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FS KKR Capital Corp - Quarter Report: 2017 March (Form 10-Q)

FS Investment Corporation
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

 

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  ☒    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      Accelerated filer  
Non-accelerated filer   ☐ (Do not check if a smaller reporting company)    Smaller reporting company  
    

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

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

There were 245,153,010 shares of the registrant’s common stock outstanding as of May 9, 2017.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I—FINANCIAL INFORMATION  
ITEM 1.   

FINANCIAL STATEMENTS

     1  
  

Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016

     1  
  

Unaudited Consolidated Statements of Operations for the three months ended March  31, 2017 and 2016

     2  
  

Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March  31, 2017 and 2016

     3  
  

Unaudited Consolidated Statements of Cash Flows for the three months ended March  31, 2017 and 2016

     4  
  

Consolidated Schedules of Investments as of March 31, 2017 (Unaudited) and December  31, 2016

     5  
  

Notes to Unaudited Consolidated Financial Statements

     27  
ITEM 2.   

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

     59  
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      81  
ITEM 4.   

CONTROLS AND PROCEDURES

     82  
PART II—OTHER INFORMATION   
ITEM 1.   

LEGAL PROCEEDINGS

     83  
ITEM 1A.   

RISK FACTORS

     83  
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     83  
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     83  
ITEM 4.   

MINE SAFETY DISCLOSURES

     83  
ITEM 5.   

OTHER INFORMATION

     83  
ITEM 6.   

EXHIBITS

     84  
   SIGNATURES      86  


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)

 

 

 

    March 31,  2017
(Unaudited)
    December 31,
2016
 

Assets

   

Investments, at fair value

   

Non-controlled/unaffiliated investments (amortized cost—$3,535,672 and $3,509,899, respectively)

  $ 3,595,984     $ 3,440,951  

Non-controlled/affiliated investments (amortized cost—$211,318 and $153,167, respectively)

    248,618       202,795  

Controlled/affiliated investments (amortized cost—$81,869 and $80,874, respectively)

    79,566       83,070  
 

 

 

   

 

 

 

Total investments, at fair value (amortized cost—$3,828,859 and $3,743,940, respectively)

    3,924,168       3,726,816  

Cash

    53,015       264,594  

Foreign currency, at fair value (cost—$667 and $4, respectively)

    669       4  

Receivable for investments sold and repaid

    252,782       75,921  

Income receivable

    47,044       36,106  

Deferred financing costs

    8,246       5,828  

Prepaid expenses and other assets

    427       802  
 

 

 

   

 

 

 

Total assets

  $ 4,286,351     $ 4,110,071  
 

 

 

   

 

 

 

Liabilities

   

Payable for investments purchased

  $ 40,000     $ 5,748  

Credit facilities payable

    755,128       619,932  

Unsecured notes payable (net of deferred financing costs of $1,880 and $1,884, respectively)

    1,071,263       1,070,701  

Secured borrowing, at fair value (amortized proceeds of $2,832 and $2,831, respectively)(1)

    2,891       2,880  

Stockholder distributions payable

    54,485       54,364  

Management fees payable

    18,367       18,022  

Subordinated income incentive fees payable(2)

    13,147       12,885  

Administrative services expense payable

    346       516  

Interest payable

    17,463       20,144  

Directors’ fees payable

    270       281  

Other accrued expenses and liabilities

    1,356       7,221  
 

 

 

   

 

 

 

Total liabilities

    1,974,716       1,812,694  
 

 

 

   

 

 

 

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, 244,599,661 and 244,063,357 shares issued and outstanding, respectively

    245       244  

Capital in excess of par value

    2,266,389       2,261,040  

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

    (205,172     (104,274

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

    146,131       148,026  

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

    104,042       (7,659
 

 

 

   

 

 

 

Total stockholders’ equity

    2,311,635       2,297,377  
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 4,286,351     $ 4,110,071  
 

 

 

   

 

 

 

Net asset value per share of common stock at period end

  $ 9.45     $ 9.41  

 

(1) See Note 8 for a discussion of the Company’s secured borrowing.

 

(2) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the 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.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

     Three Months Ended
March 31,
 
     2017     2016  

Investment income

    

From non-controlled/unaffiliated investments:

    

Interest income

   $ 79,719     $ 99,452  

Fee income

     19,530       1,642  

From non-controlled/affiliated investments:

    

Interest income

     4,290       967  

Fee income

     29       —    

Dividend income

     —         224  

From controlled/affiliated investments:

    

Interest income

     2,496       778  
  

 

 

   

 

 

 

Total investment income

     106,064       103,063  
  

 

 

   

 

 

 

Operating expenses

    

Management fees

     18,367       17,812  

Subordinated income incentive fees(1)

     13,147       12,485  

Administrative services expenses

     734       1,196  

Accounting and administrative fees

     265       228  

Interest expense

     19,439       18,894  

Directors’ fees

     271       229  

Other general and administrative expenses

     1,251       2,281  
  

 

 

   

 

 

 

Total operating expenses

     53,474       53,125  
  

 

 

   

 

 

 

Net investment income

     52,590       49,938  
  

 

 

   

 

 

 

Realized and unrealized gain/loss

    

Net realized gain (loss) on investments:

    

Non-controlled/unaffiliated investments

     (48,447     (13,779

Non-controlled/affiliated investments

     305       —    

Controlled/affiliated investments

     (52,879     —    

Net realized gain (loss) on foreign currency

     123       84  

Net change in unrealized appreciation (depreciation) on investments:

    

Non-controlled/unaffiliated investments

     129,260       (54,703

Non-controlled/affiliated investments

     (12,328     6,367  

Controlled/affiliated investments

     (4,499     1,633  

Net change in unrealized appreciation (depreciation) on secured borrowing

     (10     —    

Net change in unrealized gain (loss) on foreign currency

     (722     (1,637
  

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

     10,803       (62,035
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 63,393     $ (12,097
  

 

 

   

 

 

 

Per share information—basic and diluted

    

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

   $ 0.26     $ (0.05
  

 

 

   

 

 

 

Weighted average shares outstanding

     244,554,969       242,847,016  
  

 

 

   

 

 

 

 

(1) 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.

 

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FS Investment Corporation

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

 

 

 

     Three Months Ended
March 31,
 
   2017     2016  

Operations

    

Net investment income (loss)

   $ 52,590     $ 49,938  

Net realized gain (loss) on investments and foreign currency

     (100,898     (13,695

Net change in unrealized appreciation (depreciation) on investments and secured borrowing

     112,423       (46,703

Net change in unrealized gain (loss) on foreign currency

     (722     (1,637
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     63,393       (12,097
  

 

 

   

 

 

 

Stockholder distributions(1)

    

Distributions from net investment income

     (54,485     (54,093

Distributions from net realized gain on investments

     —         —    
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (54,485     (54,093
  

 

 

   

 

 

 

Capital share transactions(2)

    

Reinvestment of stockholder distributions

     5,350       —    
  

 

 

   

 

 

 

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

     5,350       —    
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     14,258       (66,190

Net assets at beginning of period

     2,297,377       2,208,928  
  

 

 

   

 

 

 

Net assets at end of period

   $ 2,311,635     $ 2,142,738  
  

 

 

   

 

 

 

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

   $ 146,131     $ 143,791  
  

 

 

   

 

 

 

 

(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.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

     Three Months Ended
March 31,
 
     2017     2016  

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $ 63,393     $ (12,097

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

    

Purchases of investments

     (539,689     (55,617

Paid-in-kind interest

     (8,481     (8,282

Proceeds from sales and repayments of investments

     364,308       169,128  

Net realized (gain) loss on investments

     101,021       13,779  

Net change in unrealized (appreciation) depreciation on investments and secured borrowing

     (112,423     46,703  

Accretion of discount

     (2,078     (3,088

Amortization of deferred financing costs and discount

     1,381       965  

Unrealized (gain)/loss on borrowings in foreign currency

     607       1,490  

(Increase) decrease in receivable for investments sold and repaid

     (176,861     (7,548

(Increase) decrease in income receivable

     (10,938     (10,882

(Increase) decrease in prepaid expenses and other assets

     375       259  

Increase (decrease) in payable for investments purchased

     34,252       2,627  

Increase (decrease) in management fees payable

     345       (603

Increase (decrease) in subordinated income incentive fees payable

     262       (889

Increase (decrease) in administrative services expense payable

     (170     32  

Increase (decrease) in interest payable

     (2,681     (8,365

Increase (decrease) in directors’ fees payable

     (11     (52

Increase (decrease) in other accrued expenses and liabilities

     (5,865     (5,691
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (293,253     121,869  
  

 

 

   

 

 

 

Cash flows from financing activities

    

Reinvestment of stockholder distributions

     5,350       —    

Stockholder distributions

     (54,364     (54,093

Borrowings under credit facilities(1)

     135,000       109,000  

Repayments of credit facilities(1)

     (411     (112,387

Repayments under repurchase agreement(2)

     —         (75,000

Deferred financing costs paid

     (3,236     —    
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     82,339       (132,480
  

 

 

   

 

 

 

Total increase (decrease) in cash

     (210,914     (10,611

Cash and foreign currency at beginning of period

     264,598       81,987  
  

 

 

   

 

 

 

Cash and foreign currency at end of period

   $ 53,684     $ 71,376  
  

 

 

   

 

 

 

Supplemental disclosure

    

Local and excise taxes paid

   $ 5,780     $ 5,875  
  

 

 

   

 

 

 

 

(1) See Note 8 for a discussion of the Company’s credit facilities and unsecured notes. During the three months ended March 31, 2017 and 2016, the Company paid $20,698 and $16,327, 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 three months ended March 31, 2016, the Company paid $9,967 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 March 31, 2017

(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—96.7%

               

5 Arch Income Fund 2, LLC

  (g)(j)(o)   Diversified Financials   10.5%     11/18/21   $ 16,141     $ 16,190     $ 16,141  

5 Arch Income Fund 2, LLC

  (g)(j)(o)(q)   Diversified Financials   10.5%     11/18/21     21,859       21,859       21,859  

A.P. Plasman Inc.

  (e)(f)(g)(h)(j)   Capital Goods   L+850   1.0%   12/29/19     200,793       199,077       194,769  

AG Group Merger Sub, Inc.

  (e)(g)   Commercial & Professional Services   L+750   1.0%   12/29/23     62,344       62,344       62,811  

AG Group Merger Sub, Inc.

  (g)(q)   Commercial & Professional Services   L+750   1.0%   12/29/23     27,500       27,500       27,706  

All Systems Holding LLC

  (e)(f)(g)(h)   Commercial & Professional Services   L+770   1.0%   10/31/23     44,000       44,000       44,312  

Altus Power America, Inc.

  (g)   Energy   L+750   1.5%   9/30/21     2,805       2,805       2,854  

Altus Power America, Inc.

  (g)(q)   Energy   L+750   1.5%   9/30/21     945       945       962  

AP Exhaust Acquisition, LLC

  (f)(g)   Automobiles & Components   L+775   1.5%   1/16/21     15,811       15,811       15,455  

ASG Technologies Group, Inc.

  (e)(g)(h)(t)   Software & Services   L+786, 1.2% PIK
(1.2% Max PIK)
  1.0%   4/30/20     54,117       53,794       54,929  

Aspect Software, Inc.

  (g)(t)   Software & Services   L+1000   1.0%   5/25/18     559       559       558  

Aspect Software, Inc.

  (g)(q)(t)   Software & Services   L+1000   1.0%   5/25/18     458       458       457  

Aspect Software, Inc.

  (g)(t)   Software & Services   L+1000   1.0%   5/25/20     693       693       695  

Aspect Software, Inc.

  (g)(q)(t)   Software & Services   L+1200   1.0%   5/25/18     361       361       361  

Atlas Aerospace LLC

  (g)   Capital Goods   L+803   1.0%   5/8/19     20,000       20,000       20,300  

AVF Parent, LLC

  (e)(h)   Retailing   L+725   1.3%   3/1/24     32,000       32,000       32,237  

AVF Parent, LLC

  (g)(q)   Retailing   L+725   1.3%   3/1/24     9,600       9,600       9,671  

BenefitMall Holdings, Inc.

  (e)(h)   Commercial & Professional Services   L+725   1.0%   11/24/20     14,663       14,663       14,736  

Cadence Aerospace Finance, Inc.

  (g)   Capital Goods   L+575   1.3%   5/9/18     73       73       70  

Corner Investment PropCo, LLC

  (e)(g)(h)   Consumer Services   L+975   1.3%   11/2/19     42,303       42,394       43,042  

Crestwood Holdings LLC

  (g)   Energy   L+800   1.0%   6/19/19     5,006       4,996       5,019  

CSafe Acquisition Co., Inc.

  (g)   Capital Goods   L+725   1.0%   11/1/21     1,565       1,565       1,565  

CSafe Acquisition Co., Inc.

  (g)(q)   Capital Goods   L+725   1.0%   11/1/21     4,304       4,304       4,304  

CSafe Acquisition Co., Inc.

  (g)(h)   Capital Goods   L+725   1.0%   10/31/23     44,888       44,888       45,280  

CSafe Acquisition Co., Inc.

  (g)(q)   Capital Goods   L+725   1.0%   10/31/23     27,391       27,391       27,631  

Eastman Kodak Co.

  (g)   Consumer Durables & Apparel   L+625   1.0%   9/3/19     10,438       10,340       10,490  

Empire Today, LLC

  (e)(g)   Retailing   L+800   1.0%   11/17/22     81,795       81,795       82,347  

Equian Buyer Corp.

  (g)   Health Care Equipment & Services   L+500   1.0%   12/18/21     905       905       905  

Equian Buyer Corp.

  (e)(g)(h)   Health Care Equipment & Services   L+812   1.0%   12/18/21     77,220       77,220       78,378  

Greystone Equity Member Corp.

  (g)(j)   Diversified Financials   L+1050     3/31/21     2,583       2,595       2,596  

Greystone Equity Member Corp.

  (g)(j)   Diversified Financials   L+1100     3/31/21     44,631       44,631       45,412  

Greystone Equity Member Corp.

  (g)(j)(q)   Diversified Financials   L+1100     3/31/21     6,786       6,786       6,887  

 

See notes to unaudited consolidated financial statements.

 

5


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(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+954   1.0%   3/26/21   $ 1,071     $ 1,071     $ 1,071  

Imagine Communications Corp.

  (e)(g)(h)   Media   L+825   1.0%   4/29/20     75,725       75,725       76,672  

Imagine Communications Corp.

  (g)(q)   Media   L+825   1.0%   4/29/20     28,600       28,600       28,958  

Industrial Group Intermediate Holdings, LLC

  (g)   Materials   L+800   1.3%   5/31/20     20,737       20,737       21,048  

Industry City TI Lessor, L.P.

  (g)   Consumer Services   10.8%, 1.0% PIK
(1.0% Max PIK)
    6/30/26     32,180       32,180       32,662  

International Aerospace Coatings, Inc.

  (e)(f)(h)   Capital Goods   L+750   1.0%   6/30/20     45,907       45,795       46,079  

JMC Acquisition Merger Corp.

  (g)   Capital Goods   L+857   1.0%   11/6/21     6,332       6,332       6,363  

JSS Holdings, Inc.

  (e)(g)   Capital Goods   L+800   1.0%   3/31/23     111,000       109,890       109,890  

JSS Holdings, Inc.

  (g)(q)   Capital Goods   L+800   1.0%   3/31/23     20,182       20,182       20,182  

Latham Pool Products, Inc.

  (e)(h)   Commercial & Professional Services   L+775   1.0%   6/29/21     70,000       70,000       70,350  

LEAS Acquisition Co Ltd.

  (g)(j)   Capital Goods   L+750   1.0%   6/30/20   26,984       36,709       28,973  

LEAS Acquisition Co Ltd.

  (f)(j)   Capital Goods   L+750   1.0%   6/30/20   $ 9,466       9,466       9,501  

MB Precision Holdings LLC

  (g)   Capital Goods   L+725, 1.5% PIK
(1.5% Max PIK)
  1.3%   1/23/20     12,868       12,868       12,675  

Micronics Filtration, LLC

  (e)(g)(h)   Capital Goods   L+800   1.3%   12/11/19     63,299       63,128       63,299  

MMM Holdings, Inc.

  (g)   Health Care Equipment & Services   L+875   1.5%   6/30/19     6,698       6,673       6,630  

MORSCO, Inc.

  (g)   Capital Goods   L+700   1.0%   10/31/23     14,906       14,342       15,102  

MSO of Puerto Rico, Inc.

  (g)   Health Care Equipment & Services   L+875   1.5%   6/30/19     4,869       4,851       4,820  

Nobel Learning Communities, Inc.

  (g)   Consumer Services   L+450   1.0%   4/27/20     63       63       63  

Nobel Learning Communities, Inc.

  (g)(q)   Consumer Services   L+450   1.0%   4/27/20     77       77       77  

Nobel Learning Communities, Inc.

  (g)   Consumer Services   L+840   1.0%   4/27/21     1,056       1,056       1,061  

North Haven Cadence Buyer, Inc.

  (g)(q)   Consumer Services   L+500   1.0%   9/2/21     938       938       938  

North Haven Cadence Buyer, Inc.

  (e)(g)   Consumer Services   L+812   1.0%   9/2/22     27,182       27,182       27,352  

North Haven Cadence Buyer, Inc.

  (g)(q)   Consumer Services   L+750   1.0%   9/2/22     4,063       4,063       4,088  

Nova Wildcat Amerock, LLC

  (g)   Consumer Durables & Apparel   L+856   1.3%   9/10/19     17,269       17,269       17,442  

PHRC License, LLC

  (f)(g)   Consumer Services   L+900   1.5%   8/14/20     43,722       43,722       44,378  

Polymer Additives, Inc.

  (g)   Materials   L+888   1.0%   12/19/22     10,511       10,511       10,695  

Polymer Additives, Inc.

  (g)   Materials   L+978   1.0%   12/19/22     11,019       11,019       11,019  

Polymer Additives, Inc.

  (g)   Materials   L+875   1.0%   12/19/22   15,000       16,982       16,246  

Power Distribution, Inc.

  (e)(g)   Capital Goods   L+725   1.3%   1/25/23   $ 30,155       30,155       30,155  

PSKW, LLC

  (e)(g)(h)   Health Care Equipment & Services   L+838   1.0%   11/25/21     30,000       30,000       29,235  

Roadrunner Intermediate Acquisition Co., LLC

  (e)(g)(h)   Health Care Equipment & Services   L+725   1.0%   3/15/23     35,613       35,613       36,147  

Rogue Wave Software, Inc.

