2,767         2,737   
  

 

 

    

 

 

 

Total

   $ 4,737       $ 7,002   
  

 

 

    

 

 

 

 

(1) On April 1, 2015, James F. Volk was appointed as our chief compliance officer. Prior to that date, we had contracted with Vigilant Compliance, LLC to provide the services of Salvatore Faia as our chief compliance officer. Mr. Volk is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity.

During the nine months ended September 30, 2015 and 2014, the ratio of our expenses to our average net assets was 6.36% and 6.99%, respectively. Our ratio of expenses to our average net assets during the nine months ended September 30, 2015 and 2014 includes $55,699 and $45,769, respectively, related to interest expense and $29,243 and $51,227, respectively, related to accruals for incentive fees. Without such expenses, our ratio of expenses to average net assets would have been 2.79% and 3.23% for the nine months ended September 30, 2015

 

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and 2014, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in amounts outstanding under our financing arrangements and benchmark interest rates such as LIBOR, among other factors. The lower ratio of expenses to average net assets, excluding incentive fees and interest expense, during the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, can primarily be attributed to a decline in management fees during the nine months ended September 30, 2015, as well as one-time costs associated with the listing of our shares of common stock on the NYSE incurred during the nine months ended September 30, 2014.

Net Investment Income

Our net investment income totaled $208,939 ($0.86 per share) and $173,953 ($0.69 per share) for the nine months ended September 30, 2015 and 2014, respectively. The increase in net investment income can be attributed to, among other things, the increase in revenues from interest and dividend income, and the decrease in operating expenses, for the nine months ended September 30, 2015, in each case, as described above.

Net Realized Gains or Losses

We sold investments and received principal repayments of $430,547 and $683,684, respectively, during the nine months ended September 30, 2015, from which we realized a net loss of $42,135. We also realized a net loss of $631 from settlements on foreign currency during the nine months ended September 30, 2015. We sold investments and received principal repayments of $691,863 and $832,027, respectively, during the nine months ended September 30, 2014, from which we realized a net gain of $25,959. We also realized a net loss of $243 from settlements on foreign currency during the nine months ended September 30, 2014.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Unrealized Gain (Loss) on Foreign Currency

For the nine months ended September 30, 2015, the net change in unrealized appreciation (depreciation) on investments totaled $(51,945) and the net change in unrealized gain (loss) on foreign currency totaled $2,625. For the nine months ended September 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $5,094 and the net change in unrealized gain (loss) on foreign currency totaled $207. The net change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2015 was primarily driven by a general widening of credit spreads.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the nine months ended September 30, 2015, the net increase in net assets resulting from operations was $116,853 ($0.48 per share), compared to a net increase in net assets resulting from operations of $204,970 ($0.81 per share) during the nine months ended September 30, 2014.

Financial Condition, Liquidity and Capital Resources

Overview

As of September 30, 2015, we had $85,935 in cash and foreign currency, which we held in a custodial account, and $393,188 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of September 30, 2015, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of September 30, 2015, we had seventeen debt investments with aggregate unfunded commitments of $98,466 and one equity investment with an unfunded commitment of $550. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

 

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We currently generate cash primarily from cash flows from fees, interest and dividends earned from our investments, as well as principal repayments and proceeds from sales of our investments. To seek to enhance our returns, we also employ leverage as market conditions permit and at the discretion of FB Advisor, but in no event will leverage employed exceed 50% of the value of our assets, as required by the 1940 Act. See “Financing Arrangements.”

Prior to investing in securities of portfolio companies, we invest the cash received from fees, interest and dividends earned from our investments and principal repayments and proceeds from sales of our investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.

