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FS KKR Capital Corp - Quarter Report: 2018 March (Form 10-Q)

FS Investment Corp
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, 2018

 

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 such 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 242,417,015 shares of the registrant’s common stock outstanding as of May 9, 2018.

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I—FINANCIAL INFORMATION

 

ITEM 1.

   FINANCIAL STATEMENTS      1  
   Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017      1  
  

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017

     2  
  

Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2018 and 2017

     3  
   Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017      4  
   Consolidated Schedules of Investments as of March 31, 2018 (Unaudited) and December 31, 2017      5  
   Notes to Unaudited Consolidated Financial Statements      25  

ITEM 2.

  

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

     50  

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      64  

ITEM 4.

   CONTROLS AND PROCEDURES      65  

PART II—OTHER INFORMATION

  

ITEM 1.

   LEGAL PROCEEDINGS      66  

ITEM 1A.

   RISK FACTORS      66  

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      66  

ITEM 3.

   DEFAULTS UPON SENIOR SECURITIES      67  

ITEM 4.

   MINE SAFETY DISCLOSURES      67  

ITEM 5.

   OTHER INFORMATION      67  

ITEM 6.

   EXHIBITS      68  
   SIGNATURES      70  


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, 2018
(Unaudited)
  December 31, 2017

Assets

    

Investments, at fair value

    

Non-controlled/unaffiliated investments (amortized cost—$3,434,363 and $3,532,517, respectively)

   $             3,485,256      $             3,600,911   

Non-controlled/affiliated investments (amortized cost—$201,717 and $197,468, respectively)

     228,774       230,055  

Controlled/affiliated investments (amortized cost—$91,284 and $86,861, respectively)

     89,984       95,268  
  

 

 

 

 

 

 

 

Total investments, at fair value (amortized cost—$3,727,364 and $3,816,846, respectively)

     3,804,014       3,926,234  

Cash

     209,609       134,932  

Foreign currency, at fair value (cost—$5,291 and $3,685, respectively)

     5,448       3,810  

Receivable for investments sold and repaid

     1,195       3,477  

Income receivable

     32,352       30,668  

Deferred financing costs

     3,212       3,459  

Prepaid expenses and other assets

     1,675       1,695  
  

 

 

 

 

 

 

 

Total assets

   $ 4,057,505     $ 4,104,275  
  

 

 

 

 

 

 

 

Liabilities

    

Payable for investments purchased

   $ 101     $ 1,978  

Credit facilities payable (net of deferred financing costs of $2,903 and $3,179, respectively)(1)

     639,205       638,571  

Unsecured notes payable (net of deferred financing costs of $1,245 and $1,402, respectively)(1)

     1,074,160       1,073,445  

Stockholder distributions payable

     46,683       46,704  

Management fees payable

     15,303       15,450  

Subordinated income incentive fees payable(2)

     11,999       12,871  

Administrative services expense payable

     542       294  

Interest payable

     18,190       22,851  

Directors’ fees payable

     490       276  

Other accrued expenses and liabilities

     870       7,112  
  

 

 

 

 

 

 

 

Total liabilities

     1,807,543       1,819,552  
  

 

 

 

 

 

 

 

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, 245,587,856 and 245,725,416 shares issued and outstanding, respectively

     246       246  

Capital in excess of par value

     2,271,588       2,272,591  

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

     (249,570     (245,288

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

     147,926       144,062  

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

     79,772       113,112  
  

 

 

 

 

 

 

 

Total stockholders’ equity

     2,249,962       2,284,723  
  

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

   $ 4,057,505     $ 4,104,275  
  

 

 

 

 

 

 

 

Net asset value per share of common stock at period end

   $ 9.16     $ 9.30  

 

(1) See Note 8 for a discussion of the Company’s financing arrangements.
(2) See Note 2 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,
     2018    2017  

Investment income

     

From non-controlled/unaffiliated investments:

     

Interest income

   $             75,269       $             72,838   

Paid-in-kind interest income

     8,448         6,881   

Fee income

     2,453         19,530   

Dividend income

     7,355         —   

From non-controlled/affiliated investments:

     

Interest income

     1,428         3,684   

Paid-in-kind interest income

     3,147         606   

Fee income

     —         29   

From controlled/affiliated investments:

     

Interest income

     1,120         1,502   

Paid-in-kind interest income

     1,798         994   
  

 

 

 

  

 

 

 

Total investment income

     101,018         106,064   
  

 

 

 

  

 

 

 

Operating expenses

     

Management fees(1)

     17,854         18,367   

Subordinated income incentive fees(2)

     11,999         13,147   

Administrative services expenses

     734         734   

Accounting and administrative fees

     254         265   

Interest expense(3)

     20,053         19,439   

Directors’ fees

     496         271   

Other general and administrative expenses

     1,632         1,251   
  

 

 

 

  

 

 

 

Total operating expenses

     53,022         53,474   

Management fee waiver(1)

     (2,551)        —   
  

 

 

 

  

 

 

 

Net expenses

     50,471         53,474   
  

 

 

 

  

 

 

 

Net investment income

     50,547         52,590   
  

 

 

 

  

 

 

 

Realized and unrealized gain/loss

     

Net realized gain (loss) on investments:

     

Non-controlled/unaffiliated investments

     (4,351)        (48,447)  

Non-controlled/affiliated investments

            305   

Controlled/affiliated investments

     —         (52,879)  

Net realized gain (loss) on foreign currency

     61         123   

Net change in unrealized appreciation (depreciation) on investments:

     

Non-controlled/unaffiliated investments

     (17,501)        129,260   

Non-controlled/affiliated investments

     (5,530)        (12,328)  

Controlled/affiliated investments

     (9,707)        (4,499)  

Net change in unrealized appreciation (depreciation) on secured borrowing(3)

     —         (10)  

Net change in unrealized gain (loss) on foreign currency

     (602)        (722)  
  

 

 

 

  

 

 

 

Total net realized and unrealized gain (loss)

   $ (37,622)      $ 10,803   
  

 

 

 

  

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 12,925       $ 63,393   
  

 

 

 

  

 

 

 

Per share information—basic and diluted

     

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

   $ 0.05       $ 0.26   
  

 

 

 

  

 

 

 

Weighted average shares outstanding

     245,713,188         244,554,969   
  

 

 

 

  

 

 

 

 

(1) See Note 4 for a discussion of the waiver by FB Income Advisor, LLC, the Company’s former investment adviser, of certain management fees to which it was otherwise entitled during the applicable period.
(2) See Note 2 for a discussion of the methodology employed by the Company in calculating the subordinated income incentive fee.
(3) See Note 8 for a discussion of the Company’s financing arrangements.

 

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,
     2018   2017

Operations

    

Net investment income (loss)

   $ 50,547      $ 52,590   

Net realized gain (loss) on investments and foreign currency

     (4,282     (100,898

Net change in unrealized appreciation (depreciation) on investments and secured borrowing(1)

     (32,738     112,423  

Net change in unrealized gain (loss) on foreign currency

     (602     (722
  

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

     12,925       63,393  
  

 

 

 

 

 

 

 

Stockholder distributions(2)

    

Distributions from net investment income

     (46,683     (54,485

Distributions from net realized gain on investments

            
  

 

 

 

 

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (46,683     (54,485
  

 

 

 

 

 

 

 

Capital share transactions(3)

    

Reinvestment of stockholder distributions

           5,350  

Repurchases of common stock

     (1,003      
  

 

 

 

 

 

 

 

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

     (1,003     5,350  
  

 

 

 

 

 

 

 

Total increase (decrease) in net assets

     (34,761     14,258  

Net assets at beginning of period

     2,284,723       2,297,377  
  

 

 

 

 

 

 

 

Net assets at end of period

   $   2,249,962     $   2,311,635  
  

 

 

 

 

 

 

 

Accumulated undistributed (distributions in excess of) net investment income(2)

   $ 147,926     $ 146,131  
  

 

 

 

 

 

 

 

 

(1) See Note 8 for a discussion of the Company’s financing arrangements.

 

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

 

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

 

See notes to unaudited consolidated financial statements.

 

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FS Investment Corporation

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

     Three Months Ended
March 31,
     2018   2017

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $     12,925      $     63,393   

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

    

Purchases of investments

     (115,990     (539,689

Paid-in-kind interest

     (13,393     (8,481

Proceeds from sales and repayments of investments

     215,945       364,308  

Net realized (gain) loss on investments and secured borrowing

     4,343       101,021  

Net change in unrealized (appreciation) depreciation on investments and secured borrowing(1)

     32,738       (112,423

Accretion of discount

     (1,423     (2,078

Amortization of deferred financing costs and discount

     1,238       1,381  

Unrealized (gain)/loss on borrowings in foreign currency

     608       607  

(Increase) decrease in receivable for investments sold and repaid

     2,282       (176,861

(Increase) decrease in income receivable

     (1,684     (10,938

(Increase) decrease in prepaid expenses and other assets

     20       375  

Increase (decrease) in payable for investments purchased

     (1,877     34,252  

Increase (decrease) in management fees payable

     (147     345  

Increase (decrease) in subordinated income incentive fees payable

     (872     262  

Increase (decrease) in administrative services expense payable

     248       (170

Increase (decrease) in interest payable

     (4,661     (2,681

Increase (decrease) in directors’ fees payable

     214       (11

Increase (decrease) in other accrued expenses and liabilities

     (6,242     (5,865
  

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

     124,272       (293,253
  

 

 

 

 

 

 

 

Cash flows from financing activities

    

Reinvestment of stockholder distributions

           5,350  

Repurchases of common stock

     (1,003      

Stockholder distributions

     (46,704     (54,364

Borrowings under credit facilities(1)

     48,000       135,000  

Repayments of credit facilities(1)

     (48,250     (411

Deferred financing costs paid

           (3,236
  

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

     (47,957     82,339  
  

 

 

 

 

 

 

 

Total increase (decrease) in cash

     76,315       (210,914

Cash and foreign currency at beginning of period

     138,742       264,598  
  

 

 

 

 

 

 

 

Cash and foreign currency at end of period

   $ 215,057     $ 53,684  
  

 

 

 

 

 

 

 

Supplemental disclosure

    

Local and excise taxes paid

   $ 5,385     $ 5,780  
  

 

 

 

 

 

 

 

 

(1) See Note 8 for a discussion of the Company’s financing arrangements. During the three months ended March 31, 2017, the Company paid $41 in interest expense on its secured borrowing. During the three months ended March 31, 2018 and 2017, the Company paid $23,476 and $20,698, respectively, in interest expense on the credit facilities and unsecured notes.

 

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, 2018

(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—110.2%

               

5 Arch Income Fund 2, LLC

  (g)(j)(o)   Diversified Financials   10.5%     11/18/21   $ 35,524     $ 35,570     $ 35,524  

5 Arch Income Fund 2, LLC

  (g)(j)(o)(q)   Diversified Financials   10.5%     11/18/21     2,476       2,476       2,476  

A.P. Plasman Inc.

  (e)(f)(g)(h)(j)   Capital Goods   L+900   1.0%   12/29/19     195,026       193,949       191,369  

Actian Corp.

  (e)   Software & Services   L+786   1.0%   6/30/22     11,429       11,429       11,707  

Advanced Lighting Technologies, Inc.

  (g)(t)   Materials   L+750   1.0%   10/4/22     20,332       17,326       20,332  

AG Group Merger Sub, Inc.

  (e)(g)(h)   Commercial & Professional Services   L+750   1.0%   12/29/23     88,944       88,944       90,167  

All Systems Holding LLC

  (e)(f)(g)(h)   Commercial & Professional Services   L+767   1.0%   10/31/23     48,995       48,995       49,729  

Altus Power America, Inc.

  (g)   Energy   L+750   1.5%   9/30/21     2,866       2,866       2,809  

Altus Power America, Inc.

  (g)(q)   Energy   L+750   1.5%   9/30/21     884       884       866  

Aspect Software, Inc.

  (g)(t)   Software & Services   L+1050   1.0%   5/25/18     992       992       922  

Aspect Software, Inc.

  (g)(q)(t)   Software & Services   L+1050   1.0%   5/25/18     25       25       24  

Aspect Software, Inc.

  (g)(t)   Software & Services   L+1050   1.0%   5/25/20     675       675       628  

Aspect Software, Inc.

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

Atlas Aerospace LLC

  (e)(g)   Capital Goods   L+800   1.0%   12/29/22     30,476       30,476       30,781  

AVF Parent, LLC

  (e)(h)   Retailing   L+725   1.3%   3/1/24     56,485       56,485       56,530  

Borden Dairy Co.

  (e)(g)(h)   Food, Beverage & Tobacco   L+789   1.0%   7/6/23     70,000       70,000       70,602  

ConnectiveRx, LLC

  (e)(g)(h)   Health Care Equipment & Services   L+826   1.0%   11/25/21     45,019       45,019       45,510  

CSafe Acquisition Co., Inc.

  (g)(q)   Capital Goods   L+725   1.0%   11/1/21     5,870       5,870       5,738  

CSafe Acquisition Co., Inc.

  (g)(h)   Capital Goods   L+725   1.0%   10/31/23     50,609       50,609       49,470  

CSafe Acquisition Co., Inc.

  (g)(q)   Capital Goods   L+725   1.0%   10/31/23     21,209       21,209       20,732  

Dade Paper & Bag, LLC

  (e)   Capital Goods   L+700   1.0%   6/10/24     10,636       10,636       10,649  

Dade Paper & Bag, LLC

  (e)(g)(h)   Capital Goods   L+750   1.0%   6/10/24     83,395       83,395       85,584  

Eastman Kodak Co.

  (g)   Consumer Durables & Apparel   L+625   1.0%   9/3/19     10,255       10,195       9,699  

Empire Today, LLC

  (e)(g)   Retailing   L+800   1.0%   11/17/22     80,975       80,975       81,785  

Greystone Equity Member Corp.

  (g)(j)   Diversified Financials   L+1050     3/31/21     1,102       1,104       1,104  

Greystone Equity Member Corp.

  (g)(j)   Diversified Financials   L+1100     3/31/21     50,000       50,000       50,812  

Greystone Equity Member Corp.

  (g)(j)   Diversified Financials   L+1100     3/31/21     2,898       2,898       2,966  

H.M. Dunn Co., Inc.