  (e)(g)(h)   Software & Services   L+861   1.0%   9/25/21     33,188       33,188       33,353  

 

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Safariland, LLC

  (e)(g)(h)   Capital Goods   L+770   1.0%   11/18/23   $ 126,107     $ 126,107     $ 128,314  

Safariland, LLC

  (g)(q)   Capital Goods   L+725   1.0%   11/18/23     33,282       33,282       33,865  

Sequential Brands Group, Inc.

  (e)(g)(h)   Consumer Durables & Apparel   L+900     7/1/22     80,249       80,249       81,051  

Sorenson Communications, Inc.

  (e)(g)(h)   Telecommunication Services   L+575   2.3%   4/30/20     91,386       91,122       91,728  

Sports Authority, Inc.

  (g)(l)(r)   Retailing   L+600   1.5%   11/16/17     6,318       4,382       453  

SSC (Lux) Limited S.à r.l.

  (e)(g)(j)   Health Care Equipment & Services   L+750   1.0%   9/10/24     45,455       45,455       45,511  

SunGard Availability Services Capital, Inc.

  (g)   Software & Services   L+500   1.0%   3/29/19     4,382       4,229       4,256  

Sunnova Asset Portfolio 5 Holdings, LLC

  (g)   Energy   12.0%, 0.0% PIK
(12.0% Max PIK)
    11/14/21     4,319       4,260       4,319  

Transplace Texas, LP

  (e)(g)(h)   Transportation   L+744   1.0%   9/16/21     24,486       24,486       24,670  

U.S. Xpress Enterprises, Inc.

  (e)(f)(h)   Transportation   L+1000, 0.0% PIK
(1.8% Max PIK)
  1.5%   5/30/19     53,060       53,060       52,794  

USI Senior Holdings, Inc.

  (e)(g)   Capital Goods   L+782   1.0%   1/5/22     55,000       55,000       55,116  

USI Senior Holdings, Inc.

  (g)(q)   Capital Goods   L+725   1.0%   1/5/22     13,095       13,095       13,123  

Vertellus Performance Chemicals LLC

  (f)(g)   Materials   L+950   1.0%   1/30/20     38,000       38,000       35,538  

VPG Group Holdings LLC

  (e)(g)(h)   Materials   L+900   1.0%   6/30/18     61,145       61,007       60,992  

Warren Resources, Inc.

  (f)(g)   Energy   L+900, 1.0% PIK
(1.0% Max PIK)
  1.0%   5/22/20     2,021       2,021       1,989  

Warren Resources, Inc.

  (g)(q)   Energy   L+900, 1.0% PIK
(1.0% Max PIK)
  1.0%   5/22/20     144       144       141  

Waste Pro USA, Inc.

  (e)(g)(h)   Commercial & Professional Services   L+750   1.0%   10/15/20     94,312       94,312       95,845  

Zeta Interactive Holdings Corp.

  (e)(g)(h)   Software & Services   L+750   1.0%   7/29/22     9,766       9,790       9,928  

Zeta Interactive Holdings Corp.

  (g)(s)   Software & Services   L+750   1.0%   7/29/22     2,857       2,832       2,884  

Zeta Interactive Holdings Corp.

  (g)(q)   Software & Services   L+750   1.0%   7/29/22     1,777       1,777       1,804  

Zeta Interactive Holdings Corp.

  (g)(q)(s)   Software & Services   L+750   1.0%   7/29/22     457       457       464  
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                2,437,996       2,436,048  

Unfunded Loan Commitments

                (201,819     (201,819
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                2,236,177       2,234,229  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

7


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(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—Second Lien—16.1%

               

Alison US LLC

  (g)(j)   Capital Goods   L+850   1.0%   8/29/22   $ 4,444     $ 4,308     $ 4,433  

American Bath Group, LLC

  (g)   Capital Goods   L+975   1.0%   9/30/24     18,000       17,550       17,370  

AP Exhaust Acquisition, LLC

  (f)   Automobiles & Components   12.0% PIK
(12.0% Max PIK)
    9/28/21     3,876       3,876       4,012  

Arena Energy, LP

  (g)   Energy   L+900, 4.0% PIK
(4.0% Max PIK)
  1.0%   1/24/21     8,035       8,035       8,075  

ASG Technologies Group, Inc.

  (g)(t)   Software & Services   L+1100, 0.0% PIK
(6.0% Max PIK)
  1.0%   6/27/22     24,611       18,766       24,241  

Brock Holdings III, Inc.

  (g)   Energy   Prime+725     3/16/18     6,923       6,900       6,698  

Byrider Finance, LLC

  (f)(g)   Automobiles & Components   L+1000, 0.5% PIK
(0.5% Max PIK)
  1.3%   8/22/20     10,110       10,110       10,110  

Chisholm Oil and Gas Operating, LLC

  (g)   Energy   L+800   1.0%   3/21/24     750       750       750  

Chisholm Oil and Gas Operating, LLC

  (g)(q)   Energy   L+800   1.0%   3/21/24     250       250       250  

Compuware Corp.

  (g)   Software & Services   L+825   1.0%   12/15/22     5,261       4,840       5,303  

EagleView Technology Corp.

  (g)   Software & Services   L+825   1.0%   7/14/23     11,538       11,399       11,520  

Gruden Acquisition, Inc.

  (g)   Transportation   L+850   1.0%   8/18/23     15,000       14,395       14,550  

JW Aluminum Co.

  (e)(f)(g)(h)(u)   Materials   L+850 PIK
(L+850 Max PIK)
  0.8%   11/17/20     37,531       37,514       37,719  

Logan’s Roadhouse, Inc.

  (g)(t)   Consumer Services   L+850 PIK
(L+850 Max PIK)
  1.0%   11/23/20     20,339       20,180       19,320  

National Surgical Hospitals, Inc.

  (e)(h)   Health Care Equipment & Services   L+900   1.0%   6/1/23     30,000       30,000       30,134  

Nielsen & Bainbridge, LLC

  (g)   Consumer Durables & Apparel   L+925   1.0%   8/15/21     16,675       16,489       16,633  

Paw Luxco II Sarl

  (f)(j)(l)(r)   Consumer Durables & Apparel   EURIBOR+950     1/29/19   16,364       21,013       849  

PSAV Acquisition Corp.

  (e)(g)(h)   Technology Hardware & Equipment   L+825   1.0%   1/24/22   $ 80,000       79,162       80,400  

Spencer Gifts LLC

  (e)(h)   Retailing   L+825   1.0%   6/29/22     30,000       29,890       24,300  

Stadium Management Corp.

  (e)(g)(h)   Consumer Services   L+825   1.0%   2/27/21     56,776       56,776       56,705  
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                392,203       373,372  

Unfunded Loan Commitments

                (250     (250
             

 

 

   

 

 

 

Net Senior Secured Loans—Second Lien

                391,953       373,122  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

8


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Senior Secured Bonds—7.4%

               

Advanced Lighting Technologies, Inc.

  (f)(g)(t)   Materials   5.3%, 7.3% PIK
(7.3% Max PIK)
    6/1/19   $ 82,621     $ 32,222     $ 34,494  

Black Swan Energy Ltd.

  (e)(j)   Energy   9.0%     1/20/24     6,000       6,000       5,925  

Caesars Entertainment Resort Properties, LLC

  (e)(g)(h)   Consumer Services   11.0%     10/1/21     24,248       24,042       26,461  

FourPoint Energy, LLC

  (e)(f)(h)   Energy   9.0%     12/31/21     74,813       72,629       75,561  

Global A&T Electronics Ltd.

  (g)(j)   Semiconductors & Semiconductor Equipment   10.0%     2/1/19     7,000       6,959       5,093  

Ridgeback Resources Inc.

  (f)(j)   Energy   12.0%     12/29/20     132       129       132  

Sorenson Communications, Inc.

  (f)   Telecommunication Services   9.0%, 0.0% PIK
(9.0% Max PIK)
    10/31/20     19,898       19,384       18,704  

Velvet Energy Ltd.

  (g)(j)   Energy   9.0%     10/5/23     5,000       5,000       4,973  
             

 

 

   

 

 

 

Total Senior Secured Bonds

                166,365       171,343  
             

 

 

   

 

 

 

Subordinated Debt—25.3%

               

Ascent Resources Utica Holdings, LLC

  (g)(i)   Energy   10.0%     4/1/22     40,000       40,000       41,375  

Aurora Diagnostics, LLC

  (e)(f)(h)   Health Care Equipment & Services   10.8%     1/15/18     14,935       14,940       13,168  

Bellatrix Exploration Ltd.

  (g)(j)   Energy   8.5%     5/15/20     5,000       4,933       4,766  

Brooklyn Basketball Holdings, LLC

  (f)(g)   Consumer Services   L+725     10/25/19     19,873       19,873       19,972  

CEC Entertainment, Inc.

  (f)   Consumer Services   8.0%     2/15/22     5,000       5,010       5,242  

Ceridian HCM Holding, Inc.

  (f)(g)   Commercial & Professional Services   11.0%     3/15/21     21,800       22,523       22,954  

DEI Sales, Inc.

  (e)(g)   Consumer Durables & Apparel   9.0%, 4.0% PIK
(4.0% Max PIK)
    2/28/23     65,000       64,158       64,594  

EV Energy Partners, L.P.

  (f)   Energy   8.0%     4/15/19     265       247       203  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/30/25     759       759       754  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/30/25     4,824       4,824       4,794  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/3/25     997       997       991  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/29/25     938       938       933  

Global Jet Capital Inc.

  (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/4/25     69,267       69,267       68,834  

Global Jet Capital Inc.

  (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/9/25     11,329       11,329       11,258  

Global Jet Capital Inc.

  (f)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/29/26     5,932       5,932       5,895  

 

See notes to unaudited consolidated financial statements.

 

9


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

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

Global Jet Capital Inc.

    (g)     Commercial & Professional Services    
15.0% PIK
(15.0% Max PIK)
 
 
      4/14/26     $ 12,127     $ 12,127     $ 12,051  

Global Jet Capital Inc.

    (g)     Commercial & Professional Services    
15.0% PIK
(15.0% Max PIK)
 
 
      12/2/26       11,903       11,903       11,829  

Imagine Communications Corp.

    (g)     Media    
12.5% PIK
(12.5% Max PIK)
 
 
      8/4/18       603       603       603  

Jupiter Resources Inc.

    (f)(g)(j)     Energy     8.5%         10/1/22       6,425       5,535       5,317  

Mood Media Corp.

    (g)(j)     Media     10.0%         8/6/23       6,460       5,708       6,428  

Mood Media Corp.

    (f)(g)(j)     Media     9.3%         10/15/20       43,135       42,446       30,195  

NewStar Financial, Inc.

    (g)(j)     Diversified Financials    
8.3%, 0.0% PIK
(8.8% Max PIK)
 
 
      12/4/24       75,000       61,850       70,125  

P.F. Chang’s China Bistro, Inc.

    (f)(g)     Consumer Services     10.3%         6/30/20       11,433       11,721       11,435  

PriSo Acquisition Corp.

    (g)     Capital Goods     9.0%         5/15/23       10,155       10,047       10,193  

S1 Blocker Buyer Inc.

    (g)     Commercial & Professional Services    
10.0% PIK
(10.0% Max PIK)
 
 
      10/31/22       127       127       132  

Sequel Industrial Products Holdings, LLC

    (f)     Commercial & Professional Services    
14.5%, 2.5% PIK
(2.5% Max PIK)
 
 
      9/30/19       7,044       7,005       7,247  

Sorenson Communications, Inc.

    (f)     Telecommunication Services    
13.9%, 0.0% PIK
(13.9% Max PIK)
 
 
      10/31/21       15,122       14,346       14,442  

SunGard Availability Services Capital, Inc.

    (f)(g)     Software & Services     8.8%         4/1/22       10,750       8,444       7,731  

ThermaSys Corp.

    (e)(f)(g)     Capital Goods    
6.5%, 5.0% PIK
(5.0% Max PIK)
 
 
      5/3/20       139,871       139,871       126,583  

VPG Group Holdings LLC

    (e)(g)     Materials    
11.0%, 2.0% PIK
(2.0% Max PIK)
 
 
      6/30/18       5,382       5,382       5,281  
             

 

 

   

 

 

 

Total Subordinated Debt

                602,845       585,325  
             

 

 

   

 

 

 

Collateralized Securities—2.8%

               

MP4 2013-2A Class Subord. B

    (f)(g)(j)     Diversified Financials     11.1%         10/25/25       21,000       11,580       13,320  

NewStar Clarendon 2014-1A Class D

    (g)(j)     Diversified Financials     L+435         1/25/27       1,560       1,479       1,560  

NewStar Clarendon 2014-1A Class Subord. B

    (g)(j)     Diversified Financials     15.8%         1/25/27       17,900       14,072       14,493  

Rampart CLO 2007 1A Class Subord.

    (g)(j)     Diversified Financials     11.2%         10/25/21       10,000       747       772  

Stone Tower CLO VI Class Subord.

    (f)(j)     Diversified Financials     23.6%         4/17/21       5,000       923       2,457  

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

    (g)(j)     Diversified Financials     18.9%         1/15/26       42,504       22,661       31,321  
             

 

 

   

 

 

 

Total Collateralized Securities

                51,462       63,923  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

10


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

          Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Equity/Other—21.5%(k)

               

5 Arches, LLC, Common Equity

  (g)(j)(l)(n)   Diversified Financials           9,475     $ 250     $ 250  

Advanced Lighting Technologies, Inc., Preferred Equity

  (g)(l)(t)   Materials           3,652       —         —    

Altus Power America Holdings, LLC, Common Equity

  (g)(l)   Energy           462,008       462       462  

Altus Power America Holdings, LLC, Preferred Equity

  (g)(p)   Energy           934,959       935       935  

Amaya Inc., Warrants, 5/15/2024

  (g)(j)(l)   Consumer Services           2,000,000       16,832       17,140  

AP Exhaust Holdings, LLC, Common Equity

  (g)(l)(n)   Automobiles & Components           811       811       811  

APP Holdings, LP, Warrants, 5/25/2026

  (g)(j)(l)   Capital Goods           698,482       2,545       3,425  

Aquilex Corp., Common Equity, Class A Shares

  (g)(l)(n)   Commercial & Professional Services           15,128       1,087       4,529  

Aquilex Corp., Common Equity, Class B Shares

  (g)(l)(n)   Commercial & Professional Services           32,637       1,690       9,772  

Ascent Resources Utica Holdings, LLC, Common Equity

  (g)(l)(m)   Energy           96,800,082       29,100       23,038  

ASG Technologies Group, Inc., Common Equity

  (g)(l)(t)   Software & Services           1,689,767       36,422       65,647  

ASG Technologies Group, Inc., Warrants, 6/27/2022

  (g)(l)(t)   Software & Services           229,541       6,542       3,925  

Aspect Software Parent, Inc., Common Equity

  (g)(l)(t)   Software & Services           428,935       20,197       20,632  

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

  (g)(j)(l)   Retailing           3,451,216       1,898       276  

Chisholm Oil and Gas, LLC, Series A Units

  (g)(l)(n)   Energy           53,793       54       54  

CSF Group Holdings, Inc., Common Equity

  (g)(l)   Capital Goods           391,300       391       391  

Eastman Kodak Co., Common Equity

  (g)(l)   Consumer Durables & Apparel           61,859       1,203       711  

FourPoint Energy, LLC, Common Equity, Class C-II-A Units

  (g)(l)(n)   Energy           21,000       21,000       9,975  

FourPoint Energy, LLC, Common Equity, Class D Units

  (g)(l)(n)   Energy           3,937       2,601       1,890  

FourPoint Energy, LLC, Common Equity, Class E-II Units

  (g)(l)(n)   Energy           87,400       21,850       39,330  

FourPoint Energy, LLC, Common Equity, Class E-III Units

  (g)(l)(n)   Energy           70,875       17,719       33,666  

Fronton Investor Holdings, LLC, Class B Units

  (g)(n)(t)   Consumer Services           14,943       15,011       16,437  

Global Jet Capital Holdings, LP, Preferred Equity

  (f)(g)(j)(l)   Commercial & Professional Services           42,281,308       42,281       42,281  

H.I.G. Empire Holdco, Inc., Common Equity

  (g)(l)   Retailing           375       1,118       1,144  

Harvey Holdings, LLC, Common Equity

  (g)(l)   Capital Goods           2,333,333       2,333       5,833  

Imagine Communications Corp., Common Equity, Class A Units

  (g)(l)   Media           33,034       3,783       3,254  

Industrial Group Intermediate Holdings, LLC, Common Equity

  (g)(l)(n)   Materials           441,238       441       772  

International Aerospace Coatings, Inc., Common Equity

  (f)(l)   Capital Goods           4,401       464       108  

International Aerospace Coatings, Inc., Preferred Equity

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

JMC Acquisition Holdings, LLC, Common Equity

  (g)(l)   Capital Goods           483       483       539  

JSS Holdco, LLC, Net Profits Interest

  (g)(l)   Capital Goods           —         —         —    

JW Aluminum Co., Common Equity

  (f)(g)(l)(u)   Materials           972       —         —    

JW Aluminum Co., Preferred Equity

  (f)(g)(u)   Materials           4,499       44,355       41,847  

MB Precision Investment Holdings LLC, Class A-2 Units

  (g)(l)(n)   Capital Goods           490,213       490       147  

Micronics Filtration Holdings, Inc., Common Equity

  (g)(l)   Capital Goods           53,073       553       106  

Micronics Filtration Holdings, Inc., Preferred Equity, Series A

  (g)(l)   Capital Goods           55       553       841  

 

See notes to unaudited consolidated financial statements.