Financing Arrangements

The following table presents a summary of information with respect to our outstanding financing arrangements as of September 30, 2015:

 

Arrangement

  Type of Arrangement   Rate     Amount
Outstanding
    Amount
Available
    Maturity Date

Broad Street Credit Facility

  Revolving Credit Facility     L+1.50     —        $ 125,000      December 18, 2015

ING Credit Facility

  Revolving Credit Facility     L+2.50   $ 31,812 (1)    $ 268,188      April 3, 2018

JPM Facility

  Repurchase Agreement     3.25   $ 800,000        —        April 15, 2017

4.000% Notes due 2019

  Unsecured Notes     4.00   $ 400,000        —        July 15, 2019

4.250% Notes due 2020

  Unsecured Notes     4.25   $ 325,000        —        January 15, 2020

4.750% Notes due 2022

  Unsecured Notes     4.75   $ 275,000        —        May 15, 2022

 

(1) Amount includes borrowing in U.S. dollars and Euros. Euro balance outstanding of €28,500 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.12 as of September 30, 2015 to reflect total amount outstanding in U.S. dollars.

Our average borrowings and weighted average interest rate, including the effect of non-usage fees, for the nine months ended September 30, 2015 were $1,882,772 and 3.71%, respectively. As of September 30, 2015, our weighted average effective interest rate on borrowings, including the effect of non-usage fees was 3.96%.

For additional information regarding our financing arrangements, see Note 8 to our unaudited consolidated financial statements included herein.

RIC Status and Distributions

We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, make distributions of an amount at least equal to 90% of our investment company taxable income, determined without regard to any deduction for distributions paid, each tax year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the tax year or the due date of the tax return, including extensions, distributions paid up to one year after the current taxable year can be carried back to the prior taxable year for determining the distributions paid in such taxable year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses (adjusted for certain ordinary losses), or capital gain net income, for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gain net income for preceding years that were not distributed during such years and on which we paid no U.S. federal income tax. Any distribution declared by us in October, November or December of any calendar year, payable to

 

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stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been received by our U.S. stockholders on December 31 of the calendar year in which the distribution was declared. We can offer no assurance that we will achieve results that will permit us to pay any cash distributions. If we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

Following commencement of our investment operations, we declared our first distribution on January 29, 2009. Effective January 1, 2015 and subject to applicable legal restrictions and the sole discretion of our board of directors, we intend to authorize, declare and pay regular cash distributions on a quarterly basis. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.

During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the nine months ended September 30, 2015 or 2014 represented a return of capital.

We intend to continue to make our regular distributions in the form of cash, out of assets legally available for distribution, except for those stockholders who receive their distributions in the form of shares of our common stock under the new DRP. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.

The following table reflects the cash distributions per share that we have declared on our common stock during the nine months ended September 30, 2015 and 2014:

 

     Distribution  

For the Three Months Ended,

   Per Share      Amount  

Fiscal 2014

     

March 31, 2014

   $ 0.2160       $ 56,237   

June 30, 2014

   $ 0.2228       $ 56,696   

September 30, 2014(1)

   $ 0.3228       $ 77,316   

Fiscal 2015

     

March 31, 2015

   $ 0.2228       $ 53,706   

June 30, 2015

   $ 0.2228       $ 53,839   

September 30, 2015

   $ 0.2228       $ 53,966   

 

(1) On July 1, 2014, our board of directors declared a special cash distribution of $0.10 per share, which was paid on August 15, 2014 to stockholders of record as of the close of business on July 31, 2014.

On October 29, 2015, our board of directors declared a regular quarterly cash distribution of $0.22275 per share, which will be paid on or about January 5, 2016 to stockholders of record on December 22, 2015. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.

Historically, we had an “opt in” distribution reinvestment plan for our stockholders, which terminated upon the listing of our shares of common stock on the NYSE. The final distribution reinvestment under the old DRP

 

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was made in connection with the regular monthly cash distribution paid on March 31, 2014 to stockholders of record as of the close of business on March 28, 2014. Under the old DRP, if we made a cash distribution, our stockholders received distributions in cash unless they specifically “opted in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock. On May 23, 2014, we adopted an “opt out” distribution reinvestment plan, which was effective June 2, 2014. The new DRP was first implemented in connection with the regular monthly cash distribution paid on July 2, 2014 to stockholders of record as of the close of business on June 24, 2014. Pursuant to the new DRP, we will reinvest all cash dividends or distributions declared by our board of directors on behalf of stockholders who do not elect to receive their distributions in cash. As a result, if our board of directors declares a distribution, then stockholders who have not elected to “opt out” of the new DRP will have their distributions automatically reinvested in additional shares of our common stock.