  (g)(l)(r)   Capital Goods   L+150, 7.8% PIK
(7.8% Max PIK)
  1.0%   3/26/21     1,097       1,071       499  

Hudson Technologies Co.

  (g)(h)(j)   Commercial & Professional Services   L+725   1.0%   10/10/23     39,846       39,846       40,095  

Hudson Technologies Co.

  (g)(j)(q)   Commercial & Professional Services   L+725   1.0%   10/10/23     9,511       9,511       9,570  

Icynene U.S. Acquisition Corp.

  (e)(g)(j)   Materials   L+700   1.0%   11/30/24     29,925       29,925       30,205  

Imagine Communications Corp.

  (e)(g)(h)   Media   L+825   1.0%   4/29/20     70,185       70,185       70,448  

Industrial Group Intermediate Holdings, LLC

  (g)   Materials   L+800   1.3%   5/31/20     21,481       21,481       21,803  

Industry City TI Lessor, L.P.

  (g)   Consumer Services   10.8%, 1.0% PIK
(1.0% Max PIK)
    6/30/26     30,328       30,328       30,556  

International Aerospace Coatings, Inc.

  (e)(f)(h)   Capital Goods   L+750   1.0%   6/30/20     44,520       44,450       45,410  

JMC Acquisition Merger Corp.

  (e)(g)(h)   Capital Goods   L+750   1.0%   1/29/24     54,885       54,885       55,160  

JMC Acquisition Merger Corp.

  (g)(q)   Capital Goods   L+750   1.0%   1/29/24     2,945       2,945       2,960  

 

See notes to unaudited consolidated financial statements.

 

5


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

JSS Holdings, Inc.

  (e)(g)   Capital Goods   L+800, 0.0% PIK

(2.5% Max PIK)

  1.0%   3/31/23   $ 110,441     $ 109,477     $ 112,798  

JSS Holdings, Inc.

  (g)(q)   Capital Goods   L+800, 0.0% PIK
(2.5% Max PIK)
  1.0%   3/31/23     20,182       20,182       20,613  

Kodiak BP, LLC

  (h)   Capital Goods   L+725   1.0%   12/1/24     10,515       10,515       10,463  

Kodiak BP, LLC

  (g)(q)   Capital Goods   L+725   1.0%   12/1/24     3,030       3,030       3,015  

Latham Pool Products, Inc.

  (e)(h)   Commercial & Professional Services   L+775   1.0%   6/29/21     56,183       56,183       56,956  

LEAS Acquisition Co Ltd.

  (g)(j)   Capital Goods   L+750   1.0%   6/30/20   26,168       35,593       32,800  

LEAS Acquisition Co Ltd.

  (f)(j)   Capital Goods   L+750   1.0%   6/30/20   $ 9,180       9,180       9,363  

Logan’s Roadhouse, Inc.

  (g)(t)   Consumer Services   L+1300 PIK
(L+1300 Max PIK)
  1.0%   5/5/19     7,221       7,221       7,221  

Logan’s Roadhouse, Inc.

  (g)(q)(t)   Consumer Services   L+1300 PIK
(L+1300 Max PIK)
  1.0%   5/5/19     1,120       1,131       1,120  

Logan’s Roadhouse, Inc.

  (g)(t)   Consumer Services   L+1300 PIK
(L+1300 Max PIK)
  1.0%   5/5/19     1,826       1,826       1,826  

Logan’s Roadhouse, Inc.

  (g)(q)(t)   Consumer Services   L+1300 PIK
(L+1300 Max PIK)
  1.0%   5/5/19     1,218       1,218       1,218  

MB Precision Holdings LLC

  (g)   Capital Goods   L+725, 2.3% PIK
(2.3% Max PIK)
  1.3%   1/23/21     13,226       13,226       10,813  

Micronics Filtration, LLC

  (e)(g)(h)   Capital Goods   L+850   1.3%   12/11/19     62,651       62,563       62,886  

MORSCO, Inc.

  (g)   Capital Goods   L+700   1.0%   10/31/23     2,582       2,499       2,629  

Nobel Learning Communities, Inc.

  (g)   Consumer Services   L+450   1.0%   5/5/21     31       31       31  

Nobel Learning Communities, Inc.

  (g)(q)   Consumer Services   L+450   1.0%   5/5/21     108       108       108  

Nobel Learning Communities, Inc.

  (g)   Consumer Services   L+383   4.5%   5/5/23     1,056       1,056       1,043  

Nobel Learning Communities, Inc.

  (g)(q)   Consumer Services   L+375   4.5%   5/5/23     621       621       613  

North Haven Cadence Buyer, Inc.

  (g)(q)   Consumer Services   L+500   1.0%   9/2/21     938       937       938  

North Haven Cadence Buyer, Inc.

  (e)(g)   Consumer Services   L+809   1.0%   9/2/22     28,832       28,832       29,373  

North Haven Cadence Buyer, Inc.

  (g)(q)   Consumer Services   L+750   1.0%   9/2/22     2,396       2,396       2,441  

Nova Wildcat Amerock, LLC

  (g)   Consumer Durables & Apparel   L+800   1.3%   9/10/19     3,276       3,276       3,338  

PHRC License, LLC

  (f)(g)   Consumer Services   L+850   1.5%   4/28/22     50,625       50,625       52,523  

Polymer Additives, Inc.

  (g)   Materials   L+850   1.0%   12/19/22     10,511       10,511       10,748  

Polymer Additives, Inc.

  (g)   Materials   L+795   1.0%   12/19/22     11,019       11,019       11,212  

Polymer Additives, Inc.

  (g)   Materials   L+875   1.0%   12/19/22   15,000       16,982       18,847  

Power Distribution, Inc.

  (e)(g)   Capital Goods   L+725   1.3%   1/25/23   $ 29,853       29,853       30,375  

Roadrunner Intermediate Acquisition Co., LLC

  (e)(g)(h)   Health Care Equipment & Services   L+725   1.0%   3/15/23     34,688       34,688       35,097  

Rogue Wave Software, Inc.

  (e)(g)(h)   Software & Services   L+847   1.0%   9/25/21     40,688       40,687       41,094  

Safariland, LLC

  (e)(g)(h)   Capital Goods   L+768   1.1%   11/18/23     126,107       126,107       117,753  

Safariland, LLC

  (g)(q)   Capital Goods   L+725   1.1%   11/18/23     33,282       33,282       31,077  

Sequel Youth and Family Services, LLC

  (e)(g)(h)   Health Care Equipment & Services   L+775   1.0%   9/1/22     94,082       94,082       95,023  

Sequel Youth and Family Services, LLC

  (g)(q)   Health Care Equipment & Services   L+700   1.0%   9/1/22     4,706       4,706       4,753  

 

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Sequential Brands Group, Inc.

  (e)(g)(h)   Consumer Durables & Apparel   L+900     7/1/22   $ 78,636     $ 78,636     $ 78,734  

Sorenson Communications, Inc.

  (e)(g)(h)   Telecommunication Services   L+575   2.3%   4/30/20     90,446       90,278       90,842  

SSC (Lux) Limited S.àr.l.

  (e)(g)(j)   Health Care Equipment & Services   L+750   1.0%   9/10/24     45,455       45,455       46,307  

Staples Canada, ULC

  (g)(j)   Retailing   L+700   1.0%   9/12/23   C$ 20,987       17,333       16,248  

SunGard Availability Services Capital, Inc.

  (g)   Software & Services   L+700   1.0%   9/30/21   $ 4,382       4,345       4,126  

SunGard Availability Services Capital, Inc.

  (g)   Software & Services   L+1000   1.0%   10/1/22     2,000       1,904       1,977  

Trace3, LLC

  (e)(h)   Software & Services   L+775   1.0%   6/6/23     38,809       38,809       38,954  

U.S. Xpress Enterprises, Inc.

  (e)(f)(h)   Transportation   L+1075, 0.0% PIK
(1.8% Max PIK)
  1.5%   5/30/20     52,497       52,497       52,825  

USI Senior Holdings, Inc.

  (e)(g)   Capital Goods   L+778   1.0%   1/5/22     63,656       63,656       65,088  

VPG Metals Group LLC

  (e)(g)(h)   Materials   L+1050   1.0%   12/30/20     112,752       112,713       114,443  

Warren Resources, Inc.

  (f)(g)   Energy   L+900, 1.0% PIK
(1.0% Max PIK)
  1.0%   5/22/20     696       696       696  

Westbridge Technologies, Inc.

  (g)   Software & Services   L+850   1.0%   4/28/23     11,939       11,880       11,954  

Zeta Interactive Holdings Corp.

  (e)(g)(h)   Software & Services   L+750   1.0%   7/29/22     11,766       11,766       11,942  
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                2,581,601       2,589,465  

Unfunded Loan Commitments

                (110,892     (110,892
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                2,470,709       2,478,573  
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—6.6%

               

American Bath Group, LLC

  (g)   Capital Goods   L+975   1.0%   9/30/24     18,000       17,596       18,068  

Arena Energy, LP

  (g)   Energy   L+900, 4.0% PIK
(4.0% Max PIK)
  1.0%   1/24/21     8,364       8,364       8,071  

Byrider Finance, LLC

  (f)(g)   Automobiles & Components   L+1000, 0.5% PIK
(4.0% Max PIK)
  1.3%   8/22/20     17,749       17,749       17,394  

Chisholm Oil and Gas Operating, LLC

  (g)   Energy   L+800   1.0%   3/21/24     16,000       16,000       15,994  

Gruden Acquisition, Inc.

  (g)   Transportation   L+850   1.0%   8/18/23     15,000       14,486       15,113  

JW Aluminum Co.

  (e)(f)(g)(h)(u)   Materials   L+850   0.8%   11/17/20     37,362       37,349       37,549  

Logan’s Roadhouse, Inc.

  (g)(t)   Consumer Services   L+850 PIK
(L+850 Max PIK)
  1.0%   11/23/20     22,484       22,083       11,096  

LTI Holdings, Inc.

  (e)   Materials   L+875   1.0%   5/16/25     6,482       6,366       6,579  

Spencer Gifts LLC

  (e)(h)   Retailing   L+825   1.0%   6/29/22     30,000       29,908       19,500  
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                169,901       149,364  
             

 

 

   

 

 

 

Senior Secured Bonds—7.3%

               

Advanced Lighting Technologies, Inc.

  (g)(t)   Materials   L+700, 10.0% PIK
(10.0% Max PIK)
  1.0%   10/4/23     23,853       23,853       23,853  

Black Swan Energy Ltd.

  (e)(j)   Energy   9.0%     1/20/24     6,000       6,000       5,865  

FourPoint Energy, LLC

  (e)(f)(h)   Energy   9.0%     12/31/21     74,813       72,415       76,122  

Global A&T Electronics Ltd.

  (g)(j)   Semiconductors & Semiconductor Equipment   8.5%     1/12/23     6,365       6,425       6,452  

 

See notes to unaudited consolidated financial statements.

 

7


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Mood Media Corp.

  (f)(g)(j)(t)   Media   L+600, 8.0% PIK
(8.0% Max PIK)
  1.0%   6/28/24   $ 22,445     $ 22,445     $ 22,445  

Ridgeback Resources Inc.

  (f)(j)   Energy   12.0%     12/29/20     132       130       132  

Sorenson Communications, Inc.

  (f)   Telecommunication Services   9.0%, 0.0% PIK
(9.0% Max PIK)
    10/31/20     19,898       19,506       20,010  

Sunnova Energy Corp.

  (g)   Energy   6.0%, 6.0% PIK
(6.0% Max PIK)
    10/24/18     817       817       816  

Velvet Energy Ltd.

  (g)(j)   Energy   9.0%     10/5/23     7,500       7,500       7,470  
             

 

 

   

 

 

 

Total Senior Secured Bonds

                159,091       163,165  
             

 

 

   

 

 

 

Subordinated Debt—21.9%

               

Ascent Resources Utica Holdings, LLC

  (g)   Energy   10.0%     4/1/22     40,000       40,000       43,350  

Aurora Diagnostics, LLC

  (e)(f)(g)   Health Care Equipment & Services   10.8%, 1.5% PIK
(1.5% Max PIK)
    1/15/20     15,078       13,950       13,721  

Bellatrix Exploration Ltd.

  (g)(j)   Energy   8.5%     5/15/20     5,000       4,952       4,084  

Brooklyn Basketball Holdings, LLC

  (f)(g)   Consumer Services   L+725     10/25/19     19,873       19,873       20,022  

Byrider Holding Corp.

  (g)   Automobiles & Components   20.0% PIK
(20.0% Max PIK)
    4/1/22     833       833       833  

CEC Entertainment, Inc.

  (f)   Consumer Services   8.0%     2/15/22     5,000       5,008       4,481  

Ceridian HCM Holding, Inc.

  (f)(g)   Commercial & Professional Services   11.0%     3/15/21     17,393       17,803       18,013  

DEI Sales, Inc.

  (e)(g)   Consumer Durables & Apparel   9.0%, 4.0% PIK
(4.0% Max PIK)
    2/28/23     68,209       67,466       66,845  

EV Energy Partners, L.P.

  (f)(l)(r)   Energy   8.0%     4/15/19     265       251       129  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/30/25     881       881       889  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/30/25     5,600       5,600       5,649  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/3/25     1,157       1,157       1,167  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/29/25     1,089       1,090       1,099  

Global Jet Capital Inc.

  (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/4/25     80,417       80,417       81,121  

Global Jet Capital Inc.

  (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/9/25     13,152       13,152       13,267  

Global Jet Capital Inc.

  (f)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/29/26     6,887       6,887       6,948  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/14/26     14,079       14,079       14,202  

Global Jet Capital Inc.

  (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/2/26     13,819       13,819       13,940  

 

See notes to unaudited consolidated financial statements.

 

8


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Greystone Mezzanine Equity Member Corp.

  (g)(j)   Diversified Financials   L+650     4.5%     9/15/25   $ 4,598     $ 4,598     $ 4,592  

Greystone Mezzanine Equity Member Corp.

  (g)(j)(q)   Diversified Financials   L+650     4.5%     9/15/25     22,402       22,402       22,374  

Imagine Communications Corp.

  (g)   Media   12.5% PIK
(12.5% Max PIK)
    8/4/18     681       682       681  

P.F. Chang’s China Bistro, Inc.