 

11


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

          Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Micronics Filtration Holdings, Inc., Preferred Equity, Series B

  (g)(l)   Capital Goods           23     $ 229     $ 232  

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

  (g)(j)(l)   Diversified Financials           3,000,000       15,058       6,480  

North Haven Cadence TopCo, LLC, Common Equity

  (g)(l)   Consumer Services           1,041,667       1,042       1,250  

PDI Parent LLC, Common Equity

  (g)(l)   Capital Goods           1,384,615       1,385       1,385  

PSAV Holdings LLC, Common Equity

  (f)   Technology Hardware & Equipment           10,000       10,000       32,500  

Ridgeback Resources Inc., Common Equity

  (f)(j)(l)   Energy           324,954       1,997       1,902  

Roadhouse Holding Inc., Common Equity

  (g)(l)(t)   Consumer Services           6,672,036       6,932       7,741  

S1 Blocker Buyer Inc., Common Equity

  (g)   Commercial & Professional Services           59       587       662  

Safariland, LLC, Common Equity

  (f)(l)   Capital Goods           25,000       2,500       10,673  

Safariland, LLC, Warrants, 7/27/2018

  (f)(l)   Capital Goods           2,263       246       966  

Safariland, LLC, Warrants, 9/20/2019

  (f)(l)   Capital Goods           2,273       227       970  

SandRidge Energy, Inc., Common Equity

  (g)(j)(l)   Energy           421,682       9,413       7,797  

Sequel Industrial Products Holdings, LLC, Common Equity

  (f)(g)(l)   Commercial & Professional Services           33,306       3,400       9,262  

Sequel Industrial Products Holdings, LLC, Preferred Equity

  (f)(g)   Commercial & Professional Services           8,000       12,464       12,469  

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

  (g)(l)   Commercial & Professional Services           1,293       1       203  

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

  (f)(l)   Commercial & Professional Services           19,388       12       3,453  

Sequential Brands Group, Inc., Common Equity

  (g)(l)   Consumer Durables & Apparel           206,664       2,790       804  

Sorenson Communications, Inc., Common Equity

  (f)(l)   Telecommunication Services           46,163       —         36,649  

SSC Holdco Limited, Common Equity

  (g)(j)(l)   Health Care Equipment & Services           113,636       2,273       2,273  

Sunnova Energy Corp., Common Equity

  (g)(l)   Energy           192,389       722       1,102  

Sunnova Energy Corp., Preferred Equity

  (g)(l)   Energy           18,182       97       104  

ThermaSys Corp., Common Equity

  (f)(l)   Capital Goods           51,813       1       —    

ThermaSys Corp., Preferred Equity

  (f)(l)   Capital Goods           51,813       5,181       —    

Viper Holdings, LLC, Series I Units

  (g)(l)   Consumer Durables & Apparel           120,365       207       211  

Viper Holdings, LLC, Series II Units

  (g)(l)(n)   Consumer Durables & Apparel           124,445       214       219  

Viper Parallel Holdings LLC, Class A Units

  (g)(l)   Consumer Durables & Apparel           253,057       436       444  

VPG Group Holdings LLC, Class A-2 Units

  (f)(l)   Materials           3,637,500       3,638       2,546  

Warren Resources, Inc., Common Equity

  (f)(g)(l)   Energy           113,515       534       488  

Zeta Interactive Holdings Corp., Preferred Equity

  (g)(l)   Software & Services           215,662       1,714       1,970  
             

 

 

   

 

 

 

Total Equity/Other

                380,057       496,226  
             

 

 

   

 

 

 

TOTAL INVESTMENTS—169.8%

              $ 3,828,859       3,924,168  
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(69.8%)

                (1,612,533
               

 

 

 

NET ASSETS—100%

                $ 2,311,635  
               

 

 

 

 

See notes to unaudited consolidated financial statements.

 

12


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

 

(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 March 31, 2017, the three-month London Interbank Offered Rate, or LIBOR or “L”, was 1.15%, the Euro Interbank Offered Rate, or EURIBOR, was (0.33)% and the U.S. Prime Lending Rate, or Prime, was 4.00%. PIK means paid-in-kind.

 

(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 term loan facility with JPMorgan Chase Bank, N.A. (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 revolving credit facility with ING Capital LLC (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).

 

(h) Security or portion thereof held within Hamilton Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with HSBC Bank USA, N.A. (see Note 8).

 

(i) Position or portion thereof unsettled as of March 31, 2017.

 

(j) 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 March 31, 2017, 83.2% of the Company’s total assets represented qualifying assets.

 

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

 

(l) Security is non-income producing.

 

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

 

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

 

(o) Security held within IC Arches Investments, LLC, a wholly-owned subsidiary of the Company.

 

(p) Security held within IC Altus Investments, LLC, a wholly-owned subsidiary of the Company.

 

(q) Security is an unfunded commitment. The stated rate reflects the spread disclosed at the time of commitment and may not indicate the actual rate received upon funding.

 

(r) Asset is on non-accrual status.

 

(s) The transfer of a portion of this loan does not qualify for sale accounting under Accounting Standards Codification Topic 860, Transfers and Servicing, and therefore, the entire senior secured loan remains in the unaudited consolidated schedule of investments as of March 31, 2017 (see Note 8).

 

See notes to unaudited consolidated financial statements.

 

13


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

(t) 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 more than 25% 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 March 31, 2017, the Company held investments in portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control”. The following table presents certain information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person for the three months ended March 31, 2017:

 

Portfolio Company

  Fair Value at
December 31, 2016
    Transfers
In or Out
    Purchases  and
Paid-in-kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
March 31,
2017
    Interest
Income
    Fee
Income
    Dividend
Income
 

Senior Secured Loans—First Lien

 

 

ASG Technologies Group, Inc.

  $ 54,766       —       $ 160       —       $ 21       —       $ (18   $ 54,929     $ 1,375       —         —    

Aspect Software, Inc.(1)(2)

    —       $ 634     $ 103     $ (178     —         —       $ (2   $ 557     $ 18     $ 15       —    

Aspect Software, Inc.(2)

    —       $ 697       —       $ (4     —         —       $ 2     $ 695     $ 20     $ 3       —    

Aspect Software, Inc.(2)(3)

    —       $ —         —         —         —         —         —       $ —         —       $ 11       —    

Senior Secured Loans—Second Lien

 

 

ASG Technologies Group, Inc.

  $ 23,872       —         —         —       $ 233       —       $ 136     $ 24,241     $ 971       —         —    

Logan’s Roadhouse, Inc.

  $ 15,415       —       $ 4,061       —       $ 5       —       $ (161   $ 19,320     $ 460       —         —    

Senior Secured Bonds

                     

Advanced Lighting Technologies, Inc.

    —       $ 32,222       —         —         —         —       $ 2,272     $ 34,494     $ 1,446       —         —    

Equity/Other

                     

Advanced Lighting Technologies, Inc., Preferred Equity

    —       $ —         —         —         —         —         —       $ —         —         —         —    

ASG Technologies Group, Inc., Common Equity

  $ 79,673       —         —         —         —         —       $ (14,026   $ 65,647       —         —         —    

ASG Technologies Group, Inc., Warrants, 6/27/2022

  $ 5,830       —         —         —         —         —       $ (1,905   $ 3,925       —         —         —    

Aspect Software, Inc.(2)

    —       $ 19,792     $ 100       —         —       $ 305     $ 435     $ 20,632       —         —         —    

Fronton Investor Holdings, LLC, Class B Units

  $ 15,092       —         —         —         —         —       $ 1,345     $ 16,437       —         —         —    

Roadhouse Holding Inc., Common Equity

  $ 8,147       —         —         —         —         —       $ (406   $ 7,741       —         —         —    

 

(1) Security includes a partially unfunded commitment with an amortized cost of $458 and a fair value of $457.

 

See notes to unaudited consolidated financial statements.

 

14


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

(2) The Company held this investment as of December 31, 2016 but it was not deemed to be an “affiliated person” of the portfolio company or deemed to “control” the portfolio company as of December 31, 2016. Transfers in or out have been presented at amortized cost.

 

(3) Security is an unfunded commitment with an amortized cost of $361 and a fair value of $361.

 

(u) Under the Investment Company Act of 1940, as amended, the Company generally is deemed to “control” a portfolio company if it owns more than 25% 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 March 31, 2017, the Company held investments in one portfolio company of which it is deemed to be an “affiliated person” and deemed to “control”. During the three months ended March 31, 2017, the Company disposed of investments in one portfolio company of which it was deemed to be an “affiliated person” and deemed to “control”. The following table presents certain information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person and deemed to control for the three months ended March 31, 2017:

 

Portfolio Company

  Fair Value at
December 31, 2016
    Transfers
In or Out
    Purchases  and
Paid-in-kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
March 31, 2017
    Interest
Income
    Fee
Income
    Dividend
Income
 

Senior Secured Loans—First Lien

 

   

Swiss Watch International, Inc.(1)

    —       $ 12,185       —       $ (1,615     —       $ (10,570     —         —         —         —         —    

Swiss Watch International, Inc.(1)

    —       $ 42,301       —         —         —       $ (42,301     —         —       $ (7     —         —    

Senior Secured Loans—Second Lien

 

   

JW Aluminum Co.

  $ 38,039       —       $ 146       —       $ 1       —       $ (467   $ 37,719     $ 889       —         —    

Equity/Other

 

   

JW Aluminum Co., Common Equity

    —         —         —         —         —         —         —         —         —         —         —    

JW Aluminum Co., Preferred Equity

  $ 45,031       —       $ 848       —         —         —       $ (4,032   $ 41,847     $ 1,614       —         —    

SWI Holdco LLC, Common Equity(1)

    —       $ —       $ 8       —         —       $ (8     —         —         —         —         —    

 

(1) The Company held this investment as of December 31, 2016 but it was not deemed to be an “affiliated person” of the portfolio company or deemed to “control” the portfolio company as of December 31, 2016. Transfers in or out have been presented at amortized cost.

 

See notes to unaudited consolidated financial statements.

 

15


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments

As of December 31, 2016

(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—84.2%

               

5 Arch Income Fund 2, LLC

  (g)(j)(o)   Diversified Financials   10.5%     11/18/21   $ 19,561     $ 19,611     $ 19,561  

5 Arch Income Fund 2, LLC

  (g)(j)(o)(q)   Diversified Financials   10.5%     11/18/21     18,439       18,439       18,439  

A.P. Plasman Inc.

  (e)(f)(g)(h)(j)   Capital Goods   L+850     1.0%     12/29/19     202,235       200,358       199,707  

Aeneas Buyer Corp.

  (g)   Health Care Equipment & Services   L+500     1.0%     12/18/21     916       916       916  

Aeneas Buyer Corp.

  (e)(g)(h)   Health Care Equipment & Services   L+815     1.0%     12/18/21     77,220       77,220       78,378  

AG Group Merger Sub, Inc.

  (e)(g)   Commercial & Professional Services   L+750     1.0%     12/29/23     62,500       62,500       62,500  

AG Group Merger Sub, Inc.

  (g)(q)   Commercial & Professional Services   L+750     1.0%     12/29/23     27,500       27,500       27,500  

All Systems Holding LLC

  (e)(f)(g)(h)   Commercial & Professional Services   L+770     1.0%     10/31/23     44,000       44,000       44,370  

Altus Power America, Inc.

  (g)   Energy   L+750     1.5%     9/30/21     2,665       2,665       2,715  

Altus Power America, Inc.

  (g)(q)   Energy   L+750     1.5%     9/30/21     1,085       1,085       1,106  

AP Exhaust Acquisition, LLC

  (f)(g)   Automobiles & Components   L+775     1.5%     1/16/21     15,811       15,811       14,309  

ASG Technologies Group, Inc.

  (e)(g)(h)(t)   Software & Services   L+786, 1.2% PIK
(1.2% Max PIK)
    1.0%     4/30/20     53,957       53,613       54,766  

Aspect Software, Inc.

  (g)   Software & Services   L+1000     1.0%     5/25/18     634       634       634  

Aspect Software, Inc.

  (g)(q)   Software & Services   L+1000     1.0%     5/25/18     22       22       22  

Aspect Software, Inc.

  (g)   Software & Services   L+1000     1.0%     5/25/20     697       697       705  

Atlas Aerospace LLC

  (g)   Capital Goods   L+804     1.0%     5/8/19     20,000       20,000       20,300  

BenefitMall Holdings, Inc.

  (e)(h)   Commercial & Professional Services   L+725     1.0%     11/24/20     14,700       14,700       14,847  

Cadence Aerospace Finance, Inc.

  (g)   Capital Goods   L+575     1.3%     5/9/18     73       73       71  

Caesars Entertainment Operating Co., Inc.

  (e)(g)(j)(l)   Consumer Services   L+575     3/1/17     9,294       9,231       9,414  

Caesars Entertainment Operating Co., Inc.

  (e)(j)(l)   Consumer Services   L+675     3/1/17     851       847       872  

Caesars Entertainment Operating Co., Inc.

  (e)(g)(j)(l)   Consumer Services   L+875     1.0%     3/1/17     11,852       11,839       12,334  

Corner Investment PropCo, LLC

  (e)(g)(h)   Consumer Services   L+975     1.3%     11/2/19     42,303       42,404       42,725  

Crestwood Holdings LLC

  (g)   Energy   L+800     1.0%     6/19/19     5,021       5,009       4,926  

CSafe Acquisition Co., Inc.

  (g)   Capital Goods   L+725     11/1/21     783       783       783  

CSafe Acquisition Co., Inc.

  (g)(q)   Capital Goods   L+725     11/1/21     5,087       5,087       5,087  

CSafe Acquisition Co., Inc.

  (g)(h)   Capital Goods   L+725     10/31/23     45,000       45,000       45,000  

CSafe Acquisition Co., Inc.

  (g)(q)   Capital Goods   L+725     10/31/23     27,391       27,391       27,391  

Eastman Kodak Co.

  (g)   Consumer Durables & Apparel   L+625     1.0%     9/3/19     10,438       10,331       10,503  

Empire Today, LLC

  (e)(g)   Retailing   L+800     1.0%     11/17/22     82,000       82,000       82,726  

Greystone Equity Member Corp.

  (g)(j)   Diversified Financials   L+1050     3/31/21     3,308       3,321       3,337  

Greystone Equity Member Corp.

  (g)(j)   Diversified Financials   L+1100     3/31/21     14,646       14,646       14,920  

Greystone Equity Member Corp.

  (g)(j)(q)   Diversified Financials   L+1100     3/31/21     36,047       36,047       36,716  

 

See notes to unaudited consolidated financial statements.

 

16


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(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+955     1.0%     3/26/21   $ 1,071     $ 1,071     $ 1,083  

H.M. Dunn Co., Inc.

  (g)(q)   Capital Goods   L+775     1.0%     3/26/21     357       357       361  

Imagine Communications Corp.

  (e)(g)(h)   Media   L+825     1.0%     4/29/20     75,655       75,655       76,601  

Imagine Communications Corp.

  (g)(q)   Media   L+825     1.0%     4/29/20     28,600       28,600       28,958  

Industrial Group Intermediate Holdings, LLC

  (g)   Materials   L+800     1.3%     5/31/20     20,757       20,757       21,069  

Industry City TI Lessor, L.P.

  (g)   Consumer Services   10.8%, 1.0% PIK
(1.0% Max PIK)
    6/30/26     32,613       32,613       33,102  

JMC Acquisition Merger Corp.

  (g)   Capital Goods   L+857     1.0%     11/6/21     6,332       6,332       6,332  

Latham Pool Products, Inc.

  (e)(h)   Commercial & Professional Services   L+775     1.0%     6/29/21     70,000       70,000       70,700  

Leading Edge Aviation Services, Inc.

  (e)(f)(h)   Capital Goods   L+875     1.5%     6/30/19     30,254       30,119       30,254  

LEAS Acquisition Co Ltd.

  (g)(j)   Capital Goods   L+875     1.5%     6/30/19   27,188       36,988       28,692  

LEAS Acquisition Co Ltd.

  (f)(j)   Capital Goods   L+875     1.5%     6/30/19   $ 9,538       9,538       9,538  

MB Precision Holdings LLC

  (g)   Capital Goods   L+725, 1.5% PIK
(1.5% Max PIK)
    1.3%     1/23/20     12,853       12,853       12,355  

Micronics, Inc.

  (e)(g)(h)   Capital Goods   L+800     1.3%     12/11/19     63,461       63,271       63,461  

MMM Holdings, Inc.

  (g)   Health Care Equipment & Services   L+825     1.5%     6/30/19     6,698       6,665       6,546  

MORSCO, Inc.

  (g)   Capital Goods   L+700     1.0%     10/31/23     15,000       14,413       15,150  

MSO of Puerto Rico, Inc.

  (g)   Health Care Equipment & Services   L+825     1.5%     6/30/19     4,869       4,846       4,759  

Nobel Learning Communities, Inc.

  (g)   Consumer Services   L+450     1.0%     4/27/20     52       52       52  

Nobel Learning Communities, Inc.

  (g)(q)   Consumer Services   L+450     1.0%     4/27/20     87       87       87  

Nobel Learning Communities, Inc.

  (g)   Consumer Services   L+841     1.0%     4/27/21     1,056       1,056       1,072  

North Haven Cadence Buyer, Inc.

  (g)(q)   Consumer Services   L+500     1.0%     9/2/21     938       938       938  

North Haven Cadence Buyer, Inc.

  (e)(g)   Consumer Services   L+813     1.0%     9/2/22     26,771       26,771       26,771  

North Haven Cadence Buyer, Inc.

  (g)(q)   Consumer Services   L+750     1.0%     9/2/22     4,479       4,479       4,479  

Nova Wildcat Amerock, LLC

  (g)   Consumer Durables & Apparel   L+859     1.3%     9/10/19     17,269       17,269       16,751  

PHRC License, LLC

  (f)(g)   Consumer Services   L+900     1.5%     8/14/20     43,879       43,879       44,318  

Polymer Additives, Inc.

  (g)   Materials   L+888     1.0%     12/20/21     10,511       10,511       10,564  

Polymer Additives, Inc.

  (g)   Materials   L+875     1.0%     12/20/21   15,000       16,982       15,830  

PSKW, LLC

  (e)(g)(h)   Health Care Equipment & Services   L+839     1.0%     11/25/21   $ 30,000       30,000       29,189  

Roadrunner Intermediate Acquisition Co., LLC

  (e)(g)(h)   Health Care Equipment & Services   L+800     1.0%     9/22/21     35,844       35,844       36,381  

Rogue Wave Software, Inc.

  (e)(g)(h)   Software & Services   L+802     1.0%     9/25/21     33,188       33,188       33,188  

Safariland, LLC

  (e)(g)(h)   Capital Goods   L+769     1.0%     11/18/23     126,107       126,107       125,792  

Safariland, LLC

  (g)(q)   Capital Goods   L+725     1.0%     11/18/23     33,282       33,282       33,199  

Sequential Brands Group, Inc.

  (e)(g)(h)(j)   Consumer Durables & Apparel   L+900     7/1/22     80,652       80,652       81,459  

 

See notes to unaudited consolidated financial statements.

 

17


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Sorenson Communications, Inc.

  (e)(g)(h)   Telecommunication Services   L+575     2.3%     4/30/20   $ 91,621     $ 91,339     $ 90,933  

Sports Authority, Inc.

  (g)(l)(r)   Retailing   L+600     1.5%     11/16/17     6,318       5,108       1,287  

SunGard Availability Services Capital, Inc.

  (g)   Software & Services   L+500     1.0%     3/29/19     4,382       4,210       4,253  

Sunnova Asset Portfolio 5 Holdings, LLC

  (g)   Energy   12.0%, 0.0% PIK
(12.0% Max PIK)
    11/14/21     4,703       4,633       4,750  

Swiss Watch International, Inc.