With respect to each distribution pursuant to the new DRP, we reserve the right to either issue new shares of common stock or purchase shares of common stock in the open market in connection with implementation of the new DRP. Unless in our sole discretion, we otherwise direct the plan administrator, (A) if the per share market price (as defined in the new DRP) is equal to or greater than the estimated net asset value per share (rounded up to the nearest whole cent) of our common stock on the payment date for the distribution, then we will issue shares of common stock at the greater of (i) net asset value per share of common stock or (ii) 95% of the market price; or (B) if the market price is less than the net asset value per share, then, in our sole discretion, (i) shares of common stock will be purchased in open market transactions for the accounts of participants to the extent practicable, or (ii) we will issue shares of common stock at net asset value per share. Pursuant to the terms of the new DRP, the number of shares of common stock to be issued to a participant will be determined by dividing the total dollar amount of the distribution payable to a participant by the price per share at which we issue such shares; provided, however, that shares purchased in open market transactions by the plan administrator will be allocated to a participant based on the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market.

If a stockholder receives distributions in the form of common stock pursuant to the new DRP, such stockholder generally will be subject to the same federal, state and local tax consequences as if it elected to receive distributions in cash. If our common stock is trading at or below net asset value, a stockholder receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of cash that they would have received if they had elected to receive the distribution in cash. If our common stock is trading above net asset value, a stockholder receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of the fair market value of our common stock. The stockholder’s basis for determining gain or loss upon the sale of common stock received in a distribution will be equal to the total dollar amount of the distribution payable to the stockholder. Any stock received in a distribution will have a holding period for tax purposes commencing on the day following the day on which the shares of common stock are credited to the stockholder’s account.

We may fund our cash distributions to stockholders from any sources of funds legally available to us, including proceeds from the sale of shares of our common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets and dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies. We have not established limits on the amount of funds we may use from available sources to make distributions. There can be no assurance that we will be able to pay distributions at a specific rate or at all.

 

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The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the nine months ended September 30, 2015 and 2014:

 

     Nine Months Ended September 30,  
     2015     2014  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     127,414         79     118,620         62

Short-term capital gains proceeds from the sale of assets

     —           —          39,835         21

Long-term capital gains proceeds from the sale of assets

     34,097         21     31,794         17

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Distributions on account of preferred and common equity

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 161,511         100   $ 190,249         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the nine months ended September 30, 2015 and 2014, 93.6% and 91.3%, respectively, of our gross investment income was attributable to cash income earned, 2.2% and 5.7%, respectively, was attributable to non-cash accretion of discount and 4.2% and 3.0%, respectively, was attributable to PIK interest.

Our net investment income on a tax basis for the nine months ended September 30, 2015 and 2014, was $164,390 and $168,913, respectively. As of September 30, 2015, the Company had $155,002 of undistributed net investment income and $14,506 of accumulated capital losses on a tax basis. As of December 31, 2014, the Company had $152,123 of undistributed net investment income and realized gains on a tax basis.

See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income to our tax-basis net investment income for the nine months ended September 30, 2015 and 2014.

Critical Accounting Policies

Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.

Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FB

Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs,

 

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including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party valuation services.

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:

 

   

our quarterly fair valuation process begins with FB Advisor’s management team reviewing and documenting valuations of each portfolio company or investment, which valuations may be obtained from an independent third-party valuation service, if applicable;

 

   

FB Advisor’s management team then provides the valuation committee with the preliminary valuations for each portfolio company or investment;

 

   

preliminary valuations are then discussed with the valuation committee;

 

   

the valuation committee reviews the preliminary valuations and FB Advisor’s management team, together with our independent third-party valuation services, if applicable, supplement the preliminary valuations to reflect any comments provided by the valuation committee;

 

   

following its review, the valuation committee will recommend that our board of directors approve our fair valuations; and

 

   

our board of directors discusses the valuations and determines the fair value of each such investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FB Advisor, the valuation committee and any independent third-party valuation services, if applicable.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, our board of directors may use any approved independent third-party pricing or valuation services. However, our board of directors is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information obtained from FB Advisor or any approved independent third-party valuation or pricing service that our board of directors deems to be reliable in determining fair value under the circumstances. Below is a description of factors that FB Advisor’s management team, any approved independent third-party valuation services and our board of directors may consider when determining the fair value of our investments.

Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that may be considered include the borrower’s ability to adequately service its debt, the fair market value of the borrower in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.

 

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For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its determination of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

FB Advisor’s management team, any approved independent third-party valuation services and our board of directors may also consider private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. FB Advisor’s management team, any approved independent third-party valuation services and our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the smaller size of portfolio companies relative to comparable firms, as well as such other factors as our board of directors, in consultation with FB Advisor’s management team and any approved independent third-party valuation services, if applicable, may consider relevant in assessing fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of directors subsequently values these warrants or other equity securities received at their fair value.

The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process. Our board of directors has delegated day-to-day responsibility for implementing our valuation policy to FB Advisor’s management team, and has authorized FB Advisor’s management team to utilize independent third-party valuation and pricing services that have been approved by our board of directors. The valuation committee is responsible for overseeing FB Advisor’s implementation of the valuation process.

Our investments as of September 30, 2015 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-three senior secured loan investments, two senior secured bond investments, thirteen subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features and other relevant terms of the debt. Except as described below, all of our equity/other investments were also valued by the same independent valuation firms, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One equity investment, which wase traded on an active public market, was valued at its closing price as of September 30, 2015. Two senior secured loan investments, which were newly issued and purchased near September 30, 2015, were valued at cost as our board of directors determined that the cost of each such investment was the best indication of its fair value. Except as described above, we valued our other investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.

 

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Our investments as of December 31, 2014 consisted primarily of debt investments that were acquired directly from the issuer. Forty-one senior secured loan investments, one senior secured bond investment, eleven subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One equity investment, which is traded on an active public market, was valued at its closing price as of December 31, 2014. One senior secured loan investment and two collateralized loan securities, which were newly issued and purchased near December 31, 2014, were valued at cost as our board of directors determined that the cost of each such investment was the best indication of its fair value. Except as described above, we valued our other investments, including three equity/other investments, by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.

We periodically benchmark the bid and ask prices we receive from the third-party pricing services and/or dealers, as applicable, against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where our board of directors otherwise determines that the use of such other methods is appropriate. We periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. The valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation policy.

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Our policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. We consider many factors relevant to an investment when placing it on or removing it from non-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. If there is reasonable doubt that we will receive any previously accrued interest, then the interest income will be written-off. Payments received on non-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest. Non-accrual investments may be restored to accrual status when principal and interest become current and are likely to remain current based on our judgment.

Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Structuring and other non-recurring upfront fees are recorded as fee income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.

 

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Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.

Capital Gains Incentive Fee

Pursuant to the terms of each of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While none of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement or the July 2014 investment advisory agreement include or contemplate the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, we changed our methodology for accruing for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FB Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Subordinated Income Incentive Fee

Pursuant to the terms of each of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the 2008 investment advisory and administrative services agreement, which was calculated and payable quarterly in arrears, equaled 20.0% of our “pre-incentive fee net investment income” for the immediately preceding quarter and was subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the 2008 investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor did not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeded the hurdle rate of 2.0%. Once our pre-incentive fee net investment income in any quarter exceeded the hurdle rate, FB Advisor was entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equaled 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor received 20.0% of pre-incentive fee net investment income. Under the April 2014 investment advisory agreement, the subordinated incentive fee on income was calculated in the same manner, except that the hurdle rate used to compute the subordinated incentive fee on income was based on the value of our net assets rather than adjusted capital.