  (f)(g)   Consumer Services   10.3%     6/30/20     11,433       11,640       9,046  

PriSo Acquisition Corp.

  (g)   Capital Goods   9.0%     5/15/23     10,155       10,061       10,669  

S1 Blocker Buyer Inc.

  (g)   Commercial & Professional Services   10.0% PIK
(10.0% Max PIK)
    10/31/22     113       114       130  

Sorenson Communications, Inc.

  (f)   Telecommunication Services   13.9%, 0.0% PIK
(13.9% Max PIK)
    10/31/21     15,122       14,475       15,501  

SunGard Availability Services Capital, Inc.

  (f)(g)   Software & Services   8.8%     4/1/22     10,750       8,782       6,715  

ThermaSys Corp.

  (e)(f)(g)   Capital Goods   6.5%, 5.0% PIK
(5.0% Max PIK)
    5/3/20     147,097       147,097       132,571  

VPG Metals Group LLC

  (e)(g)   Materials   11.0%, 2.0% PIK
(2.0% Max PIK)
    6/30/18     2,311       2,311       2,309  
             

 

 

   

 

 

 

Total Subordinated Debt

                529,380       514,348  

Unfunded Debt Commitments

                (22,402     (22,402
             

 

 

   

 

 

 

Net Subordinated Debt

                506,978       491,946  
             

 

 

   

 

 

 

Collateralized Securities—2.3%

               

MP4 2013-2A Class Subord. B

  (f)(g)(j)   Diversified Financials   10.9%     7/25/29     21,000       11,531       11,709  

NewStar Clarendon 2014-1A Class D

  (g)(j)   Diversified Financials   L+435     1/25/27     1,560       1,486       1,563  

NewStar Clarendon 2014-1A Class Subord. B

  (g)(j)   Diversified Financials   16.1%     1/25/27     17,900       12,581       14,373  

Rampart CLO 2007 1A Class Subord.

  (g)(j)   Diversified Financials   4.5%     10/25/21     10,000       784       449  

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

  (g)(j)   Diversified Financials   6.7%     1/15/26     42,504       20,433       24,485  
             

 

 

   

 

 

 

Total Collateralized Securities

                46,815       52,579  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

9


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Equity/Other—20.8%(k)

               

5 Arches, LLC, Common Equity

  (g)(j)(n)   Diversified Financials           20,000     $ 500     $ 750  

Advanced Lighting Technologies, Inc., Common Equity

  (g)(l)(t)   Materials           587,637       16,520       6,699  

Advanced Lighting Technologies, Inc., Warrants

  (g)(l)(t)   Materials       10/4/27     9,262       86       15  

Altus Power America Holdings, LLC, Common Equity

  (g)(l)   Energy           462,008       462        

Altus Power America Holdings, LLC, Preferred Equity

  (g)(p)   Energy   9.0%, 5.0% PIK     10/3/23     955,284       955       951  

APP Holdings, LP, Warrants

  (g)(j)(l)   Capital Goods       5/25/26     698,482       2,545       1,914  

Ascent Resources Utica Holdings, LLC, Common Equity

  (g)(l)(m)   Energy           96,800,082       29,100       24,200  

ASG Everglades Holdings, Inc., Common Equity

  (g)(l)(t)   Software & Services           1,689,767       36,422       88,628  

ASG Everglades Holdings, Inc., Warrants

  (g)(l)(t)   Software & Services       6/27/22     229,541       6,542       7,047  

Aspect Software Parent, Inc., Common Equity

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

Aurora Diagnostics Holdings, LLC, Warrants

  (e)(f)(g)(l)   Health Care Equipment & Services       5/25/27     229,489       1,671       1,578  

Burleigh Point, Ltd., Warrants

  (g)(j)(l)   Retailing       7/16/20     3,451,216       1,898       25  

Byrider Holding Corp., Common Equity

  (g)(l)   Automobiles & Components           833              

Chisholm Oil and Gas, LLC, Series A Units

  (g)(l)(n)   Energy           70,947       71       71  

CSF Group Holdings, Inc., Common Equity

  (g)(l)   Capital Goods           391,300       391       274  

Eastman Kodak Co., Common Equity

  (g)(l)(s)   Consumer Durables & Apparel           61,859       1,203       331  

Escape Velocity Holdings, Inc., Common Equity

  (g)(l)   Software & Services           19,312       193       367  

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

  (g)(l)(n)   Energy           21,000       21,000       5,933  

FourPoint Energy, LLC, Common Equity, Class D Units

  (g)(l)(n)   Energy           3,937       2,601       1,122  

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

  (g)(l)(n)   Energy           48,025       12,006       13,567  

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

  (g)(l)(n)   Energy           70,875       17,719       20,022  

Fronton Investor Holdings, LLC, Class B Units

  (g)(n)(t)   Consumer Services           14,943       6,793       17,034  

Global Jet Capital Holdings, LP, Preferred Equity

  (f)(g)(j)(l)   Commercial & Professional Services           42,281,308       42,281       38,053  

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

  (g)(l)   Retailing           375       1,118       1,106  

Harvey Holdings, LLC, Common Equity

  (g)(l)   Capital Goods           2,333,333       2,333       5,017  

Imagine Communications Corp., Common Equity, Class A Units

  (g)(l)   Media           33,034       3,783       1,288  

Industrial Group Intermediate Holdings, LLC, Common Equity

  (g)(l)(n)   Materials           441,238       441       552  

International Aerospace Coatings, Inc., Common Equity

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

International Aerospace Coatings, Inc., Preferred Equity

  (f)(l)   Capital Goods           1,303       1,303       1,255  

JMC Acquisition Holdings, LLC, Common Equity

  (g)(l)   Capital Goods           483       483       483  

JSS Holdco, LLC, Net Profits Interest

  (g)(l)   Capital Goods                       502  

JW Aluminum Co., Common Equity

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

JW Aluminum Co., Preferred Equity

  (f)(g)(u)   Materials   12.5% PIK     11/17/25     5,264       53,935       52,435  

MB Precision Investment Holdings LLC, Class A-2 Units

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

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       926  

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

  (g)(l)   Capital Goods           23       229       261  

Mood Media Corp., Common Equity

  (g)(j)(l)(t)   Media           16,243,967       11,804       21,401  

North Haven Cadence TopCo, LLC, Common Equity

  (g)(l)   Consumer Services           1,041,667       1,042       1,719  

 

See notes to unaudited consolidated financial statements.

 

10


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)     Floor     Maturity     Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

PDI Parent LLC, Common Equity

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

PSAV Holdings LLC, Common Equity

  (f)(l)   Technology Hardware & Equipment           10,000       6,337       22,500  

Ridgeback Resources Inc., Common Equity

  (f)(j)(l)   Energy           324,954       1,997       1,851  

Roadhouse Holding Inc., Common Equity

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

S1 Blocker Buyer Inc., Common Equity

  (g)   Commercial & Professional Services           59       568       958  

Safariland, LLC, Common Equity

  (f)(l)   Capital Goods           25,000       2,500       2,470  

Safariland, LLC, Warrants

  (f)(l)   Capital Goods         7/27/18       2,263       246       224  

Safariland, LLC, Warrants

  (f)(l)   Capital Goods         9/20/19       2,273       227       224  

Sequel Industrial Products Holdings, LLC, Common Equity

  (f)(g)(l)   Commercial & Professional Services           33,306       3,400       15,441  

Sequel Industrial Products Holdings, LLC, Preferred Equity

  (f)(g)   Commercial & Professional Services     9.5% PIK         11/10/18       8,000       9,239       13,696  

Sequel Industrial Products Holdings, LLC, Warrants

  (g)(l)   Commercial & Professional Services         9/28/22       1,293       1       443  

Sequel Industrial Products Holdings, LLC, Warrants

  (f)(l)   Commercial & Professional Services         5/10/22       19,388       12       7,049  

Sequential Brands Group, Inc., Common Equity

  (g)(l)(s)   Consumer Durables & Apparel           206,664       2,790       431  

Sorenson Communications, Inc., Common Equity

  (f)(l)   Telecommunication Services           46,163             38,565  

SSC Holdco Limited, Common Equity

  (g)(j)(l)   Health Care Equipment & Services           113,636       2,273       2,307  

Sunnova Energy Corp., Common Equity

  (g)(l)   Energy           192,389       722       10  

Sunnova Energy Corp., Preferred Equity

  (g)(l)   Energy           35,115       187       208  

The Brock Group, Inc., Common Equity

  (g)(l)   Energy           183,826       3,652       3,575  

The Stars Group Inc., Warrants

  (g)(j)(l)   Consumer Services         5/15/24       2,000,000       16,832       32,500  

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           308,948       509       525  

Viper Holdings, LLC, Series II Units

  (g)(l)(n)   Consumer Durables & Apparel           316,770       522       539  

Viper Parallel Holdings LLC, Class A Units

  (g)(l)   Consumer Durables & Apparel           649,538       1,070       1,104  

VPG Metals Group LLC, Class A-2 Units

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

Warren Resources, Inc., Common Equity

  (g)(l)   Energy           113,515       534       454  

Zeta Interactive Holdings Corp., Preferred Equity, Series E-1

  (g)(l)   Software & Services           215,662       1,714       2,134  

Zeta Interactive Holdings Corp., Preferred Equity, Series F

  (g)(l)   Software & Services           196,151       1,714       1,876  

Zeta Interactive Holdings Corp., Warrants

  (g)(l)   Software & Services         4/20/27       29,422             103  
             

 

 

   

 

 

 

Total Equity/Other

                373,870       468,387  
             

 

 

   

 

 

 

TOTAL INVESTMENTS—169.1%

              $ 3,727,364       3,804,014  
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(69.1%)

                  (1,554,052
               

 

 

 

NET ASSETS—100%

                $ 2,249,962  
               

 

 

 

 

See notes to unaudited consolidated financial statements.

 

11


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(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, 2018, the three-month London Interbank Offered Rate, or LIBOR or “L”, was 2.31%, the Euro Interbank Offered Rate, or EURIBOR, was (0.33)% and the U.S. Prime Lending Rate, or Prime, was 4.75%. PIK means paid-in-kind. PIK income accruals may be adjusted based on the fair value of the underlying investment.

 

(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, 2018.

 

(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, 2018, 81.1% 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) Security is classified as Level 1 in the Company’s fair value hierarchy (see Note 7).

 

See notes to unaudited consolidated financial statements.

 

12


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(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, 2018, 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, 2018:

 

Portfolio Company

   Fair Value at
December 31,
2017
    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,
2018
    Interest
Income(1)
     PIK
Income(1)
 

Senior Secured Loans—First Lien

 

Advanced Lighting Technologies, Inc.

   $ 20,383     $      $ (51   $ 145      $ 8      $ (153   $ 20,332     $ 610      $  

Aspect Software, Inc.(2)

     992                                  (71     921       31         

Aspect Software, Inc.

     628              (4                   4       628       21         

Aspect Software, Inc.(3)

     (361                                      (361             

Logan’s Roadhouse, Inc.(4)

     6,952       258                                  7,210       52        257  

Logan’s Roadhouse, Inc.(5)

           1,826                                  1,826       9        609  

Senior Secured Loans—Second Lien

 

Logan’s Roadhouse, Inc.

     10,079       279              10               728       11,096       1        279  

Senior Secured Bonds

 

Advanced Lighting Technologies, Inc.

     22,728       1,125                                  23,853       637        1,125  

Mood Media Corp.

     21,675       877                            (107     22,445       67        877  

Equity/Other

 

Advanced Lighting Technologies, Inc., Common Equity

     13,046                                  (6,347     6,699               

Advanced Lighting Technologies, Inc., Warrants

     56                                  (41     15               

ASG Everglades Holdings, Inc., Common Equity

     83,052                                  5,576       88,628               

ASG Everglades Holdings, Inc., Warrants

     6,289                                  758       7,047               

Aspect Software, Inc.

                                                          

Fronton Investor Holdings, LLC, Class B Units

     17,782              (224                   (524     17,034               

Mood Media Corp.

     26,754                                  (5,353     21,401               

Roadhouse Holding Inc., Common Equity

                                                          
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 230,055     $ 4,365      $ (279   $ 155      $ 8      $ (5,530   $ 228,774     $ 1,428      $ 3,147  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

 

(1) Interest and PIK income presented for the full three months ended March 31, 2018.

 

(2) Security includes a partially unfunded commitment with an amortized cost of $25 and a fair value of $24.

 

(3) Security is an unfunded commitment with an amortized cost of $361 and a fair value of $0.

 

(4) Security includes a partially unfunded commitment with an amortized cost of $1,131 and a fair value of $1,120.

 

(5) Security includes a partially unfunded commitment with an amortized cost of $1,218 and a fair value of $1,218.

 

See notes to unaudited consolidated financial statements.

 

13


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

 

 

 

(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, 2018, 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, 2018, 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, 2018:

 

Portfolio Company

   Fair Value at
December 31,
2017
     Purchases and
Paid-in-kind
Interest
     Sales and
Repayments
    Accretion of
Discount
     Net Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
March 31,
2018
     Interest
Income(1)
     PIK
Income(1)
 

Senior Secured Loans—Second Lien

 

JW Aluminum Co.

   $ 38,008      $      $ (84   $ 1      $ (376   $ 37,549      $ 1,002      $  

Equity/Other

                     

JW Aluminum Co., Common Equity

                                                     

JW Aluminum Co., Preferred Equity

     57,260        4,506                     (9,331     52,435        118        1,798  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 95,268      $ 4,506      $ (84   $ 1      $ (9,707   $ 89,984      $ 1,120      $ 1,798  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Interest and PIK income presented for the full three months ended March 31, 2018.

 

See notes to unaudited consolidated financial statements.

 

14


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments

As of December 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—110.3%

                

5 Arch Income Fund 2, LLC

   (g)(j)(o)   Diversified Financials   10.5%     11/18/21   $ 29,824     $ 29,871     $ 29,824  

5 Arch Income Fund 2, LLC

   (g)(j)(o)(q)   Diversified Financials   10.5%     11/18/21     8,176       8,176       8,176  

A.P. Plasman Inc.

   (e)(f)(g)(h)(j)   Capital Goods   L+900     1.0%     12/29/19     196,468       195,233       191,802  

Actian Corp.