  (g)(l)(r)   Consumer Durables & Apparel   L+825     1.3%     11/8/18     12,185       12,185       4,875  

Swiss Watch International, Inc.

  (e)(g)(l)(r)   Consumer Durables & Apparel   L+825     1.3%     11/8/18     42,611       42,301       —    

Transplace Texas, LP

  (e)(g)(h)   Transportation   L+744     1.0%     9/16/21     24,486       24,486       24,486  

Transplace Texas, LP

  (g)(q)   Transportation   L+700     1.0%     9/16/21     541       541       541  

U.S. Xpress Enterprises, Inc.

  (e)(f)(h)   Transportation   L+1000, 0.0% PIK
(1.8% Max PIK)
    1.5%     5/30/19     53,435       53,435       53,435  

Vertellus Performance Chemicals LLC

  (f)(g)   Materials   L+950     1.0%     1/30/20     38,000       38,000       35,693  

VPG Group Holdings LLC

  (e)(g)(h)   Materials   L+900     1.0%     6/30/18     61,795       61,629       61,331  

Warren Resources, Inc.

  (f)(g)   Energy   L+900, 1.0% PIK
(1.0% Max PIK)
    1.0%     5/22/20     2,016       2,016       2,016  

Warren Resources, Inc.

  (g)(q)   Energy   L+900, 1.0% PIK
(1.0% Max PIK)
    1.0%     5/22/20     144       144       144  

Waste Pro USA, Inc.

  (e)(g)(h)   Commercial & Professional Services   L+750     1.0%     10/15/20     94,553       94,553       96,326  

Zeta Interactive Holdings Corp.

  (e)(g)(h)   Software & Services   L+750     1.0%     7/29/22     9,766       9,792       9,863  

Zeta Interactive Holdings Corp.

  (g)(s)   Software & Services   L+750     1.0%     7/29/22     2,857       2,831       2,876  

Zeta Interactive Holdings Corp.

  (g)(q)   Software & Services   L+750     1.0%     7/29/22     1,777       1,777       1,793  

Zeta Interactive Holdings Corp.

  (g)(q)(s)   Software & Services   L+750     1.0%     7/29/22     457       457       461  
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                2,178,392       2,121,674  

Unfunded Loan Commitments

                (186,233     (186,233
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                1,992,159       1,935,441  
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—26.1%

               

Alison US LLC

  (g)(j)   Capital Goods   L+850     1.0%     8/29/22     4,444       4,303       4,310  

AP Exhaust Acquisition, LLC

  (f)   Automobiles & Components   12.0% PIK
(12.0% Max PIK)
    9/28/21     3,763       3,763       3,279  

Arena Energy, LP

  (g)   Energy   L+900, 4.0% PIK
(4.0% Max PIK)
    1.0%     1/24/21     7,955       7,955       7,994  

 

See notes to unaudited consolidated financial statements.

 

18


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(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)(h)   Energy   L+950     1.5%     9/30/18   $ 186,037     $ 185,553     $ 187,665  

ASG Technologies Group, Inc.

  (g)(t)   Software & Services   L+1100, 0.0% PIK
(6.0% Max PIK)
    1.0%     6/27/22     24,611       18,533       23,872  

Brock Holdings III, Inc.

  (g)   Energy   L+825     1.8%     3/16/18     6,923       6,893       6,611  

Byrider Finance, LLC

  (f)(g)   Automobiles & Components   L+1000, 0.5% PIK
(0.5% Max PIK)
    1.3%     8/22/20     10,047       10,047       9,896  

Compuware Corp.

  (g)   Software & Services   L+825     1.0%     12/15/22     6,550       5,982       6,582  

DEI Sales, Inc.

  (e)(f)(g)(h)   Consumer Durables & Apparel   L+900     1.5%     1/15/18     64,654       64,431       62,229  

EagleView Technology Corp.

  (g)   Software & Services   L+825     1.0%     7/14/23     11,538       11,394       11,520  

Gruden Acquisition, Inc.

  (g)   Transportation   L+850     1.0%     8/18/23     15,000       14,371       11,874  

JW Aluminum Co.

  (e)(f)(g)(h)(u)   Materials   L+850 PIK
(L+850 Max PIK)
    0.8%     11/17/20     37,385       37,367       38,039  

Logan’s Roadhouse, Inc.

  (g)(t)   Consumer Services   L+850 PIK
(L+850 Max PIK)
    1.0%     11/23/20     16,114       16,114       15,415  

National Surgical Hospitals, Inc.

  (e)(h)   Health Care Equipment & Services   L+900     1.0%     6/1/23     30,000       30,000       30,014  

Nielsen & Bainbridge, LLC

  (g)   Consumer Durables & Apparel   L+925     1.0%     8/15/21     16,675       16,481       16,341  

Paw Luxco II Sarl

  (f)(j)   Consumer Durables & Apparel   EURIBOR+950     1/29/19   16,364       20,914       2,055  

PSAV Acquisition Corp.

  (e)(g)(h)   Technology Hardware & Equipment   L+825     1.0%     1/24/22   $ 80,000       79,130       80,000  

Spencer Gifts LLC

  (e)(h)   Retailing   L+825     1.0%     6/29/22     30,000       29,885       24,825  

Stadium Management Corp.

  (e)(g)(h)   Consumer Services   L+825     1.0%     2/27/21     56,776       56,776       56,634  
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                619,892       599,155  
             

 

 

   

 

 

 

Senior Secured Bonds—6.9%

               

Advanced Lighting Technologies, Inc.

  (f)(g)   Materials   10.5%     6/1/19     78,500       77,670       28,103  

Caesars Entertainment Resort Properties, LLC

  (e)(g)(h)   Consumer Services   11.0%     10/1/21     24,248       24,026       26,497  

FourPoint Energy, LLC

  (e)(f)(h)   Energy   9.0%     12/31/21     74,813       72,520       76,589  

Global A&T Electronics Ltd.

  (g)(j)   Semiconductors & Semiconductor Equipment   10.0%     2/1/19     7,000       6,955       5,328  

Ridgeback Resources Inc.

  (f)(j)   Energy   12.0%     12/29/20     132       129       132  

Sorenson Communications, Inc.

  (f)   Telecommunication Services   9.0%, 0.0% PIK
(9.0% Max PIK)
    10/31/20     19,898       19,357       17,709  

Velvet Energy Ltd.

  (g)(j)   Energy   9.0%     10/5/23     5,000       5,000       5,112  
             

 

 

   

 

 

 

Total Senior Secured Bonds

                205,657       159,470  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

19


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Subordinated Debt—19.8%

               

Aurora Diagnostics, LLC

  (e)(f)(h)   Health Care Equipment & Services   10.8%     1/15/18   $ 14,935     $ 14,944     $ 12,881  

Bellatrix Exploration Ltd.

  (g)(j)   Energy   8.5%     5/15/20     5,000       4,928       4,922  

Brooklyn Basketball Holdings, LLC

  (f)(g)   Consumer Services   L+725     10/25/19     19,873       19,873       19,972  

CEC Entertainment, Inc.

  (f)   Consumer Services   8.0%     2/15/22     5,000       5,010       5,117  

Ceridian HCM Holding, Inc.

  (f)(g)   Commercial & Professional Services   11.0%     3/15/21     21,800       22,555       22,509  

EV Energy Partners, L.P.

  (f)   Energy   8.0%     4/15/19     265       245       188  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/30/25     732       732       727  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/30/25     4,649       4,649       4,620  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/3/25     961       961       955  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/29/25     904       904       899  

Global Jet Capital Inc.

  (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/4/25     66,763       66,763       66,346  

Global Jet Capital Inc.

  (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/9/25     10,919       10,919       10,851  

Global Jet Capital Inc.

  (f)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/29/26     5,718       5,718       5,682  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/14/26     11,688       11,688       11,615  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/2/26     11,473       11,473       11,473  

Imagine Communications Corp.

  (g)   Media   12.5% PIK
(12.5% Max PIK)
    8/4/18     585       585       585  

Jupiter Resources Inc.

  (f)(g)(j)   Energy   8.5%     10/1/22     6,425       5,505       5,579  

Mood Media Corp.

  (g)(i)(j)   Media   10.0%     8/6/23     6,460       5,689       5,976  

Mood Media Corp.

  (f)(g)(j)   Media   9.3%     10/15/20     43,135       42,402       26,744  

NewStar Financial, Inc.

  (g)(j)   Diversified Financials   8.3%, 0.0% PIK
(8.8% Max PIK)
    12/4/24     75,000       61,615       65,250  

P.F. Chang’s China Bistro, Inc.

  (f)(g)   Consumer Services   10.3%     6/30/20     11,433       11,743       11,223  

 

See notes to unaudited consolidated financial statements.

 

20


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

PriSo Acquisition Corp.

  (g)   Capital Goods   9.0%     5/15/23   $ 10,155     $ 10,044     $ 10,206  

S1 Blocker Buyer Inc.

  (g)   Commercial & Professional Services   10.0% PIK
(10.0% Max PIK)
    10/31/22     127       127       129  

SandRidge Energy, Inc.

  (g)(j)(l)   Energy   —%     10/4/20     4,405       5,871       5,530  

Sequel Industrial Products Holdings, LLC

  (f)   Commercial & Professional Services   14.5%, 2.5% PIK
(2.5% Max PIK)
    9/30/19     7,044       6,999       7,203  

Sorenson Communications, Inc.

  (f)   Telecommunication Services   13.9%, 0.0% PIK
(13.9% Max PIK)
    10/31/21     15,122       14,314       13,913  

SunGard Availability Services Capital, Inc.

  (f)(g)   Software & Services   8.8%     4/1/22     10,750       8,363       7,404  

ThermaSys Corp.

  (e)(f)(g)   Capital Goods   9.0%, 1.8% PIK
(5.0% Max PIK)
    5/3/20     138,106       138,106       110,312  

VPG Group Holdings LLC

  (e)(g)   Materials   11.0%, 2.0% PIK
(2.0% Max PIK)
    6/30/18     5,355       5,355       5,234  
             

 

 

   

 

 

 

Total Subordinated Debt

                498,080       454,045  
             

 

 

   

 

 

 

Collateralized Securities—3.1%

               

ACASC 2013-2A Class Subord. B

  (f)(g)(j)   Diversified Financials   12.5%     10/25/25     30,500       17,799       20,270  

NewStar Clarendon 2014-1A Class D

  (g)(j)   Diversified Financials   L+435     1/25/27     1,560       1,477       1,472  

NewStar Clarendon 2014-1A Class Subord. B

  (g)(j)   Diversified Financials   16.4%     1/25/27     17,900       14,272       14,300  

Rampart CLO 2007 1A Class Subord.

  (g)(j)   Diversified Financials   17.6%     10/25/21     10,000       741       1,105  

Stone Tower CLO VI Class Subord.

  (f)(j)   Diversified Financials   23.6%     4/17/21     5,000       1,636       2,434  

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

  (g)(j)   Diversified Financials   19.9%     1/15/26     42,504       23,300       32,477  
             

 

 

   

 

 

 

Total Collateralized Securities

                59,225       72,058  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

21


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

        Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Equity/Other—22.1%(k)

               

5 Arches, LLC, Common Equity

  (g)(j)(l)(n)   Diversified Financials           9,475     $ 250     $ 250  

A.P. Plasman Inc., Warrants, 5/25/2026

  (g)(j)(l)   Capital Goods           698,482       2,545       3,073  

Altus Power America Holdings, LLC, Common Equity

  (g)(l)   Energy           462,008       462       462  

Altus Power America Holdings, LLC, Preferred Equity

  (g)   Energy           888,211       888       888  

Amaya Inc., Warrants, 5/15/2024

  (g)(j)(l)   Consumer Services           2,000,000       16,832       13,360  

AP Exhaust Holdings, LLC, Common Equity

  (g)(l)(n)   Automobiles & Components           811       811       41  

Aquilex Corp., Common Equity, Class A Shares

  (g)(l)(n)   Commercial & Professional Services           15,128       1,087       4,529  

Aquilex Corp., Common Equity, Class B Shares

  (g)(l)(n)   Commercial & Professional Services           32,637       1,690       9,772  

Ascent Resources Utica Holdings, LLC, Common Equity

  (g)(l)(m)   Energy           96,800,082       29,100       21,683  

ASG Technologies Group, Inc., Common Equity

  (g)(l)(t)   Software & Services           1,689,767       36,422       79,673  

ASG Technologies Group, Inc., Warrants, 6/27/2022

  (g)(l)(t)   Software & Services           229,541       6,542       5,830  

Aspect Software, Inc., Common Equity

  (g)(l)   Software & Services           409,967       19,792       22,384  

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

  (g)(j)(l)   Retailing           3,451,216       1,898       276  

CSF Group Holdings, Inc., Common Equity

  (g)(l)   Capital Goods           391,300       391       391  

Eastman Kodak Co., Common Equity

  (g)(l)   Consumer Durables & Apparel           61,859       1,203       959  

FourPoint Energy, LLC, Common Equity, Class C-II-A Units

  (g)(l)(n)   Energy           21,000       21,000       10,133  

FourPoint Energy, LLC, Common Equity, Class D Units

  (g)(l)(n)   Energy           3,937       2,601       1,919  

FourPoint Energy, LLC, Common Equity, Class E-II Units

  (g)(l)(n)   Energy           87,400       21,850       39,986  

FourPoint Energy, LLC, Common Equity, Class E-III Units

  (g)(l)(n)   Energy           70,875       17,719       34,197  

Fronton Investor Holdings, LLC, Class B Units

  (g)(n)(t)   Consumer Services           14,943       15,011       15,092  

Global Jet Capital Holdings, LP, Preferred Equity

  (f)(g)(j)(l)   Commercial & Professional Services           42,281,308       42,281       42,281  

H.I.G. Empire Holdco, Inc., Common Equity

  (g)(l)   Retailing           375       1,118       1,148  

Harvey Holdings, LLC, Common Equity

  (g)(l)   Capital Goods           2,333,333       2,333       5,367  

Imagine Communications Corp., Common Equity, Class A Units

  (g)(l)   Media           33,034       3,783       3,191  

Industrial Group Intermediate Holdings, LLC, Common Equity

  (g)(l)(n)   Materials           441,238       441       772  

JMC Acquisition Holdings, LLC, Common Equity

  (g)(l)   Capital Goods           483       483       539  

JW Aluminum Co., Common Equity

  (f)(g)(l)(u)   Materials           972       —         —    

JW Aluminum Co., Preferred Equity

  (f)(g)(u)   Materials           4,499       43,507       45,031  

Leading Edge Aviation Services, Inc., Common Equity

  (f)(l)   Capital Goods           4,401       464       137  

Leading Edge Aviation Services, Inc., Preferred Equity

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

MB Precision Investment Holdings LLC, Class A-2 Units

  (g)(l)(n)   Capital Goods           490,213       490       98  

 

See notes to unaudited consolidated financial statements.

 

22


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

        Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Micronics, Inc., Common Equity

  (g)(l)   Capital Goods           53,073     $ 553     $ 403  

Micronics, Inc., Preferred Equity

  (g)(l)   Capital Goods           55       553       740  

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

  (g)(j)(l)   Diversified Financials           3,000,000       15,058       8,310  

North Haven Cadence Buyer, Inc., Common Equity

  (g)(l)   Consumer Services           1,041,667       1,042       1,094  

PSAV Holdings LLC, Common Equity

  (f)   Technology Hardware & Equipment           10,000       10,000       28,500  

Ridgeback Resources Inc., Common Equity

  (f)(j)(l)   Energy           324,954       1,997       1,997  

Roadhouse Holding Inc., Common Equity

  (g)(l)(t)   Consumer Services           6,672,036       6,932       8,147  

S1 Blocker Buyer Inc., Common Equity

  (g)   Commercial & Professional Services           59       587       571  

Safariland, LLC, Common Equity

  (f)(l)   Capital Goods           25,000       2,500       11,535  

Safariland, LLC, Warrants, 7/27/2018

  (f)(l)   Capital Goods           2,263       246       1,044  

Safariland, LLC, Warrants, 9/20/2019

  (f)(l)   Capital Goods           2,273       227       1,049  

SandRidge Energy, Inc., Common Equity

  (g)(j)(l)   Energy           186,853       4,671       4,400  

Sequel Industrial Products Holdings, LLC, Common Equity

  (f)(g)(l)   Commercial & Professional Services           33,306       3,400       9,682  

Sequel Industrial Products Holdings, LLC, Preferred Equity

  (f)(g)   Commercial & Professional Services           8,000       12,174       12,179  

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

  (g)(l)   Commercial & Professional Services           1,293       1       219  

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

  (f)(l)   Commercial & Professional Services           19,388       12       3,697  

Sequential Brands Group, Inc., Common Equity

  (g)(j)(l)   Consumer Durables & Apparel           206,664       2,790       967  

Sorenson Communications, Inc., Common Equity

  (f)(l)   Telecommunication Services           46,163       —         38,989  

Sunnova Energy Corp., Common Equity

  (g)(l)   Energy           192,389       722       1,045  

Sunnova Energy Corp., Preferred Equity

  (g)(l)   Energy           18,182       97       99  

SWI Holdco LLC, Common Equity

  (g)(l)   Consumer Durables & Apparel           950       —         2,613  

ThermaSys Corp., Common Equity

  (f)(l)   Capital Goods           51,813       1       —    

ThermaSys Corp., Preferred Equity

  (f)(l)   Capital Goods           51,813       5,181       —    

VPG Group Holdings LLC, Class A-2 Units

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

Warren Resources, Inc., Common Equity

  (f)(g)(l)   Energy           113,515       534       488  

Zeta Interactive Holdings Corp., Preferred Equity

  (g)(l)   Software & Services           215,662       1,714       1,931  
             

 

 

   

 

 

 

Total Equity/Other

                368,927       506,647  
             

 

 

   

 

 

 

TOTAL INVESTMENTS—162.2%

              $ 3,743,940       3,726,816  
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(62.2%)

                  (1,429,439
             

 

 

 

NET ASSETS—100%

                $ 2,297,377  
               

 

 

 

 

See notes to unaudited consolidated financial statements.

 

23


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

 

(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, 2016, the three-month London Interbank Offered Rate, or LIBOR or “L”, was 1.00%, the Euro Interbank Offered Rate, or EURIBOR, was (0.32)% and the U.S. Prime Lending Rate, or Prime, was 3.75%. PIK means paid-in-kind.

 

(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 term loan facility with JPMorgan Chase Bank, N.A. (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 revolving credit facility with ING Capital LLC (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).

 

(h) Security or portion thereof held within Hamilton Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with HSBC Bank USA, N.A. (see Note 8).