Under the July 2014 investment advisory agreement, the hurdle rate, expressed as a rate of return on the value of our net assets, was reduced from 2.0% to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FB Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment

 

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income for such quarter exceeds the hurdle rate of 1.875%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of net assets. Thereafter, FB Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

Under both the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the subordinated incentive fee on income is subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the applicable quarterly hurdle rate, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of our pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the nine months ended September 30, 2015 and 2014, we did not incur any interest or penalties.

Contractual Obligations

We have entered into agreements with FB Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the July 2014 investment advisory agreement are equal to (a) an annual base management fee based on the average value of our gross assets and (b) an incentive fee based on our performance. FB Advisor, and to the extent it is required to provide such services, GDFM, are reimbursed for administrative expenses incurred on our behalf. See Note 4 to our unaudited consolidated financial statements included herein and “—Related Party Transactions—Compensation of the Investment Adviser” for a discussion of these agreements and for the amount of fees and expenses accrued under these agreements during the nine months ended September 30, 2015 and 2014.

 

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A summary of our significant contractual payment obligations for the repayment of outstanding indebtedness at September 30, 2015 is as follows:

 

     Payments Due By Period  
     Total      Less than 1 year      1-3 years      3-5 years      More than 5 years  

Broad Street Credit Facility(1)

     —           —           —           —           —     

ING Credit Facility(2)

   $ 31,812         —         $ 31,812         —           —     

JPM Facility(3)

   $ 800,000       $ 800,000         —           —           —     

4.000% Notes due 2019(4)

   $ 400,000         —           —         $ 400,000         —     

4.250% Notes due 2020(5)

   $ 325,000         —           —         $ 325,000         —     

4.750% Notes due 2022(6)

   $ 275,000         —           —           —         $ 275,000   

 

(1) At September 30, 2015, $125,000 remained unused under the Broad Street credit facility.

 

(2) At September 30, 2015, $268,188 remained unused under the ING credit facility. Amounts outstanding under the ING credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on April 3, 2018. Amount includes borrowing in U.S. dollars and Euros. Euro balance outstanding of €28,500 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.12 as of September 30, 2015 to reflect total amount outstanding in U.S. dollars.

 

(3) At September 30, 2015, no amounts remained unused under the JPM Facility. Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. As of September 30, 2015, the final repurchase transaction was scheduled to occur no later than April 15, 2017.

 

(4) All amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 15, 2019.

 

(5) All amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on January 15, 2020.

 

(6) All amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 15, 2022.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Recently Issued Accounting Standards

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest to simplify the presentation of debt issuance costs in the financial statements. Under existing guidance, debt issuance costs are recognized as a deferred charge and presented as an asset on the balance sheet. The amendments to the guidance require that debt issuance costs related to a recognized liability for indebtedness be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. In August 2015, the FASB issued Accounting Standards Update No. 2015-15, Interest—Imputation of Interest to update the guidance to include SEC staff views regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs is not affected by the amendments to the guidance. The amendments to the FASB codification guidance are to be applied retrospectively with applicable disclosures for a change in accounting principle upon transition. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2015. Early application by public entities is permitted. We are currently assessing the impact of this guidance on our consolidated financial statements.

 

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Related Party Transactions

Compensation of the Investment Adviser

Pursuant to the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, FB Advisor is entitled to an annual base management fee based on the average value of our gross assets and an incentive fee based on our performance. Pursuant to the administration agreement, we also reimburse FB Advisor and GDFM for expenses necessary to perform services related to our administration and operations, including FB Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings providing administrative services to us on behalf of FB Advisor.

The following table describes the fees and expenses we accrued under the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement, the July 2014 investment advisory agreement and the administration agreement, as applicable, during the three and nine months ended September 30, 2015 and 2014:

 

            Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Related Party

 

Source Agreement

 

Description

  2015     2014     2015     2014  

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and July 2014 Investment Advisory Agreement   Base Management Fee(1)   $ 18,852      $ 20,000      $ 56,993      $ 62,229   

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and July 2014 Investment Advisory Agreement   Capital Gains Incentive Fee(2)   $ (13,811   $ (910   $ (18,418   $ 6,194   