   (e)   Software & Services   L+806     1.0%     6/30/22     11,429       11,429       11,571  

Advanced Lighting Technologies, Inc.

   (g)(t)   Materials   L+750     1.0%     10/4/22     20,383       17,224       20,383  

AG Group Merger Sub, Inc.

   (e)(g)   Commercial & Professional Services   L+750     1.0%     12/29/23     89,169       89,169       90,729  

All Systems Holding LLC

   (e)(f)(g)(h)   Commercial & Professional Services   L+767     1.0%     10/31/23     48,995       48,995       49,730  

Altus Power America, Inc.

   (g)   Energy   L+750     1.5%     9/30/21     2,866       2,866       2,809  

Altus Power America, Inc.

   (g)(q)   Energy   L+750     1.5%     9/30/21     884       884       866  

Aspect Software, Inc.

   (g)(t)   Software & Services   L+1050     1.0%     5/25/18     992       992       992  

Aspect Software, Inc.

   (g)(q)(t)   Software & Services   L+1050     1.0%     5/25/18     25       25       25  

Aspect Software, Inc.

   (g)(t)   Software & Services   L+1050     1.0%     5/25/20     679       679       628  

Aspect Software, Inc.

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

Atlas Aerospace LLC

   (g)   Capital Goods   L+802     1.0%     12/29/22     30,476       30,476       30,476  

AVF Parent, LLC

   (e)(h)   Retailing   L+725     1.3%     3/1/24     56,843       56,843       58,019  

Borden Dairy Co.

   (e)(g)(h)   Food, Beverage & Tobacco   L+804     1.0%     7/6/23     70,000       70,000       69,979  

ConnectiveRX, LLC

   (e)(g)(h)   Health Care Equipment & Services   L+828     1.0%     11/25/21     45,019       45,019       45,037  

Crestwood Holdings LLC

   (g)   Energy   L+800     1.0%     6/19/19     4,185       4,181       4,205  

CSafe Acquisition Co., Inc.

   (g)   Capital Goods   L+725     1.0%     11/1/21     3,326       3,326       3,297  

CSafe Acquisition Co., Inc.

   (g)(q)   Capital Goods   L+725     1.0%     11/1/21     2,543       2,543       2,521  

CSafe Acquisition Co., Inc.

   (g)(h)   Capital Goods   L+725     1.0%     10/31/23     46,814       46,814       46,404  

CSafe Acquisition Co., Inc.

   (g)(q)   Capital Goods   L+725     1.0%     10/31/23     25,122       25,122       24,902  

Dade Paper & Bag, LLC

   (e)(g)(h)   Capital Goods   L+750     1.0%     6/10/24     83,605       83,605       86,531  

Eastman Kodak Co.

   (g)   Consumer Durables & Apparel   L+625     1.0%     9/3/19     10,255       10,185       8,896  

Empire Today, LLC

   (e)(g)   Retailing   L+800     1.0%     11/17/22     81,180       81,180       81,992  

Greystone Equity Member Corp.

   (g)(j)   Diversified Financials   L+1050     3/31/21     1,358       1,361       1,360  

Greystone Equity Member Corp.

   (g)(j)   Diversified Financials   L+1100     3/31/21     50,000       50,000       50,750  

Greystone Equity Member Corp.

   (g)(j)   Diversified Financials   L+1100     3/31/21     2,105       2,105       2,126  

Greystone Equity Member Corp.

   (g)(j)(q)   Diversified Financials   L+1100     3/31/21     537       537       542  

H.M. Dunn Co., Inc.

   (g)   Capital Goods   L+946     1.0%     3/26/21     1,071       1,071       1,023  

Hudson Technologies Co.

   (g)(h)(j)   Commercial & Professional Services   L+725     1.0%     10/10/23     39,946       39,946       40,495  

Hudson Technologies Co.

   (g)(j)(q)   Commercial & Professional Services   L+725     1.0%     10/10/23     9,511       9,511       9,642  

Icynene U.S. Acquisition Corp.

   (e)(g)   Materials   L+700     1.0%     11/30/24     30,000       30,000       30,006  

Imagine Communications Corp.

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

Industrial Group Intermediate Holdings, LLC

   (g)   Materials   L+800     1.3%     5/31/20     21,492       21,492       21,815  

Industry City TI Lessor, L.P.

   (g)   Consumer Services   10.8%, 1.0% PIK
(1.0% Max PIK)
    6/30/26     30,810       30,810       31,195  

International Aerospace Coatings, Inc.

   (e)(f)(h)   Capital Goods   L+750     1.0%     6/30/20     44,867       44,783       45,540  

JMC Acquisition Merger Corp.

   (g)   Capital Goods   L+854     1.0%     11/6/21     6,832       6,832       6,943  

 

See notes to unaudited consolidated financial statements.

 

15


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

   Footnotes  

Industry

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

JSS Holdings, Inc.

   (e)(g)   Capital Goods   L+800, 0.0% PIK
(2.5% Max PIK)
    1.0%     3/31/23   $ 110,566     $ 109,565     $ 112,280  

JSS Holdings, Inc.

   (g)(q)   Capital Goods   L+800, 0.0% PIK
(2.5% Max PIK)
    1.0%     3/31/23     20,182       20,182       20,495  

Kodiak BP, LLC

   (h)   Capital Goods   L+725     1.0%     12/1/24     10,515       10,515       10,541  

Kodiak BP, LLC

   (h)(q)   Capital Goods   L+725     1.0%     12/1/24     3,030       3,030       3,038  

Latham Pool Products, Inc.

   (e)(h)   Commercial & Professional Services   L+775     1.0%     6/29/21     56,183       56,183       56,815  

LEAS Acquisition Co Ltd.

   (g)(j)   Capital Goods   L+750     1.0%     6/30/20   26,372       35,872       32,181  

LEAS Acquisition Co Ltd.

   (f)(j)   Capital Goods   L+750     1.0%     6/30/20   $ 9,251       9,251       9,390  

Logan’s Roadhouse, Inc.

   (g)(t)   Consumer Services   L+1100     1.0%     5/5/19     6,963       6,963       6,963  

Logan’s Roadhouse, Inc.

   (g)(q)(t)   Consumer Services   L+1100     1.0%     5/5/19     1,120       1,131       1,120  

MB Precision Holdings LLC

   (g)   Capital Goods   L+725, 2.3% PIK
(2.3% Max PIK)
    1.3%     1/23/21     13,793       13,793       12,638  

Micronics Filtration, LLC

   (e)(g)(h)   Capital Goods   L+850     1.3%     12/11/19     62,813       62,704       62,420  

MORSCO, Inc.

   (g)   Capital Goods   L+700     1.0%     10/31/23     2,686       2,595       2,738  

Nobel Learning Communities, Inc.

   (g)   Consumer Services   L+450     1.0%     5/5/21     38       38       38  

Nobel Learning Communities, Inc.

   (g)(q)   Consumer Services   L+450     1.0%     5/5/21     101       101       101  

Nobel Learning Communities, Inc.

   (g)   Consumer Services   L+436     4.5%     5/5/23     1,056       1,056       1,051  

Nobel Learning Communities, Inc.

   (g)(q)   Consumer Services   L+375     4.5%     5/5/23     621       621       618  

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+810     1.0%     9/2/22     27,686       27,686       28,206  

North Haven Cadence Buyer, Inc.

   (g)(q)   Consumer Services   L+750     1.0%     9/2/22     3,542       3,542       3,608  

Nova Wildcat Amerock, LLC

   (g)   Consumer Durables & Apparel   L+800     1.3%     9/10/19     17,312       17,312       17,399  

PHRC License, LLC

   (f)(g)   Consumer Services   L+850     1.5%     4/28/22     50,625       50,625       51,891  

Polymer Additives, Inc.

   (g)   Materials   L+888     1.0%     12/19/22     10,511       10,511       10,879  

Polymer Additives, Inc.

   (g)   Materials   L+834     1.0%     12/19/22     11,019       11,019       11,239  

Polymer Additives, Inc.

   (g)   Materials   L+875     1.0%     12/19/22   15,000       16,982       18,575  

Power Distribution, Inc.

   (e)(g)   Capital Goods   L+725     1.3%     1/25/23   $ 29,928       29,928       30,377  

Roadrunner Intermediate Acquisition Co., LLC

   (e)(g)(h)   Health Care Equipment & Services   L+725     1.0%     3/15/23     34,919       34,919       35,214  

Rogue Wave Software, Inc.

   (e)(g)(h)   Software & Services   L+858     1.0%     9/25/21     40,688       40,688       40,688  

Safariland, LLC

   (e)(g)(h)   Capital Goods   L+768     1.1%     11/18/23     126,107       126,107       127,841  

Safariland, LLC

   (g)(q)   Capital Goods   L+725     1.1%     11/18/23     33,282       33,282       33,740  

Sequel Youth and Family Services, LLC

   (e)(g)(h)   Health Care Equipment & Services   L+778     1.0%     9/1/22     94,118       94,118       94,984  

Sequel Youth and Family Services, LLC

   (g)(q)   Health Care Equipment & Services   L+700     1.0%     9/1/22     4,706       4,706       4,749  

Sequential Brands Group, Inc.

   (e)(g)(h)   Consumer Durables & Apparel   L+900     7/1/22     79,039       79,039       78,249  

Sorenson Communications, Inc.

   (e)(g)(h)   Telecommunication Services   L+575     2.3%     4/30/20     90,681       90,474       91,418  

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       46,364  

Staples Canada, ULC

   (g)(j)   Retailing   L+700     1.0%     9/12/23   C$ 20,987       17,333       16,912  

SunGard Availability Services Capital, Inc.

   (g)   Software & Services   L+700     1.0%     9/30/21   $ 4,382       4,342       4,064  

SunGard Availability Services Capital, Inc.

   (g)(i)   Software & Services   L+1000     1.0%     10/1/22     2,000       1,900       1,924  

 

See notes to unaudited consolidated financial statements.

 

16


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

   Footnotes  

Industry

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

Trace3, LLC

   (e)(h)   Software & Services   L+775     1.0%     6/6/23   $ 31,094     $ 31,094     $ 31,832  

U.S. Xpress Enterprises, Inc.

   (e)(f)(h)   Transportation   L+1075, 0.0% PIK
(1.8% Max PIK)
    1.5%     5/30/20     52,685       52,685       52,816  

USI Senior Holdings, Inc.

   (e)(g)   Capital Goods   L+779     1.0%     1/5/22     56,582       56,582       56,902  

USI Senior Holdings, Inc.

   (g)(q)   Capital Goods   L+725     1.0%     1/5/22     11,513       11,513       11,578  

VPG Metals Group LLC

   (e)(g)(h)   Materials   L+1050     1.0%     12/30/20     114,216       114,164       115,073  

Warren Resources, Inc.

   (f)(g)   Energy   L+900, 1.0% PIK
(1.0% Max PIK)
    1.0%     5/22/20     2,037       2,037       2,088  

Waste Pro USA, Inc.

   (e)(g)(h)   Commercial & Professional Services   L+750     1.0%     10/15/20     93,590       93,590       95,345  

Zeta Interactive Holdings Corp.

   (e)(g)(h)   Software & Services   L+750     1.0%     7/29/22     11,766       11,766       11,942  

Zeta Interactive Holdings Corp.

   (g)(q)   Software & Services   L+750     1.0%     7/29/22     2,234       2,234       2,268  
              

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                 2,629,542       2,649,433  

Unfunded Loan Commitments

                 (128,439     (128,439
              

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                 2,501,103       2,520,994  
              

 

 

   

 

 

 

Senior Secured Loans—Second Lien—8.6%

                

American Bath Group, LLC

   (g)   Capital Goods   L+975     1.0%     9/30/24     18,000       17,581       18,045  

Arena Energy, LP

   (g)   Energy   L+900, 4.0% PIK
(4.0% Max PIK)
    1.0%     1/24/21     8,281       8,281       7,874  

Byrider Finance, LLC

   (f)(g)   Automobiles & Components   L+1000, 0.5% PIK
(4.0% Max PIK)
    1.3%     8/22/20     13,565       13,565       12,768  

Chisholm Oil and Gas Operating, LLC

   (g)   Energy   L+800     1.0%     3/21/24     16,000       16,000       15,998  

Compuware Corp.

   (g)   Software & Services   L+825     1.0%     12/15/22     1,206       1,162       1,212  

Gruden Acquisition, Inc.

   (g)   Transportation   L+850     1.0%     8/18/23     15,000       14,463       14,981  

JW Aluminum Co.

   (e)(f)(g)(h)(u)   Materials   L+850     0.8%     11/17/20     37,447       37,432       38,008  

Logan’s Roadhouse, Inc.

   (g)(t)   Consumer Services   L+850 PIK
(L+850 Max PIK)
    1.0%     11/23/20     21,926       21,794       10,079  

LTI Holdings, Inc.

   (e)   Materials   L+875     1.0%     5/16/25     6,482       6,362       6,595  

Spencer Gifts LLC

   (e)(h)   Retailing   L+825     1.0%     6/29/22     30,000       29,903       16,200  

Stadium Management Corp.

   (e)(g)(h)   Consumer Services   Prime+725     0.3%     2/27/21     55,689       55,689       55,828  
              

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                 222,232       197,588  
              

 

 

   

 

 

 

Senior Secured Bonds—7.1%

                

Advanced Lighting Technologies, Inc.

   (g)(t)   Materials   L+700, 10.0% PIK
(10.0% Max PIK)
    10/4/23     22,728       22,728       22,728  

Black Swan Energy Ltd.

   (e)(j)   Energy   9.0%     1/20/24     6,000       6,000       6,045  

FourPoint Energy, LLC

   (e)(f)(h)   Energy   9.0%     12/31/21     74,813       72,272       76,028  

Global A&T Electronics Ltd.

   (g)(j)(l)(r)   Semiconductors & Semiconductor Equipment   10.0%     2/1/19     7,000       6,967       6,490  

 

See notes to unaudited consolidated financial statements.

 

17


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

   Footnotes  

Industry

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

Mood Media Corp.

   (f)(g)(j)(t)   Media   L+600, 8.0% PIK
(8.0% Max PIK)
    6/28/24   $ 21,568     $ 21,568     $ 21,675  

Ridgeback Resources Inc.