 

(i) Position or portion thereof unsettled as of December 31, 2016.

 

(j) 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, 2016, 81.8% of the Company’s total assets represented qualifying assets.

 

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

 

(l) Security is non-income producing.

 

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

 

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

 

(o) Security held within IC Arches Investments LLC, a wholly-owned subsidiary of the Company.

 

(p) Security held within IC Altus Investments, LLC, a wholly-owned subsidiary of the Company.

 

(q) Security is an unfunded commitment. Reflects the stated spread at the time of commitment, but may not be the actual rate received upon funding.

 

(r) Asset is on non-accrual status.

 

(s) The transfer of a portion of this loan does not qualify for sale accounting under Accounting Standards Codification Topic 860, Transfers and Servicing, and therefore, the entire senior secured loan remains in the consolidated schedule of investments as of December 31, 2016 (see Note 8).

 

See notes to unaudited consolidated financial statements.

 

24


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

(t) 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 more than 25% 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 December 31, 2016, the Company held investments in portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control”. The following table presents certain information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person for the year ended December 31, 2016:

 

Portfolio Company

  Fair Value at
December 31, 2015
    Purchases  and
Paid-in-kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
December 31,
2016
    Interest
Income
    Fee
Income
    Dividend
Income
 

Senior Secured Loans—First Lien

                   

ASG Technologies Group, Inc.

  $ 38,321     $ 15,628       —       $ 44       —       $ 773     $ 54,766     $ 4,841       —         —    

Senior Secured Loans—Second Lien

                   

ASG Technologies Group, Inc.

    —       $ 18,069       —       $ 464       —       $ 5,339     $ 23,872     $ 1,818     $ 738       —    

Logan’s Roadhouse, Inc.

    —       $ 16,114       —         —         —       $ (699   $ 15,415     $ 165     $ 14       —    

Equity/Other

                   

ASG Technologies Group, Inc., Common Equity

  $ 77,898       —         —         —         —       $ 1,775     $ 79,673       —         —         —    

ASG Technologies Group, Inc., Warrants, 6/27/2022

    —       $ 6,542       —         —         —       $ (712   $ 5,830       —         —         —    

Fronton Investor Holdings, LLC, Class B Units

  $ 16,138       —       $ (1,874     —         —       $ 828     $ 15,092       —         —       $ 224  

Roadhouse Holding Inc., Common Equity

    —       $ 6,932       —         —         —       $ 1,215     $ 8,147       —         —         —    

 

See notes to unaudited consolidated financial statements.

 

25


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

(a) Under the Investment Company Act of 1940, as amended, the Company generally is deemed to “control” a portfolio company if it owns more than 25% 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 December 31, 2016, the Company held investments in one portfolio company of which it is deemed to be an “affiliated person” and deemed to “control”. The following table presents certain information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person and deemed to control for the year ended December 31, 2016:

 

Portfolio Company

  Fair Value at
December 31, 2015
    Purchases  and
Paid-in-kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
December 31,
2016
    Interest
Income
    Fee
Income
    Dividend
Income
 

Senior Secured Loans—Second Lien

                   

JW Aluminum Co.

  $ 32,887     $ 4,478       —       $ 2       —       $ 672     $ 38,039     $ 3,338       —         —    

Senior Secured Bonds

 

   

JW Aluminum Co.

    —       $ 8,060     $ (8,141   $ 107     $ (26     —         —       $ 210       —         —    

Equity/Other

                   

JW Aluminum Co., Common Equity

    —         —         —         —         —         —         —         —         —         —    

JW Aluminum Co., Preferred Equity

  $ 43,844     $ 406       —         —         —       $ 781     $ 45,031     $ 35       —         —    

 

See notes to unaudited consolidated financial statements.

 

26


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 March 31, 2017, the Company had two wholly-owned financing subsidiaries and five wholly-owned subsidiaries through which it holds interests in portfolio companies. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2017. All significant intercompany transactions have been eliminated in consolidation. Certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state income taxes.

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 interests 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 or the cash value of common stock or other equity, in the Company’s target companies, generally 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. The Company’s investment adviser, FB Income Advisor, LLC, or FB Advisor, will seek to tailor the Company’s investment focus as market conditions evolve. Depending on market conditions, the Company may increase or decrease its exposure to less senior portions of the capital structure or otherwise make opportunistic investments.

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, 2016 included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for

 

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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 2. Summary of Significant Accounting Policies (continued)

the year ending December 31, 2017. The December 31, 2016 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, 2016. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Update No. 2013-08, Financial Services—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.

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: Pursuant to the terms of the amended and restated investment advisory agreement, dated July 17, 2014, or the investment advisory agreement, by and between the Company and FB Advisor, 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 investment advisory agreement). This fee equals 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 the investment advisory agreement neither includes nor contemplates 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, the Company includes 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 the 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 investment advisory agreement, which is calculated and payable quarterly in arrears, equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the value of the Company’s net assets, equal 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.

 

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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 2. Summary of Significant Accounting Policies (continued)

 

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.

Partial Loan Sales: The Company follows the guidance in Accounting Standards Codification Topic 860, Transfers and Servicing, or ASC Topic 860, when accounting for loan participations and other partial loan sales. This guidance requires a participation or other partial loan sale to meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s consolidated balance sheets and the proceeds are recorded as a secured borrowing until the participation or other partial loan sale meets the definition. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value. See Note 8 for additional information.

Reclassifications: Certain amounts in the unaudited consolidated financial statements as of and for the three months ended March 31, 2016 and the audited consolidated financial statements as of and for the year ended December 31, 2016 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements as of and for the three months ended March 31, 2017. 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 three months ended March 31, 2017 and 2016:

 

     Three Months Ended March 31,  
     2017      2016  
     Shares      Amount      Shares      Amount  

Reinvestment of Distributions

     536,304      $ 5,350        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Proceeds from Share Transactions

     536,304      $ 5,350        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

29


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 3. Share Transactions (continued)

 

During the three months ended March 31, 2017, the Company issued 536,304 shares of common stock pursuant to its distribution reinvestment plan, or DRP, for gross proceeds of $5,350 at an average price per share of $9.98. During the three months ended March 31, 2016, the administrator for the Company’s DRP purchased 619,897 shares of common stock in the open market at an average price per share of $9.05 (totaling $5,612) pursuant to the Company’s DRP and distributed such shares to participants in the Company’s DRP. During the period from April 1, 2017 to May 9, 2017, the Company issued an additional 553,349 shares of common stock pursuant to its DRP for gross proceeds of $5,235 at an average price per share of $9.46. For additional information regarding the terms of the DRP, see Note 5.

Note 4. Related Party Transactions

Compensation of the Investment Adviser

Pursuant to the investment advisory agreement, FB Advisor is entitled to an annual base management fee equal to 1.75% of the average value of the Company’s gross assets (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. Base management fees are paid on a quarterly basis in arrears.

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 and is subject to a hurdle rate, expressed as a rate of return on the value of the Company’s net assets, equal 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.

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.

 

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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 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 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 gains 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.

Pursuant to an investment sub-advisory agreement, or the investment sub-advisory agreement, between FB Advisor and GSO / Blackstone Debt Funds Management LLC, or GDFM, GDFM will receive 50% of all management and incentive fees payable to FB Advisor under the investment advisory agreement with respect to each year.

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. 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. (which does business as FS Investments), or FS Investments, 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.

The following table describes the fees and expenses accrued under the investment advisory agreement and the administration agreement, as applicable, during the three months ended March 31, 2017 and 2016:

 

Related Party

 

Source Agreement

 

Description

  Three Months Ended
March 31,
 
            2017               2016      

FB Advisor

  Investment Advisory Agreement   Base Management Fee(1)   $ 18,367     $ 17,812  

FB Advisor

  Investment Advisory Agreement   Subordinated Incentive Fee on Income(2)   $ 13,147     $ 12,485  

FB Advisor

  Administration Agreement   Administrative Services Expenses(3)   $ 734     $ 1,196  

 

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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)

 

 

(1) During the three months ended March 31, 2017 and 2016, $18,022 and $18,415, respectively, in base management fees were paid to FB Advisor. As of March 31, 2017, $18,367 in base management fees were payable to FB Advisor.

 

(2) During the three months ended March 31, 2017 and 2016, $12,885 and $13,374, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of March 31, 2017, a subordinated incentive fee on income of $13,147 was payable to FB Advisor.

 

(3) During the three months ended March 31, 2017 and 2016, $650 and $1,124, 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 $904 and $1,164, respectively, in administrative services expenses to FB Advisor during the three months ended March 31, 2017 and 2016.

Potential Conflicts of Interest

FB Advisor’s senior management team is comprised of substantially the same personnel as the senior management teams of the investment advisers to certain other BDCs, open- and closed-end management investment companies and a real estate investment trust sponsored by FS Investments, or the Fund Complex. As a result, such personnel provide or expect to provide investment advisory services to certain others funds in the Fund Complex and such personnel may serve in similar or other capacities for the investment advisers to future investment vehicles in the Fund Complex. While none of the investment advisers are currently providing investment advisory services to clients other than the funds in the Fund Complex, any, or all, may do so in the future. In the event that FB Advisor or its management team 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. For additional information regarding potential conflicts of interest, please see the Company’s annual report on Form 10-K for the year ended December 31, 2016.

Exemptive Relief

As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term. 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, including 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 it, in part, by allowing the Company to participate in larger investments, together with its co-investment affiliates, than would be available to the Company if such relief had not been obtained. Because the Company did not seek exemptive relief to engage in co-investment

 

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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)

 

transactions with GDFM and its affiliates, the Company is permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance (e.g., where price is the only negotiated term).

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 FS Investments. Pursuant to the trademark license agreement, FS Investments 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 FS Investments or the Company on sixty days’ prior written notice and expires if FB Advisor or one of FS Investments’ affiliates ceases to serve as investment adviser to the Company. Furthermore, FS Investments may terminate the trademark license agreement at any time and in its sole discretion in the event that FS Investments 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 FS Investments. 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 three months ended March 31, 2017 and 2016:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2016

     

March 31, 2016

   $ 0.2228      $ 54,093  

Fiscal 2017

     

March 31, 2017

   $ 0.2228      $ 54,485  

On May 3, 2017, the Company’s board of directors declared a regular quarterly cash distribution of $0.22275 per share, which will be paid on or about July 5, 2017 to stockholders of record as of the close of business on June 21, 2017. 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.

Pursuant to the Company’s 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 DRP will have their distributions automatically reinvested in additional shares of the Company’s common stock.

With respect to each distribution pursuant to the 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

 

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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)

 

implementation of the DRP. Unless the Company, in its sole discretion, otherwise directs the plan administrator, (A) if the per share market price (as defined in the 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 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 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 three months ended March 31, 2017 and 2016:

 

     Three Months Ended March 31,  
     2017     2016  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —          —       $ —          —    

Borrowings

     —          —         —          —    

Net investment income(1)

     54,485        100     54,093        100

Short-term capital gains proceeds from the sale of assets

     —          —         —          —    

Long-term capital gains proceeds from the sale of assets

     —          —         —          —    

Non-capital gains proceeds from the sale of assets

     —          —         —          —    

Distributions on account of preferred and common equity

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 54,485        100   $ 54,093        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the three months ended March 31, 2017 and 2016, 90.6% and 89.1%, respectively, of the Company’s gross investment income was attributable to cash income earned, 1.4% and 2.9%, respectively, was attributable to non-cash accretion of discount and 8.0% and 8.0%, respectively, was attributable to PIK interest.

The Company’s net investment income on a tax basis for the three months ended March 31, 2017 and 2016 was $44,846 and $49,516, respectively. As of March 31, 2017 and December 31, 2016, the Company had $143,951 and $153,590 of undistributed net investment income, respectively, and $173,189 and $73,184, respectively, of accumulated capital losses on a tax basis.

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is primarily due to the reclassification of unamortized original issue discount and prepayment fees recognized upon prepayment of loans from income for GAAP purposes to realized gains or deferred to future periods for tax purposes and the impact of consolidating certain subsidiaries for purposes of computing GAAP-basis net investment income but not for purposes of computing tax-basis net investment income.

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2017 and 2016:

 

     Three Months Ended
March 31,
 
     2017     2016  

GAAP-basis net investment income

   $ 52,590     $ 49,938  

Income subject to tax not recorded for GAAP

     (71     —    

GAAP versus tax-basis impact of consolidation of certain subsidiaries

     3,033       1,054  

Reclassification or deferral of unamortized original issue discount and prepayment fees

     (10,818     (1,549

Other miscellaneous differences

     112       73  
  

 

 

   

 

 

 

Tax-basis net investment income

   $ 44,846     $ 49,516  
  

 

 

   

 

 

 

 

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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 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 March 31, 2017 and December 31, 2016, the components of accumulated earnings on a tax basis were as follows:

 

     March 31, 2017
(Unaudited)
    December 31,
2016
 

Distributable ordinary income

   $ 143,951     $ 153,590  

Distributable realized gains (accumulated capital losses)(1)

     (173,189     (73,184

Other temporary differences

     (289     (300

Net unrealized appreciation (depreciation) on investments and secured borrowing and gain/loss on foreign currency(2)

     77,561       (44,013
  

 

 

   

 

 

 

Total

   $ 48,034     $ 36,093  
  

 

 

   

 

 

 

 

 

(1) Under the Regulated Investment Company Modernization Act of 2010, net capital losses recognized for tax years beginning after December 22, 2010 may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of March 31, 2017, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $31,503 and $141,686, respectively.

 

(2) As of March 31, 2017 and December 31, 2016, the gross unrealized appreciation on the Company’s investments and secured borrowing and gain on foreign currency was $228,531 and $226,121, respectively. As of March 31, 2017 and December 31, 2016, the gross unrealized depreciation on the Company’s investments and secured borrowing and loss on foreign currency was $150,970 and $270,134, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $3,855,340 and $3,780,294 as of March 31, 2017 and December 31, 2016, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $68,828 and $(53,478) as of March 31, 2017 and December 31, 2016, respectively.

As of March 31, 2017, the Company had a deferred tax liability of $22,707 resulting from unrealized appreciation on investments held by the Company’s wholly-owned taxable subsidiaries and a deferred tax asset of $23,151 resulting from net operating losses of the Company’s wholly-owned taxable subsidiaries. As of March 31, 2017, certain wholly-owned taxable subsidiaries anticipated that they would be unable to fully utilize their generated net operating losses, therefore the deferred tax asset was offset by a valuation allowance of $444. For the three months ended March 31, 2017, the Company did not record a provision for taxes related to wholly-owned taxable subsidiaries.

 

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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 March 31, 2017 and December 31, 2016:

 

    March 31, 2017 (Unaudited)     December 31, 2016  
    Amortized
Cost(1)
    Fair
Value
    Percentage
of  Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
 

Senior Secured Loans—First Lien

  $ 2,236,177     $ 2,234,229       57   $ 1,992,159     $ 1,935,441       52

Senior Secured Loans—Second Lien

    391,953       373,122       9     619,892       599,155       16

Senior Secured Bonds

    166,365       171,343       4     205,657       159,470       4

Subordinated Debt

    602,845       585,325       15     498,080       454,045       12

Collateralized Securities

    51,462       63,923       2     59,225       72,058       2

Equity/Other

    380,057       496,226       13     368,927       506,647       14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,828,859     $ 3,924,168       100   $ 3,743,940     $ 3,726,816       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 March 31, 2017, the Company was deemed to “control” JW Aluminum Co., as defined in the 1940 Act, in which the Company has one senior secured loan investment and two equity/other investments. As of March 31, 2017, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of Advanced Lighting Technologies, Inc., in which the Company has one senior secured bond investment and one equity/other investment, ASG Technologies Group, Inc., in which the Company has two senior secured loan investments and two equity/other investments, Aspect Software, Inc., in which the Company has two senior secured loan investments, two unfunded senior secured loan commitments and one equity/other investment, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which the Company has one senior secured loan investment and one equity/other investment, and Fronton Investor Holdings, LLC, in which the Company has an equity/other investment. As of March 31, 2017, except for these portfolio companies, the Company did not “control” and was not an “affiliated person”, each as defined in the 1940 Act, of any of its portfolio companies.

As of December 31, 2016, the Company was deemed to “control” JW Aluminum Co., as defined in the 1940 Act, in which the Company has one senior secured loan investment and two equity/other investments. As of December 31, 2016, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of ASG Technologies Group, Inc. (formerly Allen Systems Group, Inc.), in which the Company has two senior secured loan investments and two equity/other investments, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which the Company has one senior secured loan investment and one equity/other investment, and Fronton Investor Holdings, LLC, in which the Company has an equity/other investment. As of December 31, 2016, except for these portfolio companies, the Company did not “control” and was not an “affiliated person”, each as defined in the 1940 Act, of any of its portfolio companies.

In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned more than 25% 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

 

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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 (continued)

 

require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2017, the Company had twenty unfunded debt investments with aggregate unfunded commitments of $202,069, one unfunded commitment to purchase up to $315 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $21 in shares of common stock of Chisholm Oil and Gas, LLC. As of December 31, 2016, the Company had seventeen unfunded debt investments with aggregate unfunded commitments of $186,233 and one unfunded commitment to purchase up to $362 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 March 31, 2017 and the Company’s audited consolidated schedule of investments as of December 31, 2016.

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 March 31, 2017 and December 31, 2016:

 

    March 31, 2017
(Unaudited)
    December 31, 2016  

Industry Classification

  Fair
Value
    Percentage of
Portfolio
    Fair
Value
    Percentage of
Portfolio
 

Automobiles & Components

  $ 30,388       1   $ 27,525       1

Capital Goods

    954,871       24     708,946       19

Commercial & Professional Services

    518,563       13     514,682       14

Consumer Durables & Apparel

    193,448       5     198,752       5

Consumer Services

    330,286       9     343,211       9

Diversified Financials

    205,028       5     184,355       5

Energy

    288,713       7     432,047       12

Health Care Equipment & Services

    247,201       6     199,064       5

Materials

    278,197       7     263,849       7

Media

    117,510       3     113,455       3

Retailing

    140,828       4     110,262       3

Semiconductors & Semiconductor Equipment

    5,093       0     5,328       0

Software & Services

    247,605       6     265,501       7

Technology Hardware & Equipment

    112,900       3     108,500       3

Telecommunication Services

    161,523       4     161,544       4

Transportation

    92,014       3     89,795       3
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,924,168       100   $ 3,726,816       100
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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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)

 

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 March 31, 2017 and December 31, 2016, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   March 31, 2017
(Unaudited)
     December 31,
2016
 

Level 1—Price quotations in active markets

   $ 9,312      $ 6,326  

Level 2—Significant other observable inputs

     —          —    

Level 3—Significant unobservable inputs

     3,914,856        3,720,490  
  

 

 

    

 

 

 
   $ 3,924,168      $ 3,726,816  
  

 

 

    

 

 

 

The Company has elected the fair value option under ASC Topic 825, Financial Instruments, relating to accounting for debt obligations at their fair value for its secured borrowings which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. The Company reports changes in the fair value of its secured borrowing as a component of the net change in unrealized appreciation (depreciation) on secured borrowing in the consolidated statements of operations. The net gain or loss reflects the difference between the fair value and the principal amount due on maturity.