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and July 2014 Investment Advisory Agreement   Subordinated Incentive Fee on Income(3)   $ 12,485      $ 14,794      $ 47,661      $ 45,033   

FB Advisor

  2008 Investment Advisory and Administrative Services Agreement, April 2014 Investment Advisory Agreement and Administration Agreement   Administrative Services Expenses(4)   $ 900      $ 1,202      $ 2,773      $ 3,591   

 

(1) FB Advisor agreed, effective April 1, 2014, to waive a portion of the base management fee to which it was entitled under the April 2014 investment advisory agreement so that the fee received equaled 1.75% of the average value of our gross assets. For the nine months ended September 30, 2014, amounts shown are net of waivers of $2,837. During the nine months ended September 30, 2015 and 2014, $57,708 and $64,920, respectively, in base management fees were paid to FB Advisor. As of September 30, 2015, $18,845 in base management fees were payable to FB Advisor.

 

(2) During the nine months ended September 30, 2015 and 2014, we accrued capital gains incentive fees of $(18,418) and $6,194, respectively, based on the performance of our portfolio. As of September 30, 2015 and December 31, 2014, we had accrued $2,657 and $21,075, respectively, in capital gains incentive fees, all of which were based on unrealized gains, and none of which is payable unless and until those gains are actually realized. We paid FB Advisor no capital gains incentive fees during the nine months ended September 30, 2015.

 

(3) During the nine months ended September 30, 2015 and 2014, $48,260 and $44,542, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of September 30, 2015, a subordinated incentive fee on income of $12,490 was payable to FB Advisor.

 

(4)

During the nine months ended September 30, 2015 and 2014, $2,318 and $2,739, respectively, of administrative services expenses related to the allocation of costs of administrative personnel for services

 

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  rendered to us by FB Advisor and the remainder related to other reimbursable expenses. We paid $3,782 and $3,756, respectively, in administrative services expenses to FB Advisor during the nine months ended September 30, 2015 and 2014.

See Note 4 to our unaudited consolidated financial statements included herein for additional information regarding our agreements with FB Advisor and our other related party transactions and relationships, including our potential conflicts of interest, exemptive relief order and our trademark license agreement with Franklin Square Holdings.

 

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Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of September 30, 2015, 68.2% of our portfolio investments (based on fair value) paid variable interest rates, 22.0% paid fixed interest rates, 3.6% were income producing equity or other investments, and the remaining 6.2% consisted of non-income producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FB Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant to the terms of the Broad Street credit facility and the ING credit facility, Broad Street and we, respectively, borrow at a floating rate based on a benchmark interest rate. Under the terms of the agreements governing the terms of the JPM Facility, Race Street pays interest to JPM at a fixed rate. Under the indenture governing the 4.000% notes, the 4.250% notes and the 4.750% notes, we pay interest to the holders of such notes at a fixed rate. To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding, or financing arrangements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the composition of our investment portfolio, including the accrual status of our investments, and our financing arrangements in effect as of September 30, 2015 (dollar amounts are presented in thousands):

 

Basis Point Change in Interest Rates

   Increase
(Decrease)
in Interest
Income(1)
    Increase
(Decrease)
in Interest
Expense
    Increase
(Decrease)  in
Net Interest
Income
    Percentage
Change in  Net
Interest Income
 

Down 35 basis points

   $ (631   $ (107   $ (524     (0.2 )% 

No change

     —          —          —          —     

Up 100 basis points

     6,963        307        6,656        2.0

Up 300 basis points

     61,970        920        61,050        18.1

Up 500 basis points

     118,639        1,533        117,106        34.7

 

(1) Assumes no defaults or prepayments by portfolio companies over the next twelve months.

We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the nine months ended September 30, 2015 and 2014, we did not engage in interest rate hedging activities.

In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

 

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Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015.

Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three month period ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014 and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The table below provides information concerning purchases of our shares of common stock by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) promulgated under the Exchange Act during the period ended September 30, 2015. Dollar amounts in the table below and the related notes are presented in thousands, except for share and per share amounts.