   (f)(j)   Energy   12.0%     12/29/20     132       130       132  

Sorenson Communications, Inc.

   (f)   Telecommunication Services   9.0%, 0.0% PIK
(9.0% Max PIK)
    10/31/20     19,898       19,476       19,898  

Sunnova Energy Corp.

   (g)   Energy   6.0%, 6.0% PIK
(6.0% Max PIK)
    10/24/18     1,058       1,058       1,058  

Velvet Energy Ltd.

   (g)(j)   Energy   9.0%     10/5/23     7,500       7,500       7,596  
              

 

 

   

 

 

 

Total Senior Secured Bonds

                 157,699       161,650  
              

 

 

   

 

 

 

Subordinated Debt—21.4%

                

Ascent Resources Utica Holdings, LLC

   (g)   Energy   10.0%     4/1/22     40,000       40,000       43,226  

Aurora Diagnostics, LLC

   (e)(f)(h)   Health Care Equipment & Services   10.8%, 1.5% PIK
(1.5% Max PIK)
    1/15/20     14,966       13,712       13,918  

Bellatrix Exploration Ltd.

   (g)(j)   Energy   8.5%     5/15/20     5,000       4,947       4,775  

Brooklyn Basketball Holdings, LLC

   (f)(g)   Consumer Services   L+725     10/25/19     19,873       19,873       20,171  

CEC Entertainment, Inc.

   (f)   Consumer Services   8.0%     2/15/22     5,000       5,008       4,731  

Ceridian HCM Holding, Inc.

   (f)(g)   Commercial & Professional Services   11.0%     3/15/21     17,393       17,829       18,196  

DEI Sales, Inc.

   (e)(g)   Consumer Durables & Apparel   9.0%, 4.0% PIK
(4.0% Max PIK)
    2/28/23     67,532       66,763       66,519  

EV Energy Partners, L.P.

   (f)(r)   Energy   8.0%     4/15/19     265       251       135  

Global Jet Capital Inc.

   (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/30/25     849       849       864  

Global Jet Capital Inc.

   (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/30/25     5,398       5,398       5,492  

Global Jet Capital Inc.

   (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/3/25     1,115       1,115       1,135  

Global Jet Capital Inc.

   (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/29/25     1,050       1,050       1,068  

Global Jet Capital Inc.

   (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/4/25     77,511       77,511       78,867  

Global Jet Capital Inc.

   (f)(g)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/9/25     12,677       12,677       12,899  

Global Jet Capital Inc.

   (f)(j)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/29/26     6,638       6,638       6,755  

Global Jet Capital Inc.

   (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/14/26     13,570       13,570       13,807  

Global Jet Capital Inc.

   (g)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/2/26     13,320       13,320       13,553  

Greystone Mezzanine Equity Member Corp.

   (g)(j)   Diversified Financials   L+650     9/15/25     1,365       1,365       1,365  

 

See notes to unaudited consolidated financial statements.

 

18


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

   Footnotes  

Industry

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

Greystone Mezzanine Equity Member Corp.

   (g)(j)(q)   Diversified Financials   L+650     9/15/25   $ 25,635     $ 25,635     $ 25,635  

Imagine Communications Corp.

   (g)   Media   12.5% PIK (12.5%
Max PIK)
    8/4/18     661       661       661  

Jupiter Resources Inc.

   (f)(g)(j)   Energy   8.5%     10/1/22     6,425       5,623       3,967  

P.F. Chang’s China Bistro, Inc.

   (f)(g)   Consumer Services   10.3%     6/30/20     11,433       11,664       10,478  

PriSo Acquisition Corp.

   (g)   Capital Goods   9.0%     5/15/23     10,155       10,057       10,771  

S1 Blocker Buyer Inc.

   (g)   Commercial & Professional Services   10.0% PIK (10.0%
Max PIK)
    10/31/22     139       139       156  

Sorenson Communications, Inc.

   (f)   Telecommunication Services   13.9%, 0.0% PIK
(13.9% Max PIK)
    10/31/21     15,122       14,438       15,690  

SunGard Availability Services Capital, Inc.

   (f)(g)   Software & Services   8.8%     4/1/22     10,750       8,689       6,705  

ThermaSys Corp.

   (e)(f)(g)   Capital Goods   6.5%, 5.0% PIK
(5.0% Max PIK)
    5/3/20     145,241       145,241       131,625  

VPG Metals Group LLC

   (e)(g)   Materials   11.0%, 2.0% PIK
(2.0% Max PIK)
    6/30/18     2,238       2,238       2,232  
              

 

 

   

 

 

 

Total Subordinated Debt

                 526,261       515,396  

Unfunded Debt Commitments

                 (25,635     (25,635
              

 

 

   

 

 

 

Net Subordinated Debt

                 500,626       489,761  
              

 

 

   

 

 

 

Collateralized Securities—2.4%

                

MP4 2013-2A Class Subord. B

   (f)(g)(j)   Diversified Financials   14.9%     10/25/25     21,000       11,305       11,993  

NewStar Clarendon 2014-1A Class D

   (g)(j)   Diversified Financials   L+435     1/25/27     1,560       1,484       1,562  

NewStar Clarendon 2014-1A Class Subord. B

   (g)(j)   Diversified Financials   15.8%     1/25/27     17,900       12,928       14,714  

Rampart CLO 2007 1A Class Subord.

   (g)(j)   Diversified Financials   4.5%     10/25/21     10,000       775       661  

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

   (g)(j)   Diversified Financials   9.9%     1/15/26     42,504       20,979       25,389  
              

 

 

   

 

 

 

Total Collateralized Securities

                 47,471       54,319  
              

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

19


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

   Footnotes  

Industry

  Rate(b)   Floor     Maturity   Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

Equity/Other—22.0%(k)

                

5 Arches, LLC, Common Equity

   (g)(j)(n)   Diversified Financials           20,000     $ 500     $ 500  

Advanced Lighting Technologies, Inc., Common Equity

   (g)(l)(t)   Materials           587,637       16,520       13,046  

Advanced Lighting Technologies, Inc., Warrants, 10/4/2027

   (g)(l)(t)   Materials           9,262       86       56  

Altus Power America Holdings, LLC, Common Equity

   (g)(l)   Energy           462,008       462       69  

Altus Power America Holdings, LLC, Preferred Equity

   (g)(p)   Energy   9.0%, 5.0% PIK     10/3/23     955,284       955       955  

AP Exhaust Holdings, LLC, Class A1 Common Units

   (g)(l)(n)   Automobiles & Components           8              

AP Exhaust Holdings, LLC, Class A1 Preferred Units

   (g)(l)(n)   Automobiles & Components           803       895       811  

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

   (g)(j)(l)   Capital Goods           698,482       2,545       1,903  

Ascent Resources Utica Holdings, LLC, Common Equity

   (g)(l)(m)   Energy           96,800,082       29,100       24,200  

ASG Everglades Holdings, Inc., Common Equity

   (g)(l)(t)   Software & Services           1,689,767       36,422       83,052  

ASG Everglades Holdings, Inc., Warrants, 6/27/2022

   (g)(l)(t)   Software & Services           229,541       6,542       6,289  

Aspect Software Parent, Inc., Common Equity

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

Aurora Diagnostics Holdings, LLC, Warrants, 5/25/2027

   (e)(f)(g)(l)   Health Care Equipment & Services           229,489       1,671       1,640  

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

   (g)(j)(l)   Retailing           3,451,216       1,898       49  

Chisholm Oil and Gas, LLC, Series A Units

   (g)(l)(n)   Energy           70,947       71       70  

CSF Group Holdings, Inc., Common Equity

   (g)(l)   Capital Goods           391,300       391       274  

Eastman Kodak Co., Common Equity

   (g)(l)(s)   Consumer Durables & Apparel           61,859       1,203       192  

Escape Velocity Holdings, Inc., Common Equity

   (g)(l)   Software & Services           19,312       193       456  

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

   (g)(l)(n)   Energy           21,000       21,000       6,090  

FourPoint Energy, LLC, Common Equity, Class D Units

   (g)(l)(n)   Energy           3,937       2,601       1,152  

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

   (g)(l)(n)   Energy           48,025       12,006       13,807  

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

   (g)(l)(n)   Energy           70,875       17,719       20,554  

Fronton Investor Holdings, LLC, Class B Units

   (g)(n)(t)   Consumer Services           14,943       7,017       17,782  

Global Jet Capital Holdings, LP, Preferred Equity

   (f)(g)(j)(l)   Commercial & Professional Services           42,281,308       42,281       38,053  

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

   (g)(l)   Retailing           375       1,118       1,117  

Harvey Holdings, LLC, Common Equity

   (g)(l)   Capital Goods           2,333,333       2,333       5,950  

Imagine Communications Corp., Common Equity, Class A Units

   (g)(l)   Media           33,034       3,783       2,573  

Industrial Group Intermediate Holdings, LLC, Common Equity

   (g)(l)(n)   Materials           441,238       441       662  

International Aerospace Coatings, Inc., Common Equity

   (f)(l)   Capital Goods           4,401       464       26  

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       655  

JSS Holdco, LLC, Net Profits Interest

   (g)(l)   Capital Goods                       761  

JW Aluminum Co., Common Equity

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

JW Aluminum Co., Preferred Equity

   (f)(g)(u)   Materials   12.5% PIK     11/17/25     4,499       49,429       57,260  

MB Precision Investment Holdings LLC, Class A-2 Units

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

Micronics Filtration Holdings, Inc., Common Equity

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

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

   (g)(l)   Capital Goods           55       553       901  

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

   (g)(l)   Capital Goods           23       229       254  

Mood Media Corp., Common Equity

   (g)(j)(l)(t)   Media           16,243,967       11,804       26,754  

 

See notes to unaudited consolidated financial statements.

 

20


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

   Footnotes  

Industry

  Rate(b)     Floor     Maturity     Number of
Shares
    Amortized
Cost
    Fair
Value(d)
 

North Haven Cadence TopCo, LLC, Common Equity

   (g)(l)   Consumer Services           1,041,667     $ 1,042     $ 1,615  

PDI Parent LLC, Common Equity

   (g)(l)   Capital Goods           1,384,615       1,385       1,454  

PSAV Holdings LLC, Common Equity

   (f)(l)   Technology Hardware & Equipment           10,000       10,000       34,000  

Ridgeback Resources Inc., Common Equity

   (f)(j)(l)   Energy           324,954       1,997       1,973  

Roadhouse Holding Inc., Common Equity

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

S1 Blocker Buyer Inc., Common Equity

   (g)   Commercial & Professional Services           59       587       893  

Safariland, LLC, Common Equity

   (f)(l)   Capital Goods           25,000       2,500       8,200  

Safariland, LLC, Warrants, 7/27/2018

   (f)(l)   Capital Goods           2,263       246       742  

Safariland, LLC, Warrants, 9/20/2019

   (f)(l)   Capital Goods           2,273       227       746  

SandRidge Energy, Inc., Common Equity

   (g)(j)(l)(s)   Energy           421,682       9,413       8,885  

Sequel Industrial Products Holdings, LLC, Common Equity

   (f)(g)(l)   Commercial & Professional Services           33,306       3,400       14,898  

Sequel Industrial Products Holdings, LLC, Preferred Equity

   (f)(g)   Commercial & Professional Services     9.5% PIK         11/10/18       8,000       13,376       13,378  

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

   (g)(l)   Commercial & Professional Services           1,293       1       422  

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

   (f)(l)   Commercial & Professional Services           19,388       12       6,733  

Sequential Brands Group, Inc., Common Equity

   (g)(l)(s)   Consumer Durables & Apparel           206,664       2,790       368  

Sorenson Communications, Inc., Common Equity

   (f)(l)   Telecommunication Services           46,163             37,858  

SSC Holdco Limited, Common Equity

   (g)(j)(l)   Health Care Equipment & Services           113,636       2,273       2,716  

Sunnova Energy Corp., Common Equity

   (g)(l)   Energy           192,389       722        

Sunnova Energy Corp., Preferred Equity

   (g)(l)   Energy           35,115       187       142  

The Brock Group, Inc., Common Equity

   (g)(l)   Energy           183,826       3,652       3,833  

The Stars Group Inc., Warrants, 5/15/2024

   (g)(j)(l)   Consumer Services           2,000,000       16,832       25,140  

ThermaSys Corp., Common Equity

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

ThermaSys Corp., Preferred Equity

   (f)(l)   Capital Goods           51,813       5,181       78  

Viper Holdings, LLC, Series I Units

   (g)(l)   Consumer Durables & Apparel           308,948       509       541  

Viper Holdings, LLC, Series II Units

   (g)(l)(n)   Consumer Durables & Apparel           316,770       522       554  

Viper Parallel Holdings LLC, Class A Units

   (g)(l)   Consumer Durables & Apparel           649,538       1,070       1,137  

VPG Metals Group 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       193  

Zeta Interactive Holdings Corp., Preferred Equity, Series E-1

   (g)(l)   Software & Services           215,662       1,714       2,092  

Zeta Interactive Holdings Corp., Preferred Equity, Series F

   (g)(l)   Software & Services           196,151       1,714       1,830  

Zeta Interactive Holdings Corp., Warrants, 4/20/2027

   (g)(l)   Software & Services           29,422             102  
              

 

 

   

 

 

 

Total Equity/Other

                 387,715       501,922  
              

 

 

   

 

 

 

TOTAL INVESTMENTS—171.8%

               $ 3,816,846       3,926,234  
              

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(71.8%)

                   (1,641,511
             

 

 

 

NET ASSETS—100%

                 $ 2,284,723  
                

 

 

 

 

See notes to unaudited consolidated financial statements.

 

21


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 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 December 31, 2017, the three-month London Interbank Offered Rate, or LIBOR or “L”, was 1.69%, the Euro Interbank Offered Rate, or EURIBOR, was (0.33)% and the U.S. Prime Lending Rate, or Prime, was 4.50%. 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, 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 December 31, 2017, 82.0% 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) Security is classified as Level 1 in the Company’s fair value hierarchy (see Note 7).

 

See notes to unaudited consolidated financial statements.