The secured borrowing as of March 31, 2017 was valued using Level 3 inputs under the fair value hierarchy. The Company’s approach to determining fair value of the Level 3 secured borrowing is consistent with its approach to determining fair value of the Level 3 investments that are associated with the secured borrowing. See Note 2 and Note 8 for additional information.

As of March 31, 2017 and December 31, 2016, the Company’s secured borrowing was categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   March 31, 2017
(Unaudited)
     December 31,
2016
 

Level 1—Price quotations in active markets

   $ —        $ —    

Level 2—Significant other observable inputs

     —          —    

Level 3—Significant unobservable inputs

     2,891        2,880  
  

 

 

    

 

 

 
   $ 2,891      $ 2,880  
  

 

 

    

 

 

 

 

39


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 Company’s investments as of March 31, 2017 consisted primarily of debt investments that were acquired directly from the issuer. Sixty-four senior secured loan investments, five senior secured bond investments and seventeen subordinated debt investments, 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 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 earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Three equity investments, which were traded on an active public market, were valued at their respective closing price as of March 31, 2017. Two senior secured loan investments and two equity/other investments, which were newly issued and purchased near March 31, 2017, 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.

The Company’s investments as of December 31, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Sixty senior secured loan investments, four senior secured bond investments and sixteen subordinated debt investments, 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 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. Three equity investments, which were traded on an active public market, were valued at their respective closing prices as of December 31, 2016. One senior secured loan investment, which was newly issued and purchased near December 31, 2016, was valued at cost as the Company’s board of directors determined that the cost of this 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.

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

 

40


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)

 

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.

The following is a reconciliation for the three months ended March 31, 2017 and 2016 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Three Months Ended March 31, 2017  
    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

  $ 1,935,441     $ 599,155     $ 159,470     $ 454,045     $ 72,058     $ 500,321     $ 3,720,490  

Accretion of discount (amortization of premium)

    425       1,076       160       414       2       1       2,078  

Net realized gain (loss)

    (53,064     200       (47,058     (1,130     (266     297       (101,021

Net change in unrealized appreciation (depreciation)

    54,770       1,906       51,165       26,515       (372     (19,795     114,189  

Purchases

    335,783       51,826       38,221       104,143       —         4,974       534,947  

Paid-in-kind interest

    280       987       —         6,077       —         1,137       8,481  

Sales and repayments

    (39,406     (282,028     (30,615     (4,739     (7,499     (21     (364,308

Net transfers in or out of Level 3

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,234,229     $ 373,122     $ 171,343     $ 585,325     $ 63,923     $ 486,914     $ 3,914,856  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 5,805     $ 1,814     $ 1,594     $ 26,172     $ (372   $ (17,179   $ 17,834  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

    For the Three Months Ended March 31, 2016  
    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

  $ 2,173,829     $ 624,814     $ 240,754     $ 438,414     $ 85,007     $ 465,769     $ 4,028,587  

Accretion of discount (amortization of premium)

    496       354       1,769       443       —         26       3,088  

Net realized gain (loss)

    (75     219       (14,688     (405     —         1,170       (13,779

Net change in unrealized appreciation (depreciation)

    8,198       1,216       (24,721     (12,644     (3,509     (15,039     (46,499

Purchases

    19,943       —         —         11,516       —         24,158       55,617  

Paid-in-kind interest

    295       1,914       —         5,440       —         633       8,282  

Sales and repayments

    (110,016     (40,581     (10,453     (1,395     (3,013     (3,670     (169,128

Net transfers in or out of Level 3(1)

    —         —         —         —         —         (1,412     (1,412
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,092,670     $ 587,936     $ 192,661     $ 441,369     $ 78,485     $ 471,635     $ 3,864,756  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 9,389     $ 1,110     $ (24,721   $ (12,644   $ (3,509   $ (11,951   $ (42,326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) There was one transfer of an investment from Level 3 to Level 1 during the three months ended March 31, 2016. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.

The following is a reconciliation for the three months ended March 31, 2017 of a secured borrowing for which significant unobservable inputs (Level 3) were used in determining market value:

 

     For the Three Months Ended
March 31, 2017
 
     Secured Borrowing  

Fair value at beginning of period

   $ (2,880

Amortization of premium (accretion of discount)

     (1

Net realized gain (loss)

     —    

Net change in unrealized appreciation (depreciation)

     (10

Repayments on secured borrowing

     —    

Paid-in-kind interest

     —    

Proceeds from secured borrowing

     —    

Net transfers in or out of Level 3

     —    
  

 

 

 

Fair value at end of period

   $ (2,891
  

 

 

 

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

   $ (10
  

 

 

 

 

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)

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of March 31, 2017 and December 31, 2016 were as follows:

 

Type of Investment

  Fair Value at
March 31, 2017
(Unaudited)
   

Valuation

Technique(1)

 

Unobservable

Input

 

Range

  Weighted
Average

Senior Secured Loans—First Lien

  $ 1,886,737     Market Comparables   Market Yield (%)   5.6% - 16.7%   9.7%
    55,993     Other(2)   Other(2)   N/A   N/A
    181,609     Market Quotes   Indicative Dealer Quotes   6.0% - 102.0%   100.4%
    109,890     Cost   Cost   99.0% - 99.0%   99.0%

Senior Secured Loans—Second Lien

    179,865     Market Comparables   Market Yield (%)   8.5% - 16.8%   10.5%
    34,146     Other(2)   Other(2)   N/A   N/A
    158,361     Market Quotes   Indicative Dealer Quotes   2.9% - 101.4%   95.7%
    750     Cost   Cost   100.0% - 100.0%   100.0%

Senior Secured Bonds

    121,085     Market Comparables   Market Yield (%)   8.5% - 9.8%   8.8%
      EBITDA Multiples (x)   4.8x - 6.3x   6.0x

.

      Production Multiples (Mboe/d)   $40,000.0 - $42,500.0   $41,250.0
      Proved Reserves Multiples (Mmboe)   $11.5 - $12.5   $12.0
      PV-10 Multiples (x)   0.8x - 0.9x   0.8x
    50,258     Market Quotes   Indicative Dealer Quotes   72.5% - 109.3%   99.8%

Subordinated Debt

    411,876     Market Comparables   Market Yield (%)   8.0% - 16.5%   13.8%
      EBITDA Multiples (x)   8.5x - 11.5x   8.8x
    173,449     Market Quotes   Indicative Dealer Quotes   68.6% - 105.8%   93.2%

Collateralized Securities

    63,923     Market Quotes   Indicative Dealer Quotes   7.7% - 100.0%   72.1%

Equity/Other

    404,899     Market Comparables   Market Yield (%)   13.8% - 14.3%   14.0%
      EBITDA Multiples (x)   4.8x - 14.8x   8.0x
      Production Multiples (Mboe/d)   $37,500.0 - $42,500.0   $38,804.8
      Proved Reserves Multiples (Mmboe)   $5.9 - $12.5   $11.1
      Production Multiples (MMcfe/d)   $2,375.0 - $2,625.0   $2,500.0
      Proved Reserves Multiples (Bcfe)   $1.1 - $1.2   $1.1
      PV-10 Multiples (x)   0.8x - 6.6x   3.5x
      Undeveloped Acreage Multiples ($/Acre)   $8,000.0 - $10,000.0   $9,000.0
      Capacity Multiple ($/kW)   $2,750.0 - $3,250.0   $3,000.0
    Discounted Cash Flow   Discount Rate (%)   22.8% - 24.8%   23.8%
    Option Valuation Model   Volatility (%)   32.5% - 42.5%   39.4%
    81,961     Other(2)   Other(2)   N/A   N/A
    54     Cost   Cost   100.0% - 100.0%   100.0%
 

 

 

         

Total

  $ 3,914,856          
 

 

 

         

Secured Borrowing

  $ (2,891   Market Comparables   Market Yield (%)   (6.1)% - (7.1)%   (6.6)%
 

 

 

         

 

43


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)

 

 

(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 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.

 

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

 

 

44


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, 2016
   

Valuation

Technique(1)

  

Unobservable

Input

  

Range

   Weighted
Average

Senior Secured Loans—First Lien

   $ 1,575,465     Market Comparables    Market Yield (%)    5.5% - 17.3%    10.0%
     93,703     Other(2)    Other(2)    N/A    N/A
     203,773     Market Quotes    Indicative Dealer Quotes    18.2% - 104.1%    99.6%
     62,500     Cost    Cost    100.0% - 100.0%    100.0%

Senior Secured Loans—Second Lien

     458,403     Market Comparables    Market Yield (%)    8.8% - 26.0%    12.4%
     140,752     Market Quotes    Indicative Dealer Quotes    8.8% - 101.0%    93.3%

Senior Secured Bonds

     109,936     Market Comparables    Market Yield (%)    7.5% - 9.0%    7.8%
        EBITDA Multiples (x)    6.3x - 7.3x    6.5x
        Production Multiples (Mboe/d)    $45,000.0 - $50,000.0    $47,500.0
        Proved Reserves Multiples (Mmboe)    $14.5 - $15.0    $14.8
        PV-10 Multiples (x)    0.8x - 0.9x    0.9x
     49,534     Market Quotes    Indicative Dealer Quotes    76.0% - 109.6%    98.5%

Subordinated Debt

     321,853     Market Comparables    Market Yield (%)    8.0% - 15.3%    13.0%
        EBITDA Multiples (x)    7.3x - 10.3x    8.7x
     132,192     Market Quotes    Indicative Dealer Quotes    60.8% - 125.5%    89.0%

Collateralized Securities

     72,058     Market Quotes    Indicative Dealer Quotes    11.1% - 94.3%    72.7%

Equity/Other

     453,246     Market Comparables    EBITDA Multiples (x)    4.5x - 16.3x    8.8x
        Production Multiples (Mboe/d)    $2,225.0 - $50,000.0    $42,391.6
        Proved Reserves Multiples (Mmboe)    $0.7 - $15.0    $8.8
        Undeveloped Acreage Multiples ($/Acre)    $8,000.0 - $10,000.0    $9,000.0
        Capacity Multiple ($/kW)    $2,375.0 - $2,875.0    $2,625.0
     Discounted Cash Flow    Discount Rate (%)    11.0% - 24.8%    19.9%
     Option Valuation Model    Volatility (%)    34.5% - 41.0%    39.5%
     47,075     Other(2)    Other(2)    N/A    N/A
  

 

 

            

Total

   $ 3,720,490             
  

 

 

            

Secured Borrowing

   $ (2,880   Market Comparables    Market Yield (%)    (6.0)% - (7.1)%    (6.6)%
  

 

 

            

 

(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 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

 

45


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)

 

  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.

Note 8. Financing Arrangements

The following tables present summary information with respect to the Company’s outstanding financing arrangements as of March 31, 2017 and December 31, 2016. 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, 2016 and the additional disclosure set forth in this Note 8.

 

    As of March 31, 2017
(Unaudited)

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
    Maturity Date

Hamilton Street Credit Facility

  Revolving Credit Facility   L+2.50%   $ 150,000     $ —       December 15, 2021

ING Credit Facility

  Revolving Credit Facility   L+2.25%   $ 180,128 (1)    $ 147,372     March 16, 2021

Locust Street Credit Facility

  Term Loan Credit Facility   L+2.68%   $ 425,000     $ —       November 1, 2020

4.000% Notes due 2019

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

4.250% Notes due 2020

  Unsecured Notes   4.25%   $ 405,000     $ —       January 15, 2020

4.750% Notes due 2022

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

Partial Loan Sale

  Secured Borrowing   L+4.50%
(1% floor)
  $ 2,857     $ —       July 29, 2022

 

(1) Amount includes borrowing in U.S. dollars and Euros. Euro balance outstanding of €42,188 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.07 as of March 31, 2017 to reflect total amount outstanding in U.S. dollars.

 

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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 8. Financing Arrangements (continued)

 

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2017 were $1,791,799 and 4.03%, respectively. As of March 31, 2017, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 4.01%.

 

    As of December 31, 2016

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
    Maturity Date

Hamilton Street Credit Facility

  Revolving Credit Facility   L+2.50%   $ 150,000     $ —       December 15, 2021

ING Credit Facility

  Revolving Credit Facility   L+2.50%   $ 44,932 (1)    $ 255,068     April 3, 2018

Locust Street Credit Facility

  Term Loan Credit Facility   L+2.68%   $ 425,000     $ —       November 1, 2020

4.000% Notes due 2019

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

4.250% Notes due 2020

  Unsecured Notes   4.25%   $ 405,000     $ —       January 15, 2020

4.750% Notes due 2022

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

Partial Loan Sale

  Secured Borrowing   L+4.50%
(1% floor)
  $ 2,857     $ —       July 29, 2022

 

(1) Borrowings in Euros. Euro balance outstanding of €42,575 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.06 as of December 31, 2016 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 year ended December 31, 2016 were $1,793,749 and 3.84%, respectively. As of December 31, 2016, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 4.16%.

Hamilton Street Credit Facility

On December 15, 2016, Hamilton Street Funding LLC, or Hamilton Street, a wholly owned, special purpose financing subsidiary of the Company, entered into a revolving credit facility, or the Hamilton Street credit facility, pursuant to (a) a Loan and Security Agreement, dated as of December 15, 2016, by and among Hamilton Street, as borrower, each of the lenders from time to time party thereto, each of the lender agents from time to time party thereto, HSBC Bank USA, National Association, as administrative agent, and U.S. Bank National Association, as collateral agent, account bank and custodian, and (b) certain other related transaction documents.

The Hamilton Street credit facility provides for a five-year credit facility with a four-year revolving period, during which Hamilton Street is permitted to borrow, repay and reborrow advances in U.S. dollars and certain agreed foreign currencies in an initial aggregate amount of up to $150,000, subject to its compliance with the terms of the Hamilton Street credit facility (including maintenance of the required borrowing base). The Hamilton Street credit facility has an accordion option that would permit the parties to increase the commitments by an additional $50,000 to $200,000. After the revolving period, outstanding advances under the Hamilton Street credit facility must be repaid by 5% each month until the maturity date at which time all remaining outstanding advances must be repaid.

As of March 31, 2017 and December 31, 2016, $150,000 was outstanding under the Hamilton Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $1,637 in connection with obtaining the Hamilton Street 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 March 31, 2017, $1,543 of such deferred financing costs had yet to be amortized to interest expense.

 

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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 months ended March 31, 2017 and 2016, the components of total interest expense for the Hamilton Street credit facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 1,382        —    

Non-usage fees

     —          —    

Amortization of deferred financing costs

     81        —    
  

 

 

    

 

 

 

Total interest expense

   $ 1,463        —    
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Hamilton Street credit facility were as follows:

 

     Three Months Ended
March  31,
 
         2017             2016      

Cash paid for interest expense(1)

     —         —    

Average borrowings under the facility

   $ 150,000       —    

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

     3.69     —    

Weighted average interest rate (including the effect of non-usage fees)(2)

     3.69     —    

 

(1) Interest under the Hamilton Street credit facility is paid quarterly in arrears.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

Borrowings of Hamilton Street are 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 a senior secured revolving credit facility with ING Capital LLC, or ING, as administrative agent, and the lenders party thereto, or the ING credit facility. The ING credit facility originally provided 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.

On March 16, 2017, the Company, certain subsidiary guarantors of the Company, the several banks and other financial institutions or entities from time to time party thereto and ING entered into a second amendment, or the Amendment, to the ING credit facility. The Amendment, among other things, (i) increased the lenders’ aggregate commitments under the ING credit facility to $327,500, (ii) extended the term of the revolving period to March 16, 2020 and the final maturity date to March 16, 2021, (iii) increased the size of the accordion

 

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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)

 

provision to permit increases to the lenders’ aggregate commitments under the ING credit facility up to $600,000 and (iv) decreased the Applicable Margin (as defined therein) to 1.25% with respect to any ABR Loan (as defined therein) and 2.25% with respect to any Eurocurrency Loan (as defined therein).

As of March 31, 2017 and December 31, 2016, $180,128 and $44,932, respectively, was outstanding under the ING credit facility, which includes borrowings in Euro in an aggregate amount of €42,188 and €42,575, respectively. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $6,106 in connection with obtaining and amending 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 March 31, 2017, $2,680 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the ING credit facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 1,023      $ 823  

Non-usage fees

     252        237  

Amortization of deferred financing costs

     308        281  
  

 

 

    

 

 

 

Total interest expense

   $ 1,583      $ 1,341  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the ING credit facility were as follows:

 

     Three Months Ended
March  31,
 
         2017             2016      

Cash paid for interest expense(1)

   $ 1,353     $ 1,421  

Average borrowings under the facility

   $ 133,941     $ 114,174  

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

     3.68     10.70

Weighted average interest rate (including the effect of non-usage fees)(2)

     3.81     3.67

 

(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.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

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 was subsequently amended several times, or the JPM Facility. Prior to its termination, the Company and JPM had most recently amended the financing arrangement on April 28, 2016 to, among other things, reduce the amount of outstanding available debt financing from $725,000 to $650,000. On November 1, 2016, in connection with the entrance into

 

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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 Locust Street credit facility (as defined below), (i) the Class A Notes issued by Locust Street to Race Street were redeemed, (ii) the amended and restated global master repurchase agreement between Race Street and Locust Street was terminated and (iii) the JPM Facility was prepaid and terminated.