 

Period

   Total Number of
Shares Purchased
     Average
Price Paid
per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)
     Maximum Number (or
Approximate Dollar
Value) of

Shares that May Yet
Be Purchased Under
the Plans or Programs(2)
 

July 1 to July 31, 2015

     18,237       $ 9.7469         18,237       $ 3,882   

August 1 to August 31, 2015

     58,752       $ 9.6794         58,752       $ 3,254   

September 1 to September 30, 2015

     32,100       $ 9.2813         32,100       $ 2,956   
  

 

 

    

 

 

    

 

 

    

 

 

 
     109,089       $ 9.5735         109,089       $ 2,956   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) On March 16, 2015, Franklin Square Holdings entered into a written trading plan in accordance with Rule 10b5-1 and Rule 10b-18 promulgated under the Exchange Act, or the FSH Trading Plan, to facilitate the purchase of shares of our common stock pursuant to the terms and conditions of such plan. The FSH Trading Plan provides for the purchase of up to $4,000 worth of shares of our common stock, subject to the limitations provided therein. The FSH Trading Plan is currently scheduled to expire on December 31, 2015.

 

(2) The approximate dollar value of shares that could be purchased under the FSH Trading Plan during the applicable period does not reflect any brokerage commissions associated with shares that have not yet been purchased.

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

 

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Item 6. Exhibits

 

3.1    Second Articles of Amendment and Restatement of FS Investment Corporation. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 16, 2014.)
3.2    Second Amended and Restated Bylaws of FS Investment Corporation. (Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on April 16, 2014.)
4.1    Distribution Reinvestment Plan, effective as of June 2, 2014. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 23, 2014.)
4.2    Indenture, dated as of July 14, 2014, by and between the Company and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report in Form 10-Q for the quarterly period ended June 30, 2014 filed on August 14, 2014.)
4.3    First Supplemental Indenture, dated as of July 14, 2014, relating to the 4.000% Notes due 2019, by and between the Company and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 15, 2014.)
4.4    Form of 4.000% Notes due 2019. (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 15, 2014.)
4.5    Second Supplemental Indenture, dated as of December 3, 2014, relating to the 4.250% Notes due 2020, by and between the Company and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 3, 2014.)
4.6    Form of 4.250% Notes due 2020. (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 3, 2014.)
4.7    Third Supplemental Indenture, dated as of April 30, 2015, relating to the 4.750% Notes due 2022, by and between the Company and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on April 30, 2015.)
4.8    Form of 4.750% Notes due 2022. (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on April 30, 2015.)
10.1    Amended and Restated Investment Advisory Agreement, dated as of April 16, 2014, by and between FS Investment Corporation and FB Income Advisor, LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 16, 2014.)
10.2    Amended and Restated Investment Advisory Agreement, dated as of July 17, 2014, by and between FS Investment Corporation and FB Income Advisor, LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 22, 2014.)
10.3    Administration Agreement, dated as of April 16, 2014, by and between FS Investment Corporation and FB Income Advisor, LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 16, 2014.)
10.4    Investment Sub-advisory Agreement, dated as of April 13, 2008, by and between FB Income Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on June 19, 2008.)
10.5    Investment Advisory and Administrative Services Agreement, dated as of February 12, 2008, by and between the Company and FB Income Advisor, LLC. (Incorporated by reference to Exhibit (g) filed with the Company’s registration statement on Form N-2 (File No. 333-149374) filed on February 25, 2008.)
10.6    Custodian Agreement, dated as of November 14, 2011, by and between the Company and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.9 filed with the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 filed on November 14, 2011.)