 

22


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 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 December 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 year ended December 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
December 31,
2017
    Interest
Income(5)
    PIK
Income(5)
    Fee
Income(5)
 

Senior Secured Loans—First Lien

 

Advanced Lighting Technologies, Inc.

  $     $     $ 20,026     $ (2,948   $ 138     $ 8     $ 3,159     $ 20,383     $ 584     $     $ 891  

ASG Technologies Group, Inc.

    54,766             11,832       (65,789     49       295       (1,153           3,203       356        

Aspect Software, Inc.(1)(2)

          634       536       (178                       992       93             14  

Aspect Software, Inc.(2)

          697             (18                 (51     628       79             3  

Aspect Software, Inc.(3)

                                        (361     (361     6             12  

Logan’s Roadhouse, Inc.(4)

                6,963                         (11     6,952       32       81       729  

Senior Secured Loans—Second Lien

 

ASG Technologies Group, Inc.

    23,872                   (24,611     549       5,529       (5,339           2,286             1,231  

Logan’s Roadhouse, Inc.

    15,415             5,648             32             (11,016     10,079       12       2,032        

Senior Secured Bonds

 

Advanced Lighting Technologies, Inc.

          32,222             (34,048           1,826                   2,169              

Advanced Lighting Technologies, Inc.

                22,728                               22,728       337              

Mood Media Corp.

          21,568                               107       21,675       1,535              

Subordinated Debt

 

Mood Media Corp.(2)

          5,689             (6,460     44       727                   432              

Equity/Other

 

Advanced Lighting Technologies, Inc., Common Equity

                16,520                         (3,474     13,046                    

Advanced Lighting Technologies, Inc., Warrants

                86                         (30     56                    

Advanced Lighting Technologies, Inc., Preferred Equity

                                                                 

ASG Everglades Holdings, Inc., Common Equity

    79,673                                     3,379       83,052                    

ASG Everglades Holdings, Inc., Warrants, 6/27/2022

    5,830                                     459       6,289                    

Aspect Software, Inc.(2)

          19,792       100                   305       (20,197                        

Fronton Investor Holdings, LLC, Class B Units

    15,092                   (7,994                 10,684       17,782                    

Mood Media Corp.

          6,662       5,142                         14,950       26,754                    

Roadhouse Holding Inc., Common Equity

    8,147                                     (8,147                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 202,795     $ 87,264     $ 89,581     $ (142,046   $ 812     $ 8,690     $ (17,041   $ 230,055     $ 10,768     $ 2,469     $ 2,880  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

23


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

 

 

 

 

 

(1) Security includes a partially unfunded commitment with an amortized cost of $25 and a fair value of $25.

 

(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 $0.

 

(4) Security includes a partially unfunded commitment with an amortized cost of $1,131 and a fair value of $1,120.

 

(5) Interest, PIK, fee and dividend income presented for the full year ended December 31, 2017.

 

(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 December 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 year ended December 31, 2017, the Company disposed of investments in one portfolio 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 year ended December 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
December 31,
2017
     Interest
Income(2)
    PIK
Income(2)
 

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        (85     4              (96     38,008        3,536       146  

Equity/Other

                         

JW Aluminum Co., Common Equity

                                                                 

JW Aluminum Co., Preferred Equity

     45,031               5,922                           6,307       57,260        844       5,923  

SWI Holdco LLC, Common Equity(1)

                   8                     (8                         
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 83,070      $ 54,486      $ 6,076      $ (1,700   $ 4      $ (52,879   $ 6,211     $ 95,268      $ 4,373     $ 6,069  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

(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.

 

(2) Interest, PIK, fee and dividend income presented for the full year ended December 31, 2017.

 

See notes to unaudited consolidated financial statements.

 

24


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, 2018, 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, 2018. 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, including through the restructuring of such 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 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.

As the Company previously announced on April 9, 2018, GSO / Blackstone Debt Funds Management LLC, or GDFM, resigned as the investment sub-adviser to the Company and terminated the investment sub-advisory agreement, or the investment sub-advisory agreement, between FB Income Advisor, LLC, or FB Advisor, and GDFM, effective April 9, 2018. In connection with GDFM’s resignation as the investment sub-adviser to the Company, on April 9, 2018, the Company entered into an investment advisory agreement, or the FS/KKR Advisor investment advisory agreement, with FS/KKR Advisor, LLC, or FS/KKR Advisor, a newly-formed investment adviser jointly operated by an affiliate of Franklin Square Holdings, L.P. (which does business as FS Investments) and by KKR Credit Advisors (US), LLC, or KKR Credit, pursuant to which FS/KKR Advisor acts as investment adviser to the Company. The FS/KKR Advisor investment advisory agreement replaced the amended and restated investment advisory agreement, dated July 17, 2014, or the FB Advisor investment advisory agreement, by and between the Company and FB Advisor. See Note 11 for additional information.

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, 2017

 

25


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)

 

included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The December 31, 2017 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, 2017. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Codification Topic 946, 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 FB Advisor 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 FB Advisor 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.

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.

See Note 11 for information relating to the incentive fee on capital gains under the FS/KKR investment advisory agreement.

Subordinated Income Incentive Fee: Pursuant to the terms of the FB Advisor 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 FB Advisor 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.

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

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

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.

See Note 11 for information relating to the subordinated incentive fee on income under the FS/KKR investment advisory agreement.

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, 2017 and the audited consolidated financial statements as of and for the year ended December 31, 2017 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, 2018. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Revenue Recognition: Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis to the extent that it expects to collect such amounts. The Company records dividend income on the ex-dividend date. The Company does not accrue as a receivable interest or dividends on loans and securities if it has reason to doubt its ability to collect such income. The Company’s policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. The Company considers 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 the Company 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 the Company’s judgment.

Loan origination fees, original issue discount and market discount are capitalized and the Company amortizes 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. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.

Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, using the cumulative effect method applied to in-scope contracts with customers that have not been completed as of the date of adoption. The Company did not identify any in-scope contracts that had not been completed as of the date of adoption and, as a result, the Company did not recognize a cumulative effect on stockholders’ equity in connection with the adoption of the new revenue recognition guidance.

The new revenue recognition guidance applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, excluding, among other things, financial instruments as well as certain other contractual rights and obligations. Under the new revenue recognition guidance, which the Company has applied to all new in-scope contracts as of the date of adoption, structuring and other upfront fees are recognized as revenue based on the transaction price as the

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

performance obligation is fulfilled. The related performance obligation consists of structuring activities and is satisfied over time as such activities are performed. Consideration is variable and is constrained from being included in the transaction price until the uncertainty associated with the variable consideration is resolved, typically as of the trade date of the related transaction. Payment is typically due on the settlement date of the related transaction.

For the three months ended March 31, 2018, the Company recognized $1,490 in structuring fee revenue under the new revenue recognition guidance and included such revenue in the fee income line item on its consolidated statement of operations. Comparative periods are presented in accordance with revenue recognition guidance effective prior to January 1, 2018, under which the Company recorded structuring and other non-recurring upfront fees as income when earned. The Company has determined that the adoption of the new revenue recognition guidance did not have a material impact on the amount of revenue recognized for the three months ended March 31, 2018.

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, 2018 and 2017:

 

     Three Months Ended March 31,
     2018   2017
     Shares   Amount   Shares   Amount

Reinvestment of Distributions

                     —      $               —                536,304      $         5,350   

Share Repurchase Program

     (137,560     (1,003            
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Proceeds from Share Transactions

     (137,560   $ (1,003     536,304     $ 5,350  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three months ended March 31, 2018, the administrator for the Company’s distribution reinvestment plan, or DRP, purchased 572,388 shares of common stock in the open market at an average price per share of $7.69 (totaling $4,399) pursuant to the DRP, and distributed such shares to participants in the DRP. During the period from April 1, 2018 to May 9, 2018, the administrator for the DRP purchased 579,404 shares of common stock in the open market at an average price per share of $7.53 (totaling $4,362) pursuant to the DRP, and distributed such shares to participants in the DRP. For additional information regarding the terms of the DRP, see Note 5.

Share Repurchase Program

In February 2018, the Company’s board of directors authorized a stock repurchase program. Under the program, the Company may repurchase up to $50 million in the aggregate of its outstanding common stock in the open market at prices below the then-current net asset value per share. The timing, manner, price and amount of any share repurchases will be determined by the Company, in its discretion, based upon the evaluation of economic and market conditions, the Company’s stock price, applicable legal and regulatory requirements and other factors. The program will be in effect through February 21, 2019, unless extended or until the aggregate repurchase amount that has been approved by the Company’s board of directors has been expended. The program does not require the Company to repurchase any specific number of shares. The program may be suspended, extended, modified or discontinued at any time.

During the three months ended March 31, 2018, the Company repurchased 137,560 shares of common stock pursuant to the share repurchase program at an average price per share of $7.29 (totaling $1,003). During the period from April 1, 2018 to May 9, 2018, the Company repurchased 3,324,358 shares of common stock pursuant to the share repurchase program at an average price per share (inclusive of commissions paid) of $7.52 (totaling $25,000).

 

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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

Compensation of the Investment Adviser

Pursuant to the FB Advisor 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. FB Advisor has agreed, effective October 1, 2017, to (a) waive a portion of the base management fee to which it is entitled under the FB Advisor investment advisory agreement so that the fee received equals 1.50% of the average value of the Company’s gross assets and (b) continue to calculate the subordinated incentive fee on income to which it is entitled under the FB Advisor investment advisory agreement as if the base management fee was 1.75% of the average value of the Company’s gross assets. See Note 2 for a discussion of the capital gains and subordinated income incentive fees that FB Advisor may be entitled to under the FB Advisor investment advisory agreement.

Pursuant to the investment sub-advisory agreement, GDFM is entitled to receive 50% of all management and incentive fees payable to FB Advisor under the FB Advisor investment advisory agreement with respect to each year.

On April 16, 2014, the Company entered into an administration agreement with FB Advisor, or the FB Advisor administration agreement, which governs the administrative services provided to the Company by FB Advisor. Pursuant to the FB Advisor 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 FB Advisor 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 FB Advisor investment advisory agreement and the FB Advisor administration agreement, as applicable, during the three months ended March 31, 2018 and 2017:

 

            Three Months Ended
March 31,

Related Party  

 

Source Agreement

 

Description

  2018   2017

FB Advisor

 

 FB Advisor Investment Advisory Agreement

 

Base Management Fee(1)

  $     15,303      $     18,367   

FB Advisor

 

 FB Advisor Investment Advisory Agreement

 

Subordinated Incentive Fee on Income(2)

  $ 11,999     $ 13,147  

FB Advisor

 

 FB Advisor Administration Agreement

 

Administrative Services Expenses(3)

  $ 734     $ 734  

 

(1) FB Advisor agreed, effective October 1, 2017, to waive a portion of the base management fee to which it was entitled under the FB Advisor investment advisory agreement so that the fee received equaled 1.50% of the average value of the Company’s gross assets. For the three months ended March 31, 2018, the amount shown is net of waivers of $2,551. During the three months ended March 31, 2018 and 2017, $15,450 and $18,022, respectively, in base management fees were paid to FB Advisor. As of March 31, 2018, $15,303 in base management fees were payable to FB Advisor.
(2) During the three months ended March 31, 2018 and 2017, $12,871 and $12,885, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of March 31, 2018, a subordinated incentive fee on income of $11,999 was payable to FB Advisor.
(3) During the three months ended March 31, 2018 and 2017, $568 and $650, 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 $486 and $904, respectively, in administrative services expenses to FB Advisor during the three months ended March 31, 2018 and 2017.

 

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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)

 

See Note 11 for information relating to the compensation of FS/KKR Advisor under the FS/KKR investment advisory agreement and the FS/KKR administration agreement.

Potential Conflicts of Interest

The members of the senior management and investment teams of FS/KKR Advisor serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Company does, or of investment vehicles managed by the same personnel. For example, FS/KKR Advisor is the investment adviser to FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV, Corporate Capital Trust, Inc. and Corporate Capital Trust II, and the officers, managers and other personnel of FS/KKR Advisor may serve in similar or other capacities for the investment advisers to future investment vehicles affiliated with FS Investments or KKR Credit. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the Company’s best interests or in the best interest of the Company’s stockholders. The Company’s investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For additional information regarding potential conflicts of interest, see the Company’s annual report on Form 10-K for the year ended December 31, 2017.

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, or the FS Order, 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. However, in connection with the investment advisory relationship with FS/KKR Advisor, and in an effort to mitigate potential future conflicts of interest, the Company’s board of directors authorized and directed that the Company (i) withdraw from the FS Order, except with respect to any transaction in which the Company participated in reliance on the FS Order prior to April 9, 2018, and (ii) rely on an exemptive relief order, dated April 3, 2018, that permits the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions, including investments originated and directly negotiated by FS/KKR Advisor or KKR Credit, with certain affiliates of FS/KKR Advisor.

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, 2018 and 2017:

 

     Distribution

For the Three Months Ended

   Per Share    Amount

Fiscal 2017

     

March 31, 2017

   $     0.22275      $     54,485  

Fiscal 2018

     

March 31, 2018

   $ 0.19000      $ 46,683  

On May 2, 2018, the Company’s board of directors declared a regular quarterly cash distribution of $0.19 per share, which will be paid on or about July 3, 2018 to stockholders of record as of the close of business on June 20, 2018. As previously announced by the Company, subject to market conditions, the Company’s board of directors currently intends to make a special distribution in the fourth quarter of 2018 that equates to the cumulative amount, if any, of net investment income earned during

 

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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 twelve months following October 1, 2017 that is in excess of $0.76 per share. 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 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, 2018 and 2017:

 

     Three Months Ended March 31,
     2018   2017

Source of Distribution

   Distribution
Amount
   Percentage   Distribution
Amount
   Percentage

Offering proceeds

   $            $         

Borrowings

                          

Net investment income(1)

     46,683        100     54,485        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

   $     46,683                    100   $     54,485                    100
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

(1) During the three months ended March 31, 2018 and 2017, 85.4% and 90.6%, respectively, of the Company’s gross investment income was attributable to cash income earned, 1.4% and 1.4%, respectively, was attributable to non-cash accretion of discount and 13.2% 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, 2018 and 2017 was $49,569 and $44,846, respectively. As of March 31, 2018 and December 31, 2017, the Company had $149,533 and $146,647 of undistributed net investment income, respectively, and $205,647 and $195,140, 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, 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 and income recognized for tax purposes on certain transactions but not recognized for GAAP purposes.