For the three months ended March 31, 2016, the components of total interest expense for the JPM Facility were as follows:

 

     Three Months Ended
March 31, 2016
 

Direct interest expense

   $ 6,363  
  

 

 

 

Total interest expense

   $ 6,363  
  

 

 

 

For the three months ended March 31, 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM Facility were as follows:

 

     Three Months Ended
March 31, 2016
 

Cash paid for interest expense(1)

   $ 9,967  

Average borrowings under the facility

   $ 774,451  

Effective interest rate on borrowings

     3.25

Weighted average interest rate(2)

     3.25

 

(1) Interest under the JPM Facility is paid quarterly in arrears.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

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

JPM Term Loan Facility

On November 1, 2016, Locust Street entered into a loan agreement, or the Locust Street loan agreement and, together with the related transaction documents, the Locust Street term loan facility, with JPM, as lender and administrative agent, Citibank, N.A., as collateral agent and securities intermediary, and Virtus Group, LP, as collateral administrator, pursuant to which JPM advanced $625,000 to Locust Street. Advances outstanding under the Locust Street term loan facility bear interest at a rate equal to LIBOR for a three-month interest period plus a spread of 2.6833% per annum. Interest is payable in arrears beginning on January 15, 2017 and each quarter thereafter. Under the Locust Street loan agreement, Locust Street agreed to repay $200,000 of the aggregate principal amount of the advances on or before January 31, 2017, which repayment was satisfied in full in December 2016. All remaining outstanding advances under the Locust Street loan agreement will mature, and all accrued and unpaid interest thereunder, will be due and payable, on November 1, 2020.

As of March 31, 2017 and December 31, 2016, $425,000 was outstanding under the Locust Street term loan. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $4,481 in connection with obtaining the Locust Street term loan, 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 March 31, 2017, $4,023 of such deferred financing costs had yet to be amortized to interest expense.

 

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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 months ended March 31, 2017 and 2016, the components of total interest expense for the Locust Street credit facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 3,792        —    

Non-usage fees

     —          —    

Amortization of deferred financing costs

     276        —    
  

 

 

    

 

 

 

Total interest expense

   $ 4,068        —    
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Locust Street credit facility were as follows:

 

       Three Months Ended  
March 31,
 
     2017     2016  

Cash paid for interest expense(1)

   $ 2,738       —    

Average borrowings under the facility

   $ 425,000       —    

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

     3.57     —    

Weighted average interest rate (including the effect of non-usage fees)(2)

     3.57     —    

 

(1) Interest under the Locust Street credit facility is paid quarterly in arrears.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

Amounts outstanding under the Locust Street term loan are 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.

 

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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 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 4.000% notes and U.S. Bank if the Company is no longer subject to the reporting requirements under the Securities 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 March 31, 2017 and December 31, 2016, $400,000 of the 4.000% notes was outstanding. As of March 31, 2017, the fair value of the 4.000% notes was approximately $403,360. 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 March 31, 2017, $257 of such deferred financing costs had yet to be amortized to interest expense. In connection with issuing the 4.000% notes, the Company has charged $5,608 of discount against the carrying amount of such notes. As of March 31, 2017, $2,565 of such discount had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the 4.000% notes were as follows:

 

     Three Months Ended
March  31,
 
         2017              2016      

Direct interest expense

   $ 4,000      $ 3,788  

Amortization of deferred financing costs and discount

     302        308  
  

 

 

    

 

 

 

Total interest expense

   $ 4,302      $ 4,096  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the 4.000% notes were as follows:

 

     Three Months Ended
March  31,
 
     2017     2016  

Cash paid for interest expense(1)

   $ 8,000     $ 8,000  

Average borrowings under the 4.000% notes

   $ 400,000     $ 400,000  

Effective interest rate on borrowings

     4.00     4.00

Weighted average interest rate(2)

     4.00     4.00

 

(1) Interest under the 4.000% notes is paid semi-annually in arrears.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

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. On December 8, 2016, the Company issued an additional $80,000 aggregate principal amount of the 4.250% notes as additional notes under the second supplemental 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 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. 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 March 31, 2017 and December 31, 2016, $405,000 of the 4.250% notes was outstanding. As of March 31, 2017, the fair value of the 4.250% notes was approximately $409,396. The Company incurred costs of $1,747 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 March 31, 2017, $1,277 of such deferred financing costs had yet to be amortized to interest expense. In connection with issuing the 4.250% notes, the Company has charged $3,690 of discount against the carrying amount of such notes. As of March 31, 2017, $1,861 of such discount had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the 4.250% notes were as follows:

 

     Three Months Ended
March  31,
 
         2017              2016      

Direct interest expense

   $ 4,303      $ 3,453  

Amortization of deferred financing costs and discount

     279        241  
  

 

 

    

 

 

 

Total interest expense

   $ 4,582      $ 3,694  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the 4.250% notes were as follows:

 

     Three Months Ended
March 31,
 
     2017     2016  

Cash paid for interest expense(1)

   $ 8,607     $ 6,906  

Average borrowings under the 4.250% notes

   $ 405,000     $ 325,000  

Effective interest rate on borrowings

     4.25     4.25

Weighted average interest rate(2)

     4.25     4.25

 

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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)

 

 

(1) Interest under the 4.250% notes is paid semi-annually in arrears.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

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 March 31, 2017 and December 31, 2016, $275,000 of the 4.750% notes was outstanding. As of March 31, 2017, the fair value of the 4.750% notes was approximately $282,034. 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 March 31, 2017, $346 of such deferred financing costs had yet to be amortized to interest expense. In connection with issuing the 4.750% notes, the Company has charged $3,344 of discount against the carrying amount of such notes. As of March 31, 2017, $2,431 of such discount had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the 4.750% notes were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 3,266      $ 3,265  

Amortization of deferred financing costs and discount

     134        135  
  

 

 

    

 

 

 

Total interest expense

   $ 3,400      $ 3,400  
  

 

 

    

 

 

 

 

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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 months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the 4.750% notes were as follows:

 

     Three Months Ended
March  31,
 
         2017             2016      

Cash paid for interest expense(1)

     —         —    

Average borrowings under the 4.750% notes

   $ 275,000     $ 275,000  

Effective interest rate on borrowings

     4.75     4.75

Weighted average interest rate(2)

     4.75     4.75

 

(1) Interest under the 4.750% notes is paid semi-annually in arrears.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

Partial Loan Sale

Certain partial loan sales do not qualify for sale accounting under ASC Topic 860 because these sales do not meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment on the consolidated balance sheets and the portion sold is recorded as a secured borrowing in the liabilities section of the consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded within interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the consolidated statements of operations.

As of March 31, 2017 and December 31, 2016, the Company recognized a secured borrowing at fair value of $2,891 and $2,880, respectively, and the fair value of the loan that is associated with the secured borrowing was $15,080 and $14,993, respectively. The secured borrowing was the result of the Company’s completion of a partial sale of a senior secured loan associated with one portfolio company that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and the partial loan sale was treated as a secured borrowing.

During the three months ended March 31, 2017, there were no new partial loan sales, fundings on revolving and delayed draw secured borrowings or repayments on secured borrowings.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the secured borrowing were as follows:

 

     Three Months Ended
March  31,
 
         2017              2016      

Direct interest expense

   $ 40        —    

Amortization of discount

     1        —    
  

 

 

    

 

 

 

Total interest expense

   $ 41        —    
  

 

 

    

 

 

 

 

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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 months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the secured borrowing were as follows:

 

     Three Months Ended
March 31,
 
         2017             2016      

Cash paid for interest expense(1)

   $ 41       —    

Average secured borrowing

   $ 2,857       —    

Effective interest rate on secured borrowing

     5.53     —    

Weighted average interest rate(2)

     5.50     —    

 

(1) Interest under the secured borrowing is paid quarterly in arrears.
(2) The weighted average interest rate presented for periods of less than one year is annualized.

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 three months ended March 31, 2017 and the year ended December 31, 2016:

 

     Three Months Ended
March 31, 2017
    Year Ended
December 31,
2016
 
     (Unaudited)    

Per Share Data:(1)

    

Net asset value, beginning of period

   $ 9.41     $ 9.10  

Results of operations(2)

    

Net investment income (loss)

     0.22       0.85  

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

     0.04       0.35  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.26       1.20  
  

 

 

   

 

 

 

Stockholder distributions(3)

    

Distributions from net investment income

     (0.22     (0.89

Distributions from net realized gain on investments

     —         —    
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (0.22     (0.89
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock(4)

     0.00       0.00  
  

 

 

   

 

 

 

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

     —         —    
  

 

 

   

 

 

 

Net asset value, end of period

   $ 9.45     $ 9.41  
  

 

 

   

 

 

 

Per share market value, end of period

   $ 9.80     $ 10.30  
  

 

 

   

 

 

 

Shares outstanding, end of period

     244,599,661       244,063,357  
  

 

 

   

 

 

 

Total return based on net asset value(5)

     2.76     13.19
  

 

 

   

 

 

 

Total return based on market value(6)

     (2.61 )%      25.91
  

 

 

   

 

 

 

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 2,311,635     $ 2,297,377  
  

 

 

   

 

 

 

Ratio of net investment income to average net assets(7)

     2.29     9.32
  

 

 

   

 

 

 

Ratio of total operating expenses to average net assets(7)

     2.33     9.69
  

 

 

   

 

 

 

Portfolio turnover(8)

     9.49     29.65
  

 

 

   

 

 

 

Total amount of senior securities outstanding, exclusive of treasury securities

   $ 1,837,985     $ 1,702,789  
  

 

 

   

 

 

 

Asset coverage per unit(9)

     2.26       2.35  

 

(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 pursuant to the Company’s DRP. 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. The per share impact of the Company’s DRP is an increase to the net asset value of less than $0.01 per share during the three months ended March 31, 2017 and year ended December 31, 2016.

 

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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)

 

(5) 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.

 

(6) The total return based on market value for each period presented was calculated based on the change in market price during the applicable period, including the impact of distributions reinvested in accordance with the Company’s DRP. 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 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.

 

(7) Weighted average net assets during the applicable period are used for this calculation. The following is a schedule of supplemental ratios for the three months ended March 31, 2017 and year ended December 31, 2016:

 

    Three Months Ended
March 31, 2017

(Unaudited)
    Year Ended
December 31, 2016
 

Ratio of subordinated income incentive fees to average net assets

    0.57     2.33

Ratio of interest expense to average net assets

    0.85     3.33

Ratio of excise taxes to average net assets

    —         0.25

 

(8) Portfolio turnover for the three months ended March 31, 2017 is not annualized.

 

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

 

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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 the Fund Complex or any affiliate thereof;

 

   

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 on us and the portfolio companies in which we may invest and our and their 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 New York Stock Exchange, or 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 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 relationships and our relationship with GDFM and its global sourcing and origination platform, including its industry relationships, 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 (i.e., 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) 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 anchor orders. 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, we 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 interests 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 or the cash value of common stock or other equity, in our target companies, generally 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 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.

 

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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 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 FS Investments 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 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.

 

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We bear all other expenses of our operations and transactions, including all other expenses incurred by FB Advisor, GDFM or us in connection with administering our business, including expenses incurred by FB Advisor or GDFM in performing administrative services for us and administrative personnel paid by FB Advisor or GDFM. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2016.

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 Months Ended March 31, 2017 and for the Year Ended December 31, 2016

During the three months ended March 31, 2017, we made investments in portfolio companies totaling $539,689. During the same period, we sold investments for proceeds of $169,253 and received principal repayments of $195,055. As of March 31, 2017, our investment portfolio, with a total fair value of $3,924,168 (57% in first lien senior secured loans, 9% in second lien senior secured loans, 4% in senior secured bonds, 15% in subordinated debt, 2% in collateralized securities and 13% in equity/other), consisted of interests in 108 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $86.1 million. As of March 31, 2017, the debt investments in our portfolio were purchased at a weighted average price of 97.2% 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 9.3% based upon the amortized cost of our investments. For the three months ended March 31, 2017, our total return based on net asset value was 2.76% and our total return based on market value was (2.61)%.

During the year ended December 31, 2016, we made investments in portfolio companies totaling $1,157,827. During the same period, we sold investments for proceeds of $547,222 and received principal repayments of $1,041,276. As of December 31, 2016, our investment portfolio, with a total fair value of $3,726,816 (52% in first lien senior secured loans, 16% in second lien senior secured loans, 4% in senior secured bonds, 12% in subordinated debt, 2% in collateralized securities and 14% in equity/other), consisted of interests in 102 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $100.0 million. As of December 31, 2016, the debt investments in our portfolio were purchased at a weighted average price of 98.6% of par, and our estimated gross portfolio yield, prior to leverage, was 9.1% based upon the amortized cost of our investments. For the year ended December 31, 2016, our total return based on net asset value was 13.19% and our total return based on market value was 25.91%.

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 5 and 6 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 months ended March 31, 2017 and year ended December 31, 2016:

 

Net Investment Activity

   For the Three Months Ended
March 31, 2017
    For the Year  Ended
December 31, 2016
 

Purchases

   $ 539,689     $ 1,157,827  

Sales and Redemptions

     (364,308     (1,588,498
  

 

 

   

 

 

 

Net Portfolio Activity

   $ 175,381     $ (430,671
  

 

 

   

 

 

 

 

     For the Three Months Ended
March 31, 2017
    For the Year Ended
December 31, 2016
 

New Investment Activity by Asset Class

   Purchases      Percentage     Purchases      Percentage  

Senior Secured Loans—First Lien

   $ 335,783        62   $ 896,207        77

Senior Secured Loans—Second Lien

     51,826        10     52,526        5

Senior Secured Bonds

     38,221        7     13,189        1

Subordinated Debt

     104,143        19     67,563        6

Collateralized Securities

     —          —         4,575        0

Equity/Other

     9,716        2     123,767        11
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 539,689        100   $ 1,157,827        100
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2017 and December 31, 2016:

 

    March 31, 2017
(Unaudited)
    December 31, 2016  
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
 

Senior Secured Loans—First Lien

  $ 2,236,177     $ 2,234,229       57   $ 1,992,159     $ 1,935,441       52

Senior Secured Loans—Second Lien

    391,953       373,122       9     619,892       599,155       16

Senior Secured Bonds

    166,365       171,343       4     205,657       159,470       4

Subordinated Debt

    602,845       585,325       15     498,080       454,045       12

Collateralized Securities

    51,462       63,923       2     59,225       72,058       2

Equity/Other

    380,057       496,226       13     368,927       506,647       14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,828,859     $ 3,924,168       100   $ 3,743,940     $ 3,726,816       100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The following table presents certain selected information regarding the composition of our investment portfolio as of March 31, 2017 and December 31, 2016:

 

     March 31,
2017
    December 31,
2016
 

Number of Portfolio Companies

     108       102  

% Variable Rate (based on fair value)

     65.5     67.0

% Fixed Rate (based on fair value)

     21.8     19.4

% Income Producing Equity/Other Investments (based on fair value)

     2.7     2.7

% Non-Income Producing Equity/Other Investments (based on fair value)

     10.0     10.9

Average Annual EBITDA of Portfolio Companies

   $ 86,100     $ 100,000  

Weighted Average Purchase Price of Debt Investments (as a % of par)

     97.2     98.6

% of Investments on Non-Accrual (based on fair value)

     0.0     0.2

Gross Portfolio Yield Prior to Leverage (based on amortized cost)

     9.3     9.1

Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets

     10.2     10.1

 

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Direct Originations

The following tables present certain selected information regarding our direct originations for the three months ended March 31, 2017 and year ended December 31, 2016:

 

New Direct Originations

   For the Three Months Ended
March 31, 2017
    For the Year  Ended
December 31, 2016
 

Total Commitments (including unfunded commitments)

   $ 429,407     $ 1,113,309  

Exited Investments (including partial paydowns)

     (322,068     (1,296,693
  

 

 

   

 

 

 

Net Direct Originations

   $ 107,339     $ (183,384
  

 

 

   

 

 

 

 

     For the Three Months Ended
March 31, 2017
    For the Year Ended
December 31, 2016
 

New Direct Originations by Asset Class (including unfunded
commitments)

   Commitment
Amount
     Percentage     Commitment
Amount
     Percentage  

Senior Secured Loans—First Lien

   $ 348,809        81   $ 913,941        82

Senior Secured Loans—Second Lien

     4,780        1     56,376        5

Senior Secured Bonds

     6,000        2     13,273        1

Subordinated Debt

     65,000        15     33,187        3

Collateralized Securities

     —          —         —          —    

Equity/Other

     4,818        1     96,532        9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 429,407        100   $ 1,113,309        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     For the Three
Months Ended
March 31, 2017
    For the
Year Ended
December 31, 2016
 

Average New Direct Origination Commitment Amount

   $ 35,784     $ 29,298  

Weighted Average Maturity for New Direct Originations

     3/2/23       4/24/22  

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period

     9.8     8.8

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period—Excluding Non-Income Producing Assets

     10.0     9.7

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period

     9.1     8.9

The following table presents certain selected information regarding our direct originations as of March 31, 2017 and December 31, 2016:

 

Characteristics of All Direct Originations held in Portfolio

   March 31, 2017     December 31, 2016  

Number of Portfolio Companies

     73       67  

Average Annual EBITDA of Portfolio Companies

   $ 64,700     $ 64,600  

Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities

     4.5x       4.8x  

% of Investments on Non-Accrual

     —         0.1

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations

     9.3     9.1

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets

     10.1     10.1

 

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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 March 31, 2017 and December 31, 2016:

 

     March 31, 2017     December 31, 2016  

Portfolio Composition by Strategy

   Fair
Value
     Percentage of
Portfolio
    Fair
Value
     Percentage of
Portfolio
 

Direct Originations

   $ 3,430,320        87   $ 3,264,395        88

Opportunistic

     384,288        10     352,937        9

Broadly Syndicated/Other

     109,560        3     109,484        3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,924,168        100   $ 3,726,816        100
  

 

 

    

 

 

   

 

 

    

 

 

 

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 March 31, 2017 and December 31, 2016:

 

     March 31, 2017
(Unaudited)
    December 31, 2016  

Industry Classification

   Fair
Value
     Percentage of
Portfolio
    Fair
Value
     Percentage of
Portfolio
 

Automobiles & Components

   $ 30,388        1   $ 27,525        1

Capital Goods

     954,871        24     708,946        19

Commercial & Professional Services

     518,563        13     514,682        14

Consumer Durables & Apparel

     193,448        5     198,752        5

Consumer Services

     330,286        9     343,211        9

Diversified Financials

     205,028        5     184,355        5

Energy

     288,713        7     432,047        12

Health Care Equipment & Services

     247,201        6     199,064        5

Materials

     278,197        7     263,849        7

Media

     117,510        3     113,455        3

Retailing

     140,828        4     110,262        3

Semiconductors & Semiconductor Equipment

     5,093        0     5,328        0

Software & Services

     247,605        6     265,501        7

Technology Hardware & Equipment

     112,900        3     108,500        3

Telecommunication Services

     161,523        4     161,544        4

Transportation

     92,014        3     89,795        3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,924,168        100   $ 3,726,816        100
  

 

 

    

 

 

   

 

 

    

 

 

 

As of March 31, 2017, we were deemed to “control” JW Aluminum Co., as defined in the 1940 Act, in which we have one senior secured loan investment and two equity/other investments. As of March 31, 2017, we were deemed to be an “affiliated person”, as defined in the 1940 Act, of Advanced Lighting Technologies, Inc., in which we have one senior secured bond investment and one equity/other investment, ASG Technologies Group, Inc., in which we have two senior secured loan investments and two equity/other investments, Aspect Software, Inc., in which we have two senior secured loan investments, two unfunded senior secured loan commitments and one equity/other investment, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which we have one senior secured loan investment and one equity/other investment, and Fronton Investor Holdings, LLC, in which we have an equity/other investment. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned more than 25% 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. As of March 31, 2017, except for these portfolio companies, the Company did not “control” and was not an “affiliated person”, each as defined in the 1940 Act, of any of its portfolio companies.