 

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10.7    Amended and Restated Credit Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 1, 2011.)
10.8    Fourth Amendment to Credit Agreement, dated as of March 23, 2012, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 27, 2012.)
10.9    Fifth Amendment to Credit Agreement, dated as of March 22, 2013, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 28, 2013.)
10.10    Sixth Amendment to Credit Agreement, dated as of December 20, 2013, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 24, 2013.)
10.11    Seventh Amendment to Credit Agreement, dated as of December 18, 2014, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 18, 2014.)
10.12    Asset Contribution Agreement, dated as of March 10, 2010, by and between the Company and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 16, 2010.)
10.13    First Amendment to Asset Contribution Agreement, dated as of June 17, 2010, by and between the Company and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 19, 2010.)
10.14    Investment Management Agreement, dated as of March 10, 2010, by and between the Company and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 16, 2010.)
10.15    Amended and Restated Security Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 1, 2011.)
10.16    Amended and Restated Investment Management Agreement, dated as of August 29, 2012, by and between the Company and Arch Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.17    Amended and Restated Asset Transfer Agreement, dated as of September 26, 2012, by and between the Company and Locust Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.18    Loan Agreement, dated as of August 29, 2012 and amended as of March 31, 2014, by and between Arch Street Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 4, 2014.)
10.19    Account Control Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.20    Security Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)

 

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10.21    Agreement and Plan of Merger, dated as of August 29, 2012, by and among Arch Street Funding LLC, Benjamin Loan Funding LLC, Benjamin 2 Loan Funding LLC, Citibank, N.A. and Citibank Financial Products Inc. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.22    Amended and Restated Indenture, dated as of September 26, 2012, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.23    Supplemental Indenture No. 1, dated as of April 23, 2013, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.24    Locust Street Funding LLC Class A Floating Rate Secured Note, due 2021. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.25    Locust Street Funding LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.26    Locust Street Funding LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.27    TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of September 26, 2012. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.28    TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of April 23, 2013. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.29    Amended and Restated Confirmation, dated as of February 15, 2012, by and between Race Street Funding LLC and JPMorgan Chase Bank, N.A., London Branch. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.30    Revolving Credit Agreement, dated as of July 21, 2011, by and between the Company and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on July 27, 2011.)
10.31    Amendment to Credit Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Company. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.32    Asset Transfer Amendment, dated as of September 26, 2012, by and between the Company and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.33    Amendment Agreement, dated as of October 24, 2013, by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC. (Incorporated by references to Exhibit 10.1 to the Company’s Current Report in Form 8-K filed on October 28, 2013.)
10.34    Amended and Restated Collateral Management Agreement, dated as of September 26, 2012, by and between Locust Street Funding LLC and the Company. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)

 

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10.35    Amended and Restated Collateral Administration Agreement, dated as of September 26, 2012, by and among Locust Street Funding LLC, the Company and Virtus Group, LP. (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.36    Collateral Management Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Company. (Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.37    Loan and Servicing Agreement, dated as of May 17, 2012, by and among Walnut Street Funding LLC, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association, and the other lender parties thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)
10.38    Amendment No. 1 to Loan and Servicing Agreement, dated as of March 11, 2014, by and among Walnut Street Funding LLC, Wells Fargo Securities, LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2014).
10.39    Purchase and Sale Agreement, dated as of May 17, 2012, by and between the Company and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)
10.40    Collateral Management Agreement, dated as of May 17, 2012, by and between the Company and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)
10.41    Securities Account Control Agreement, dated as of May 17, 2012, by and between Walnut Street Funding LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)
10.42    Senior Secured Revolving Credit Agreement, dated as of April 3, 2014, by and among FS Investment Corporation, ING Capital LLC, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 4, 2014.)
10.43    Guarantee, Pledge and Security Agreement, dated as of April 3, 2014, by and among FS Investment Corporation, ING Capital LLC, as revolving administrative agent and collateral agent, the subsidiary guarantors party thereto and each financing agent and designated indebtedness holder party thereto. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 4, 2014.)
10.44    Control Agreement, dated as of April 3, 2014, by and among FS Investment Corporation, ING Capital LLC, as collateral agent, and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 4, 2014.)
10.45    Trademark License Agreement, dated as of April 16, 2014, by and between FS Investment Corporation and Franklin Square Holdings, L.P. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 16, 2014.)
31.1*    Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2*    Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1*    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized on November 9, 2015.

 

FS INVESTMENT CORPORATION
By:  

/s/    Michael C. Forman

 

Michael C. Forman

Chief Executive Officer

(Principal Executive Officer)

By:  

/s/    William Goebel

 

William Goebel

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

92