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, 2018 and 2017:

 

     Three Months Ended March 31,
             2018                   2017        

GAAP-basis net investment income

   $ 50,547      $ 52,590   

Income subject to tax not recorded for GAAP

     (144     (71

GAAP versus tax-basis impact of consolidation of certain subsidiaries

     2,910       3,033  

Reclassification or deferral of unamortized original issue discount, prepayment fees and other income

     (3,794     (10,818

Other miscellaneous differences

     50       112  
  

 

 

 

 

 

 

 

Tax-basis net investment income

   $     49,569     $     44,846  
  

 

 

 

 

 

 

 

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.

 

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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)

 

As of March 31, 2018 and December 31, 2017, the components of accumulated earnings on a tax basis were as follows:

 

     March 31, 2018
(Unaudited)
  December 31, 2017

Distributable ordinary income

   $ 149,533      $ 146,647   

Distributable realized gains (accumulated capital losses)(1)

     (205,647     (195,140

Other temporary differences

     (246     (257

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

     37,079       60,636  
  

 

 

 

 

 

 

 

Total

   $         (19,281   $         11,886  
  

 

 

 

 

 

 

 

 

(1) Net capital losses may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of March 31, 2018, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $27,909 and $177,738, respectively.
(2) As of March 31, 2018 and December 31, 2017, the gross unrealized appreciation on the Company’s investments and secured borrowing and gain on foreign currency was $243,317 and $259,416, respectively. As of March 31, 2018 and December 31, 2017, the gross unrealized depreciation on the Company’s investments and secured borrowing and loss on foreign currency was $206,238 and $198,780, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $3,770,057 and $3,869,322 as of March 31, 2018 and December 31, 2017, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $33,957 and $56,912 as of March 31, 2018 and December 31, 2017, respectively.

As of March 31, 2018, the Company had a deferred tax liability of $5,961 resulting from unrealized appreciation on investments held by the Company’s wholly-owned taxable subsidiaries and a deferred tax asset of $13,987 resulting from net operating losses of the Company’s wholly-owned taxable subsidiaries. As of March 31, 2018, certain wholly-owned taxable subsidiaries anticipated that they would be unable to fully utilize their generated net operating losses and capital losses, therefore the deferred tax asset was offset by a valuation allowance of $8,026. For the three months ended March 31, 2018, the Company did not record a provision for taxes related to wholly-owned taxable subsidiaries.

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, 2018 and December 31, 2017:

 

     March 31, 2018
(Unaudited)
  December 31, 2017
     Amortized
Cost(1)
  Fair Value   Percentage
of Portfolio
  Amortized
Cost(1)
  Fair Value   Percentage
of Portfolio

Senior Secured Loans—First Lien

   $ 2,470,709      $ 2,478,573        65%      $ 2,501,103      $ 2,520,994        64%   

Senior Secured Loans—Second Lien

     169,901       149,364       4%       222,232       197,588       5%  

Senior Secured Bonds

     159,091       163,165       4%       157,699       161,650       4%  

Subordinated Debt

     506,978       491,946       13%       500,626       489,761       13%  

Collateralized Securities

     46,815       52,579       1%       47,471       54,319       1%  

Equity/Other

     373,870       468,387       13%       387,715       501,922       13%  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

   $  3,727,364     $  3,804,014               100%     $  3,816,846     $  3,926,234               100%  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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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)

 

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.

As of March 31, 2018, the Company held investments in one portfolio company of which it is deemed to “control.” As of March 31, 2018, the Company held investments in six portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control.” For additional information with respect to such portfolio companies, see footnotes (t) and (u) to the unaudited consolidated schedule of investments as of March 31, 2018 in this quarterly report on Form 10-Q.

As of December 31, 2017, the Company held investments in one portfolio company of which it is deemed to “control.” As of December 31, 2017, the Company held investments in six portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control.” For additional information with respect to such portfolio companies, see footnotes (t) and (u) to the consolidated schedule of investments as of December 31, 2017 in this quarterly report on Form 10-Q.

The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2018, the Company had nineteen unfunded debt investments with aggregate unfunded commitments of $133,294, one unfunded commitment to purchase up to $295 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $4 in shares of common stock of Chisholm Oil and Gas, LLC. As of December 31, 2017, the Company had twenty unfunded debt investments with aggregate unfunded commitments of $154,074, one unfunded commitment to purchase up to $295 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $4 in shares of common stock of Chisholm Oil and Gas, 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, 2018 and the Company’s audited consolidated schedule of investments as of December 31, 2017.

 

34


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 6. Investment Portfolio (continued)

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2018 and December 31, 2017:

 

     March 31, 2018
(Unaudited)
    December 31, 2017

Industry Classification

   Fair
Value
     Percentage of
Portfolio
  Fair
Value
   Percentage of
Portfolio

Automobiles & Components

   $ 18,227         1 %     $ 13,579         0 %  

Capital Goods

     1,097,856        29     1,053,614        27

Commercial & Professional Services

     469,071        12     560,414        14

Consumer Durables & Apparel

     161,546        4     173,855        4

Consumer Services

     218,498        6     265,220        7

Diversified Financials

     148,299        4     140,249        4

Energy

     237,484        6     257,841        7

Food, Beverage & Tobacco

     70,602        2     69,979        2

Health Care Equipment & Services

     239,590        6     239,916        6

Materials

     359,764        9     370,740        10

Media

     116,263        3     128,335        3

Retailing

     175,194        5     174,289        4

Semiconductors & Semiconductor Equipment

     6,452        0     6,490        0

Software & Services

     229,812        6     205,052        5

Technology Hardware & Equipment

     22,500        1     34,000        1

Telecommunication Services

     164,918        4     164,864        4

Transportation

     67,938        2     67,797        2
  

 

 

    

 

 

 

 

 

 

 

  

 

 

 

Total

   $  3,804,014                100   $  3,926,234                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 valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

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

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

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

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

 

35


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)

 

As of March 31, 2018 and December 31, 2017, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   March 31, 2018
(Unaudited)
  December 31,
2017

Level 1—Price quotations in active markets

   $ 762      $ 9,445   

Level 2—Significant other observable inputs

                       —  

Level 3—Significant unobservable inputs

     3,803,252       3,916,789  
  

 

 

 

 

 

 

 

   $     3,804,014     $     3,926,234  
  

 

 

 

 

 

 

 

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 Company’s investments consist primarily of debt investments that were acquired directly from the issuer. Debt investments, for which broker quotes are not available, are valued by independent valuation firms, which determine 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, anticipated repayments and other relevant terms of the investments. Except as described below, all of the Company’s equity/other investments are also valued by independent valuation firms, which determine 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. An investment that is newly issued and purchased near the date of the financial statements is valued at cost if the Company’s board of directors determines that the cost of such investment is the best indication of its fair value. Investments that are traded on an active public market are valued at their closing price as of the date of the financial statements. Except as described above, the Company values 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 are provided by independent third-party pricing services and screened for validity by such services.

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

 

36


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 following is a reconciliation for the three months ended March 31, 2018 and 2017 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Three Months Ended March 31, 2018  
    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

  $ 2,520,994      $ 197,588      $ 161,650      $ 489,761      $ 54,319      $ 492,477      $     3,916,789   

Accretion of discount (amortization of premium)

    464        59        643        265              (10)       1,423   

Net realized gain (loss)

    51        43        (767)       (2,508)       —        319        (2,862)  

Net change in unrealized appreciation (depreciation)

    (12,027)       4,107        123        (4,167)       (1,084)       (20,420)       (33,468)  

Purchases

    98,395        4,167        6,426        4,059        235        2,708        115,990   

Paid-in-kind interest

    1,170        379        2,034        7,694        —        2,116        13,393   

Sales and repayments

    (130,474)       (56,979)       (6,944)       (3,158)       (893)       (9,565)       (208,013)  

Net transfers in or out of Level 3

    —        —        —        —        —        —        —   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,478,573      $ 149,364      $ 163,165      $ 491,946      $ 52,579      $ 467,625      $ 3,803,252   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (9,918)     $ 4,296      $ (356)     $ (5,822)     $ (1,084)     $ (20,330)     $ (33,214)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    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                    2,078   

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


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 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)  
 

 

 

 

 

38


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, 2018 and December 31, 2017 were as follows:

 

Type of Investment

  Fair Value at
March 31, 2018
(Unaudited)
    Valuation
Technique(1)
  Unobservable Input   Range   Weighted
Average

Senior Secured Loans—First Lien

  $ 2,300,794       Market Comparables    Market Yield (%)   6.8% - 14.3%   10.3%
       EBITDA Multiples (x)   5.8x - 10.5x   8.4x
    56,552       Other(2)    Other(2)   N/A   N/A
    121,227       Market Quotes    Indicative Dealer Quotes   92.2% -102.5%   99.7%

Senior Secured Loans—Second Lien

    90,104       Market Comparables    Market Yield (%)   9.0% - 18.5%   11.7%
       EBITDA Multiples (x)   5.8x - 6.8x   6.3x
    59,260       Market Quotes    Indicative Dealer Quotes   64.0% -102.0%   89.0%

Senior Secured Bonds

    112,850       Market Comparables    Market Yield (%)   8.3% - 12.5%   8.7%
       EBITDA Multiples (x)   4.5x - 7.3x   7.0x
       Production Multiples (Mboe/d)   $41,000.0 -$43,500.0   $42,250.0
       Proved Reserves Multiples (Mmboe)   $13.5 - $14.5   $14.0
       PV-10 Multiples (x)   1.0x - 1.0x   1.0x
    23,853       Other(2)    Other(2)   N/A   N/A
    26,462       Market Quotes    Indicative Dealer Quotes   100.5% - 101.5%   100.8%

Subordinated Debt

    366,237       Market Comparables    Market Yield (%)   8.3% - 20.3%   15.0%
       EBITDA Multiples (x)   9.0x - 11.3x   9.3x
    125,709       Market Quotes    Indicative Dealer Quotes   47.5% - 108.5%   98.6%

Collateralized Securities

    52,579       Market Quotes    Indicative Dealer Quotes   4.5% - 100.2%   64.2%

Equity/Other

    462,090       Market Comparables    Market Yield (%)   16.0% - 16.5%   16.3%
       Capacity Multiple ($/kW)   $1,875.0 - $2,125.0   $2,000.0
       EBITDA Multiples (x)   4.5x - 27.8x   8.5x
       Production Multiples (Mboe/d)   $32,500.0 - $43,500.0   $34,120.3
       Production Multiples (MMcfe/d)   $4,000.0 - $4,500.0   $4,250.0
       Proved Reserves Multiples (Bcfe)   $1.0 - $1.1   $1.0
       Proved Reserves Multiples (Mmboe)   $4.3 - $14.5   $4.9
       PV-10 Multiples (x)   1.0x - 2.0x   1.4x
     Discounted Cash Flow    Discount Rate (%)   10.5% - 12.5%   11.5%
     Option Valuation Model    Volatility (%)   24.3% - 34.5%   32.5%
    5,535      Other(2)    Other(2)   N/A   N/A
 

 

 

         

Total

  $ 3,803,252           
 

 

 

         

 

(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.

 

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)

 

Type of Investment

  Fair Value at
December 31, 2017
    Valuation
Technique(1)
  Unobservable Input   Range   Weighted
Average

Senior Secured Loans—First Lien

  $ 2,355,454      Market Comparables   Market Yield (%)   6.2% - 14.0%   9.8%
      EBITDA Multiples (x)   5.0x - 8.0x   7.2x
    52,295      Other(2)   Other(2)   N/A   N/A
    113,245      Market Quotes   Indicative Dealer Quotes   85.5% - 102.8%   99.4%

Senior Secured Loans—Second Lien

    84,727      Market Comparables   Market Yield (%)   8.3% - 20.7%   11.3%
      EBITDA Multiples (x)   5.0x - 6.0x   5.5x
    112,861      Market Quotes   Indicative Dealer Quotes   50.5% - 102.3%   93.7%

Senior Secured Bonds

    112,534      Market Comparables   Market Yield (%)   7.7% - 12.3%   8.6%
      EBITDA Multiples (x)   4.8x - 8.0x   7.7x
      Production Multiples (Mboe/d)   $42,250.0 - $44,750.0   $43,500.0
      Proved Reserves Multiples (Mmboe)   $10.3 - $11.3   $10.8
      PV-10 Multiples (x)   0.8x - 0.8x   0.8x
    29,218      Other(2)   Other(2)   N/A   N/A
    19,898      Market Quotes   Indicative Dealer Quotes   99.5% - 100.5%   100.0%

Subordinated Debt

    357,169      Market Comparables   Market Yield (%)   7.8% - 16.8%   14.5%
      EBITDA Multiples (x)   9.0x - 11.0x   9.5x
    132,592      Market Quotes   Indicative Dealer Quotes   50.0% - 108.5%   99.4%

Collateralized Securities

    54,319      Market Quotes   Indicative Dealer Quotes   6.6% - 100.2%   65.8%

Equity/Other

    448,949      Market Comparables   Market Yield (%)   15.3% - 15.8%   15.5%
      Capacity Multiple ($/kW)   $2,000.0 - $2,250.0   $2,125.0
      EBITDA Multiples (x)   4.8x - 23.5x   8.3x
      Production Multiples (Mboe/d)   $32,500.0 - $44,750.0   $34,191.4
      Production Multiples (MMcfe/d)   $5,000.0 - $5,500.0   $5,250.0
      Proved Reserves Multiples (Bcfe)   $1.8 - $2.0   $1.9
      Proved Reserves Multiples (Mmboe)   $8.3 - $11.3   $8.6
      PV-10 Multiples (x)   0.8x - 2.6x   2.3x
    Discounted Cash
Flow
  Discount Rate (%)   11.0% - 13.0%   12.0%
    Option Valuation
Model
  Volatility (%)   30.0% - 36.5%   35.3%
    43,528      Other(2)   Other(2)   N/A   N/A
 

 

 

         

Total

  $ 3,916,789           
 

 

 

         

 

(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.