 

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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 March 31, 2017, we had twenty unfunded debt investments with aggregate unfunded commitments of $202,069, one unfunded commitment to purchase up to $315 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $21 in shares of common stock of Chisholm Oil and Gas, LLC. As of December 31, 2016, we had seventeen unfunded debt investments with aggregate unfunded commitments of $186,233 and one unfunded commitment to purchase up to $362 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 March 31, 2017 and audited consolidated schedule of investments as of December 31, 2016.

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 March 31, 2017 and December 31, 2016:

 

     March 31, 2017     December 31, 2016  

Investment Rating

   Fair
Value
     Percentage  of
Portfolio
    Fair
Value
     Percentage  of
Portfolio
 

1

   $ 405,256        10   $ 383,790        10

2

     3,237,441        83     3,049,433        82

3

     238,109        6     242,608        7

4

     —          —         —          —    

5

     43,362        1     50,985        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,924,168        100   $ 3,726,816        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.

 

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Results of Operations

Comparison of the Three Months Ended March 31, 2017 and March 31, 2016

Revenues

We generated investment income of $106,064 and $103,063 for the three months ended March 31, 2017 and 2016, 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 $96,078 and $91,767 of cash income earned as well as $9,986 and $11,296 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2017 and 2016, 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 three months ended March 31, 2017 and 2016, we generated $86,505 and $101,197, respectively, of interest income, which represented 81.6% and 98.2%, 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 three months ended March 31, 2017 and 2016, we generated $19,559 and $1,642, respectively, of fee income, which represented 18.4% and 1.6%, respectively, of total investment income. Fee income is transaction based, and typically consists of amendment and consent fees, prepayment fees, structuring fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.

The decrease in interest income during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was primarily due to prepayments of higher-yielding assets and increased equity holdings during the three months ended March 31, 2017.

The increase in fee income during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was primarily due to increased prepayment activity during the three months ended March 31, 2017.

Expenses

Our total expenses were $53,474 and $53,125 for the three months ended March 31, 2017 and 2016, respectively. Our operating expenses include base management fees attributed to FB Advisor of $18,367 and $17,812 for the three months ended March 31, 2017 and 2016, respectively. Our expenses also include administrative services expenses attributed to FB Advisor of $734 and $1,196 for the three months ended March 31, 2017 and 2016, respectively.

FB Advisor is eligible to receive incentive fees based on our performance. During the three months ended March 31, 2017, we accrued a subordinated incentive fee on income of $13,147 which was payable to FS Advisor as of March 31, 2017. During the three months ended March 31, 2016, we accrued a subordinated incentive fee on income of $12,485. During the three months ended March 31, 2017 and 2016, we accrued no capital gains incentive fees based on the performance of our portfolio. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for additional information about how the incentive fees are calculated.

We recorded interest expense of $19,439 and $18,894 for the three months ended March 31, 2017 and 2016, respectively, in connection with our financing arrangements. The fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $265 and $228 for the three months ended March 31, 2017 and 2016, respectively. Fees for our board of directors were $271 and $229 for the three months ended March 31, 2017 and 2016, respectively.

 

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Our other general and administrative expenses totaled $1,251 and $2,281 for the three months ended March 31, 2017 and 2016, respectively, and consisted of the following:

 

     Three Months Ended
March 31,
 
         2017              2016      

Expenses associated with our independent audit and related fees

   $ 111      $ 112  

Legal fees

     118        297  

Printing fees

     149        445  

Stock transfer agent fees

     29        90  

Other

     844        1,337  
  

 

 

    

 

 

 

Total

   $ 1,251      $ 2,281  
  

 

 

    

 

 

 

During the three months ended March 31, 2017 and 2016, the ratio of our expenses to our average net assets was 2.33% and 2.44%, respectively. Our ratio of expenses to our average net assets during the three months ended March 31, 2017 and 2016 includes $19,439 and $18,894, respectively, related to interest expense and $13,147 and $12,485, respectively, related to accruals for incentive fees. Without such expenses, our ratio of expenses to average net assets would have been 0.91% and 1.00% for the three months ended March 31, 2017 and 2016, 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 adjusted expenses to average net assets during the three months ended March 31, 2017, compared to the three months ended March 31, 2016, can primarily be attributed to a decrease in printing fees and administrative services fees during the three months ended March 31, 2017 and loan breakage fees associated with the partial paydown of the JPM facility during the three months ended March 31, 2016.

Net Investment Income

Our net investment income totaled $52,590 ($0.22 per share) and $49,938 ($0.21 per share) for the three months ended March 31, 2017 and 2016, respectively. The increase in net investment income can be attributed primarily to additional fee income due to increased prepayment activity during the three months March 31, 2017.

Net Realized Gains or Losses

We sold investments and received principal repayments of $169,253 and $195,055, respectively, during the three months ended March 31, 2017, from which we realized a net loss of $101,021 as a result of the disposition of certain portfolio investments. We also realized a net gain of $123 from settlements on foreign currency during the three months ended March 31, 2017. We sold investments and received principal repayments of $65,846 and $103,282, respectively, during the three months ended March 31, 2016, from which we realized a net loss of $13,779. We also realized a net gain of $84 from settlements on foreign currency during the three months ended March 31, 2016.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Secured Borrowing and Unrealized Gain (Loss) on Foreign Currency

For the three months ended March 31, 2017, the net change in unrealized appreciation (depreciation) on investments and secured borrowing totaled $112,423 and the net change in unrealized gain (loss) on foreign currency totaled $(722). For the three months ended March 31, 2016, the net change in unrealized appreciation (depreciation) on investments totaled $(46,703) and the net change in unrealized gain (loss) on foreign currency totaled $(1,637). The net change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2017 was primarily driven by the conversion of unrealized depreciation to realized losses.

 

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Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2017, the net increase in net assets resulting from operations was $63,393 ($0.26 per share) compared to a net decrease in net assets resulting from operations of $12,097 ($(0.05) per share) during the three months ended March 31, 2016.

Financial Condition, Liquidity and Capital Resources

Overview

As of March 31, 2017, we had $53,684 in cash and foreign currency, which we or our wholly-owned financing subsidiaries held in custodial accounts, and $147,372 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of March 31, 2017, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of March 31, 2017, we had twenty unfunded debt investments with aggregate unfunded commitments of $202,069, one unfunded commitment to purchase up to $315 in shares of preferred stock and one unfunded commitment to purchase up to $21 in shares of common stock. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise.

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, including money market funds, 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 summary information with respect to our outstanding financing arrangements as of March 31, 2017:

 

Arrangement

  Type of Arrangement  

Rate

  Amount
Outstanding
    Amount
Available
    Maturity Date

Hamilton Street Credit Facility

  Revolving Credit Facility   L+2.50%   $ 150,000     $ —       December 15, 2021

ING Credit Facility

  Revolving Credit Facility   L+2.25%   $ 180,128 (1)    $ 147,372     March 16, 2021

Locust Street Credit Facility

  Term Loan Credit Facility   L+2.68%   $ 425,000     $ —       November 1, 2020

4.000% Notes due 2019

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

4.250% Notes due 2020

  Unsecured Notes   4.25%   $ 405,000     $ —       January 15, 2020

4.750% Notes due 2022

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

Partial Loan Sale

  Secured Borrowing  

L+4.50%

(1% floor)

  $ 2,857     $ —       July 29, 2022

 

(1) Amount includes borrowing in U.S. dollars and Euros. Euro balance outstanding of €42,188 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.07 as of March 31, 2017 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 three months ended March 31, 2017 were $1,791,799 and 4.03%, respectively. As of March 31, 2017, our weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 4.01%.

 

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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 subject to tax as a RIC under Subchapter M of the Code. In order to qualify for RIC tax treatment, 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 a tax year or the due date of the tax return for such tax year, including extensions, distributions paid up to twelve months after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC tax status each tax year. We are also subject to a 4% nondeductible federal excise taxes on certain undistributed income unless we make distributions in a timely manner to our stockholders generally of 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 gain net income, which is the excess of capital gains in excess of capital losses, or “capital gain net income” (adjusted for certain ordinary losses), for the one-year period ending October 31 of that calendar year and (3) any net ordinary income and capital gain net income for the 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 during October, November or December of any calendar year, payable to 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 paid by us, as well as 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.

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 three months ended March 31, 2017 or 2016 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 DRP. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.

 

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The following table reflects the cash distributions per share that we have declared on our common stock during the three months ended March 31, 2017 and 2016:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2016

     

March 31, 2016

   $ 0.2228      $ 54,093  

Fiscal 2017

     

March 31, 2017

   $ 0.2228      $ 54,485  

On May 3, 2017, our board of directors declared a regular quarterly cash distribution of $0.22275 per share, which will be paid on or about July 5, 2017 to stockholders of record as of the close of business on June 21, 2017. 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.

Pursuant to our 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 DRP will have their distributions automatically reinvested in additional shares of our common stock.

With respect to each distribution pursuant to the 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 DRP. Unless in our sole discretion, we otherwise direct the plan administrator, (A) if the per share market price (as defined in the 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 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 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 three months ended March 31, 2017 and 2016:

 

     Three Months Ended March 31,  
     2017     2016  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —          —       $ —          —    

Borrowings

     —          —         —          —    

Net investment income(1)

     54,485        100     54,093        100

Short-term capital gains proceeds from the sale of assets

     —          —         —          —    

Long-term capital gains proceeds from the sale of assets

     —          —         —          —    

Non-capital gains proceeds from the sale of assets

     —          —         —          —    

Distributions on account of preferred and common equity

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 54,485        100   $ 54,093        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the three months ended March 31, 2017 and 2016, 90.6% and 89.1%, respectively, of our gross investment income was attributable to cash income earned, 1.4% and 2.9%, respectively, was attributable to non-cash accretion of discount and 8.0% and 8.0%, respectively, was attributable to PIK interest.

Our net investment income on a tax basis for the three months ended March 31, 2017 and 2016, was $44,846 and $49,516, respectively. As of March 31, 2017 and December 31, 2016, we had $143,951 and $153,590, respectively, of undistributed net investment income, and $173,189 and $73,184, respectively, of accumulated capital losses 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 three months ended March 31, 2017 and 2016.

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 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, 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.

 

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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;

 

   

our 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.

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.

 

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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 March 31, 2017 consisted primarily of debt investments that were acquired directly from the issuer. Sixty-four senior secured loan investments, five senior secured bond investments and seventeen subordinated debt investments, 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 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. Three equity investments, which were traded on an active public market, were valued at their respective closing price as of March 31, 2017. Two senior secured loan investments and two equity/other investments, which were newly issued and purchased near March 31, 2017, 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.

Our investments as of December 31, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Sixty senior secured loan investments, four senior secured bond investments and sixteen subordinated debt investments, for which broker quotes were not available, were valued by independent

 

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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 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. Three equity investments, which were traded on an active public market, were valued at their respective closing prices as of December 31, 2016. One senior secured loan investment, which was newly issued and purchased near December 31, 2016, was valued at cost as our board of directors determined that the cost of this 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.

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 the 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 earn 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.

We follow the guidance in ASC Topic 860 when accounting for loan participations and other partial loan sales. This guidance requires a participation or other partial loan sale to meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on our consolidated balance sheets and the proceeds are recorded as a secured borrowing until the participation or other partial loan sale meets the definition. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.

Capital Gains Incentive Fee

Pursuant to the terms of the 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 the investment advisory agreement). This fee equals 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 the investment advisory agreement neither includes nor contemplates 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, we 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 the 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 investment advisory agreement, which is calculated and payable quarterly in arrears, equals 20.0% of our “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the value of our net assets, equal 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 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.

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

 

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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 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 three months ended March 31, 2017 and 2016, 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 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 three months ended March 31, 2017 and 2016.

A summary of our significant contractual payment obligations for the repayment of outstanding indebtedness at March 31, 2017 is as follows:

 

     Payments Due By Period  
     Total      Less than 1 year      1-3 years      3-5 years      More than 5 years  

Hamilton Street Credit Facility(1)

   $ 150,000        —          —        $ 150,000        —    

ING Credit Facility(2)

   $ 180,128        —          —        $ 180,128        —    

Locust Street Credit Facility(3)

   $ 425,000        —          —        $ 425,000        —    

4.000% Notes due 2019(4)

   $ 400,000        —        $ 400,000        —          —    

4.250% Notes due 2020(5)

   $ 405,000        —        $ 405,000        —          —    

4.750% Notes due 2022(6)

   $ 275,000        —          —          —        $ 275,000  

Partial Loan Sale(7)

   $ 2,857        —          —          —        $ 2,857  

 

(1) At March 31, 2017, no amounts remained unused under the Hamilton Street credit facility

 

(2)

At March 31, 2017, $147,372 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,

 

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  on March 16, 2021. Amount includes borrowing in U.S. dollars and Euros. Euro balance outstanding of €42,188 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.07 as of March 31, 2017 to reflect total amount outstanding in U.S. dollars.

 

(3) At March 31, 2017, no amounts remained unused under the Locust Street credit facility.

 

(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.

 

(7) All amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 29, 2022.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Related Party Transactions

Compensation of the Investment Adviser

Pursuant to the investment advisory agreement, FB Advisor is entitled to an annual base management fee equal to 1.75% of the average value of our gross assets and an incentive fee based on our performance. The investment sub-advisory agreement provides that GDFM will receive 50% of all management and incentive fees payable to FB Advisor under the investment advisory agreement with respect to each year. 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 FS Investments providing administrative services to us on behalf of FB Advisor.

The following table describes the fees and expenses we accrued under the investment advisory agreement and the administration agreement, as applicable, during the three months ended March 31, 2017 and 2016:

 

            Three Months Ended
March 31,
 

Related Party

 

Source Agreement

 

Description

    2017       2016  

FB Advisor

  Investment Advisory Agreement   Base Management Fee(1)   $ 18,367     $ 17,812  

FB Advisor

  Investment Advisory Agreement   Subordinated Incentive Fee on Income(2)   $ 13,147     $ 12,485  

FB Advisor

  Administration Agreement   Administrative Services Expenses(3)   $ 734     $ 1,196  

 

(1) During the three months ended March 31, 2017 and 2016, $18,022 and $18,415, respectively, in base management fees were paid to FB Advisor. As of March 31, 2017, $18,367 in base management fees were payable to FB Advisor.

 

(2) During the three months ended March 31, 2017 and 2016, $12,885 and $13,374, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of March 31, 2017, a subordinated incentive fee on income of $13,147 was payable to FB Advisor.

 

(3) During the three months ended March 31, 2017 and 2016, $650 and $1,124, respectively, of administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FB Advisor and the remainder related to other reimbursable expenses. We paid $904 and $1,164, respectively, in administrative services expenses to FB Advisor during the three months ended March 31, 2017 and 2016.

 

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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 FS Investments.

 

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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 March 31, 2017, 65.5% of our portfolio investments (based on fair value) paid variable interest rates, 21.8% paid fixed interest rates, 2.7% were income producing equity or other investments, and the remaining 10.0% 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 Hamilton Street credit facility, ING credit facility, Locust Street credit facility and secured borrowing arrangement, we borrow at a floating rate based on a benchmark interest 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 March 31, 2017 (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 100 basis points

   $ (4,537   $ (6,614   $ 2,077        0.7

No change

     —         —         —          —    

Up 100 basis points

     24,068       6,614       17,454        6.1

Up 300 basis points

     75,286       19,842       55,444        19.5

Up 500 basis points

     126,596       33,070       93,526        32.9

 

(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 three months ended March 31, 2017 and 2016, 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 March 31, 2017.

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 March 31, 2017 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, 2016.

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 quarterly period ended March 31, 2017. 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)
 

January 1 to January 31, 2017

     —          —          —        $ 1,500  

February 1 to February 28, 2017

     —          —          —        $ 1,500  

March 1 to March 31, 2017

     —          —          —        $ 1,500  
  

 

 

    

 

 

    

 

 

    
     —          —          —       
  

 

 

    

 

 

    

 

 

    

 

(1) On December 6, 2016 and March 10, 2017, FS Investments entered into written trading plans in accordance with Rule 10b5-1 and Rule 10b-18 promulgated under the Exchange Act, or the FSH Trading Plans, to facilitate the purchase of shares of our common stock pursuant to the terms and conditions of such plan. Each of the FSH Trading Plans provided for the purchase of up to $1,500 worth of shares of our common stock, subject to the limitations provided therein. The December 6, 2016 FSH Trading Plan expired on March 31, 2017. The March 10, 2017 FSH Trading Plan became effective on April 1, 2017 and will expire on June 30, 2017.

 

(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 on 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 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.)
10.2    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.)
10.3    Investment Sub-advisory Agreement, dated as of April 3, 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.)
10.4    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.)
10.5    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.)
10.6    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.)
10.7    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.)

 

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10.8    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.)
10.9    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.)
10.10    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.)
10.11    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.)
10.12    Loan Agreement, dated as of November 1, 2016, among Locust Street Funding LLC, JPMorgan Chase Bank, National Association, as lender and Administrative Agent, Citibank, N.A., as Collateral Agent and Securities Intermediary, and Virtus Group, LP, as Collateral Administrator. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 2, 2016.)
10.13    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.)
10.14    Amendment No. 2 to Senior Secured Revolving Credit Agreement, dated as of March 16, 2017, among FS Investment Corporation, the several banks and other financial institutions or entities from time to time party thereto, ING Capital LLC, as administrative agent, and certain subsidiary guarantors. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 20, 2017.)
10.15    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.)
10.16    Second Amended and Restated Control Agreement, dated as of April 8, 2016, by and among FS Investment Corporation, ING Capital LLC, as collateral agent, and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 filed on May 9, 2016.)
10.17    Loan and Security Agreement, dated as of December 15, 2016, by and among Hamilton Street Funding LLC, as borrower, each of the lenders from time to time party thereto, each of the lender agents from time to time party thereto, HSBC Bank USA, National Association, as administrative agent, and U.S. Bank National Association, as collateral agent, account bank and custodian. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 19, 2016.)
10.18    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 May 10, 2017.

 

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)

 

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