 

40


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements

The following tables present summary information with respect to the Company’s outstanding financing arrangements as of March 31, 2018 and December 31, 2017. For additional information regarding these financing arrangements, 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, 2017 and the additional disclosure set forth in this Note 8.

 

    

As of March 31, 2018

(Unaudited)

Arrangement

  

Type of Arrangement

   Rate      Amount
Outstanding
    Amount
Available
    

Maturity Date

Hamilton Street Credit Facility(1)

   Revolving Credit Facility      L+2.50%      $ 102,000     $ 48,000      December 15, 2021

ING Credit Facility(1)

   Revolving Credit Facility      L+2.25%        115,108 (2)      212,392      March 16, 2021

Locust Street Credit Facility(1)

   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
        

 

 

   

 

 

    

Total

         $     1,722,108     $     260,392     

 

(1) The carrying amount outstanding under the facility approximates its fair value.
(2) Amount includes borrowing in Euros and Canadian dollars. Euro balance outstanding of €41,372 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.23 as of March 31, 2018 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $20,987 has been converted to U.S dollars at an exchange rate of CAD $1.00 to $0.78 as of March 31, 2018 to reflect total amount outstanding in U.S. dollars.

 

    

As of December 31, 2017

Arrangement

  

Type of Arrangement

   Rate      Amount
Outstanding
    Amount
Available
    

Maturity Date

Hamilton Street Credit Facility(1)

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

ING Credit Facility(1)

   Revolving Credit Facility      L+2.25%        66,750 (2)      260,750      March 16, 2021

Locust Street Credit Facility(1)

   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
        

 

 

   

 

 

    

Total

         $     1,721,750     $     260,750     

 

(1) The carrying amount outstanding under the facility approximates its fair value.
(2) Borrowings in Euros and Canadian dollars. Euro balance outstanding of €41,576 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.20 as of December 31, 2017 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $20,987 has been converted to U.S. dollars at an exchange rate of CAD $1.00 to $0.80 as of December 31, 2017 to reflect total amount outstanding in U.S. dollars.

 

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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, 2018 and 2017, the components of total interest expense for the Company’s financing arrangements were as follows:

 

     Three Months Ended March 31,  
     2018      2017  

Arrangement(1)

   Direct Interest
Expense
     Amortization of
Deferred
Financing Costs
and Discount
     Total Interest
Expense
     Direct Interest
Expense
     Amortization of
Deferred
Financing Costs
and Discount
     Total Interest
Expense
 

Hamilton Street Credit Facility(2)

   $ 1,465      $ 81      $ 1,546      $ 1,382      $ 81      $ 1,463  

ING Credit Facility(2)

     1,103        166        1,269        1,275        308        1,583  

Locust Street Credit Facility

     4,678        276        4,954        3,792        276        4,068  

4.000% Notes due 2019

     4,000        302        4,302        4,000        302        4,302  

4.250% Notes due 2020

     4,303        279        4,582        4,303        279        4,582  

4.750% Notes due 2022

     3,266        134        3,400        3,266        134        3,400  

Partial Loan Sale(3)

                          40        1        41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $         18,815      $             1,238      $         20,053      $         18,058      $              1,381      $         19,439  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Borrowings of each of the Company’s wholly-owned, special-purpose financing subsidiaries are considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.
(2) Direct interest expense includes the effect of non-usage fees.
(3) Total interest expense for the secured borrowing includes the effect of amortization of discount.

For the three months ended March 31, 2018 and 2017, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Company’s financing arrangements were as follows:

 

    Three Months Ended March 31,
    2018   2017

Arrangement

  Cash Paid
  for Interest  
Expense
    Average
  Borrowings  
      Effective  
Interest
Rate
    Weighted  
Average
Interest
Rate(1)
  Cash Paid
  for Interest  
Expense
    Average
  Borrowings  
      Effective  
Interest
Rate
    Weighted  
Average
Interest
Rate(1)

Hamilton Street Credit Facility(2)(3)

  $ 1,501      $ 139,333      4.57%   4.21%   $ —      $ 150,000      3.69%   3.69%

ING Credit Facility(2)(4)

    1,003        77,942      3.99%   5.66%     1,353        133,941      3.68%   3.81%

Locust Street Credit Facility(3)

    4,365        425,000      4.38%   4.40%     2,738        425,000      3.57%   3.57%

4.000% Notes due 2019(5)

    8,000        400,000      4.00%   4.00%     8,000        400,000      4.00%   4.00%

4.250% Notes due 2020(5)

    8,607        405,000      4.25%   4.25%     8,607        405,000      4.25%   4.25%

4.750% Notes due 2022(5)

    —        275,000      4.75%   4.75%     —        275,000      4.75%   4.75%

Partial Loan Sale(3)

    —        —            41        2,857      5.53%   5.50%
 

 

 

   

 

 

       

 

 

   

 

 

     
  $ 23,476      $ 1,722,275      4.31%   4.37%   $ 20,739      $ 1,791,798      4.01%   4.03%
 

 

 

   

 

 

       

 

 

   

 

 

     

 

(1) The weighted average interest rates presented for periods of less than one year are annualized.
(2) Effective interest rate and weighted average interest rate includes the effect of non-usage fees.
(3) Interest is paid quarterly in arrears.
(4) Interest is paid at the end of each interest period (but no less frequently than quarterly) in arrears for Eurocurrency Loans (as described below) and quarterly in arrears for ABR Loans (as described below).
(5) Interest is paid semi-annually in arrears.

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

 

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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)

 

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.

Hamilton Street will pay interest quarterly in arrears on the advances under the Hamilton Street credit facility at a rate per annum equal to LIBOR for a three-month interest period (subject to a 0% floor) plus a spread of 2.50%. Hamilton Street will pay an undrawn fee during the revolving period in an amount equal to 0.50% per annum on any unborrowed amounts up to 35% of the commitments plus 1.65% per annum on any unborrowed amounts above that threshold.

The Company incurred costs 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, 2018, $1,216 of such deferred financing costs had yet to be amortized to interest expense.

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 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).

Borrowings under the ING credit facility are subject to compliance with a borrowing base. Interest under the ING credit facility for (i) loans for which the Company elects the base rate option is payable at a rate equal to 1.50% per annum plus the greatest of (x) the “U.S. Prime Rate” as published in The Wall Street Journal, (y) the federal funds effective rate plus 0.5% per annum and (z) three-month LIBOR plus 1% per annum and (ii) loans for which the Company elects the option to borrow in Euro is payable at a rate equal to 2.50% per annum plus adjusted LIBOR. The ING credit facility is subject to a non-usage fee of (a) 1% per annum on the unused portion of the commitment under the ING credit facility for each day such unused portion is 65% or more of the commitments and (b) 0.375% per annum on the unused portion of the commitments for each day the unused portion is less than 65%. The Company will pay letter of credit participation fees and a fronting fee on the average daily amount of any lender’s exposure with respect to any letters of credit issued under the ING credit facility.

As of March 31, 2018 and December 31, 2017, $115,108 and $66,750, respectively, was outstanding under the ING credit facility, which includes borrowings in Euro in an aggregate amount of €41,372 and €41,576, respectively, and borrowings in

 

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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)

 

Canadian dollars in an aggregate amount of CAD $20,987 and CAD $20,987, respectively. The Company incurred costs 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, 2018, $1,996 of such deferred financing costs had yet to be amortized to interest expense.

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 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 Locust Street and JPM was terminated and (iii) the JPM Facility was prepaid and terminated.

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.

The Company incurred costs 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, 2018, $2,903 of such deferred financing costs had yet to be amortized to interest expense.

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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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 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, 2018, the fair value of the 4.000% notes was approximately $403,142. The Company incurred costs 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, 2018, $145 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 discount costs against the carrying amount of such notes. As of March 31, 2018, $1,444 of such discount had yet to be amortized to interest expense.

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.

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, 2018, the fair value of the 4.250% notes was approximately $409,454. The Company incurred costs 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, 2018, $821 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 discount costs against the carrying amount of such notes. As of March 31, 2018, $1,194 of such discount had yet to be amortized to interest expense.

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

 

45


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

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, 2018, the fair value of the 4.750% notes was approximately $280,140. The Company incurred costs 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, 2018, $279 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 discount costs against the carrying amount of such notes. As of March 31, 2018, $1,957 of such discount had yet to be amortized to interest expense.

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.

During the year ended December 31, 2017, the secured borrowing was fully repaid.

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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Table of Contents

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, 2018 and the year ended December 31, 2017:

 

       Three Months Ended  
March 31, 2018
(Unaudited)
     Year Ended
  December 31, 2017  
 

Per Share Data:(1)

     

Net asset value, beginning of period

   $ 9.30           $ 9.41        

Results of operations(2)

     

Net investment income (loss)

     0.21             0.83        

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

     (0.16)            (0.08)      
  

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.05             0.75        
  

 

 

    

 

 

 

Stockholder distributions(3)

     

Distributions from net investment income

     (0.19)            (0.86)      

Distributions from net realized gain on investments

     —             —        
  

 

 

    

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (0.19)            (0.86)      
  

 

 

    

 

 

 

Capital share transactions

     

Issuance of common stock(4)

     —             0.00        

Repurchases of common stock(5)

     0.00            —        
  

 

 

    

 

 

 

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

     —             —        
  

 

 

    

 

 

 

Net asset value, end of period

   $ 9.16           $ 9.30        
  

 

 

    

 

 

 

Per share market value, end of period

   $ 7.25           $ 7.35        
  

 

 

    

 

 

 

Shares outstanding, end of period

     245,587,856             245,725,416        
  

 

 

    

 

 

 

Total return based on net asset value(6)

     0.54%         7.97%   
  

 

 

    

 

 

 

Total return based on market value(7)

     1.13%         (21.39)%   
  

 

 

    

 

 

 

Ratio/Supplemental Data:

     

Net assets, end of period

   $ 2,249,962           $ 2,284,723        

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

     8.84%         8.86%   

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

     9.27%         9.48%   

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

     8.83%         9.37%   

Portfolio turnover(9)

     3.02%         29.17%   

Total amount of senior securities outstanding, exclusive of treasury securities

   $ 1,722,108           $ 1,721,750        

Asset coverage per unit(10)

     2.31             2.33        

 

(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, 2018 and year ended December 31, 2017.
(5) The per share impact of the Company’s repurchases of common stock is a reduction to net asset value of less than $0.01 per share during the three months ended March 31, 2018.
(6)

The total return based on net asset value for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share that were declared during the period and dividing the total by the net asset

 

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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 10. Financial Highlights (continued)

 

  value per share at the beginning of the period. Total return based on net asset value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The historical calculation of total return based on net asset value in the table should not be considered a representation of the Company’s future total return based on net asset value, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.
(7) The total return based on market value for 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.
(8) Weighted average net assets during the applicable period are used for this calculation. Ratios for the three months ended March 31, 2018 are annualized. Annualized ratios for the three months ended March 31, 2018 are not necessarily indicative of the ratios that may be expected for the year ending December 31, 2017. The following is a schedule of supplemental ratios for the three months ended March 31, 2018 and year ended December 31, 2017:

 

     Three Months Ended
March 31, 2018

 

(Unaudited)

     Year Ended
December 31,
2017
 

Ratio of subordinated income incentive fees to average net assets

     2.10%        2.19%  

Ratio of interest expense to average net assets

     3.51%        3.44%  

Ratio of excise taxes to average net assets

     —            0.23%  

 

(9) Portfolio turnover for the three months ended March 31, 2018 is not annualized.
(10) 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.

Note 11. Subsequent Events

On April 9, 2018, the Company entered into the FS/KKR Advisor investment advisory agreement, which replaced the FB Advisor investment advisory agreement. Pursuant to the FS/KKR Advisor investment advisory agreement, FS/KKR Advisor is entitled to an annual base management fee based on the average weekly value of the Company’s gross assets and an incentive fee based on the Company’s performance. The base management fee is payable quarterly in arrears, and is calculated at an annual rate of 1.50% of the average weekly value of the Company’s gross assets.

The incentive fee consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the Company’s net assets, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, FS/KKR 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 1.75%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS/KKR Advisor will be entitled to a “catch-up” fee equal to the amount of the Company’s 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

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 11. Subsequent Events (continued)

 

2.1875%, or 8.75% annually, of the value of the Company’s net assets. Thereafter, FS/KKR Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.

The subordinated incentive fee on income is subject to a cap equal to (i) 20.0% of the per share pre-incentive fee return for the then-current and eleven preceding calendar quarters minus the cumulative per share incentive fees accrued and/or payable for the eleven preceding calendar quarters multiplied by (ii) the weighted average number of shares outstanding during the calendar quarter for which the subordinated incentive fee on income is being calculated. For the foregoing purpose, the “per share pre-incentive fee return” for any calendar quarter is equal to (i) the sum of the Company’s pre-incentive fee net investment income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation and depreciation of the Company’s investments for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, base management fees for the calendar quarter, divided by (ii) the weighted average number of shares outstanding during such calendar quarter. In addition, the “per share incentive fee” for any calendar quarter is equal to (i) the incentive fee accrued and/or payable for such calendar quarter divided by (ii) the weighted average number of shares outstanding during such calendar quarter.

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 FS/KKR Advisor investment advisory agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equals 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 on capital gains based on net realized and unrealized gains; however, the fee payable to FS/KKR 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.

On April 9, 2018, the Company entered into a new administration agreement with FS/KKR Advisor, or the FS/KKR Advisor administration agreement, which replaced the FB Advisor administration agreement. Pursuant to the FS/KKR Advisor administration agreement, FS/KKR Advisor oversees the Company’s day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. FS/KKR Advisor also performs, or oversees the performance of, the Company’s corporate operations and required administrative services, which includes being responsible for the financial records that the Company is required to maintain and preparing reports for the Company’s stockholders and reports filed with the SEC. In addition, FS/KKR Advisor assists the Company in calculating its net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to the Company’s stockholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others.

Pursuant to the FS/KKR Advisor administration agreement, the Company reimburses FS/KKR Advisor for expenses necessary to perform services related to its administration and operations, including FS/KKR Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to us on behalf of FS/KKR Advisor. The Company reimburses FS/KKR Advisor no less than quarterly for all costs and expenses incurred by FS/KKR Advisor in performing its obligations and providing personnel and facilities under the FS/KKR Advisor administration agreement. FS/KKR 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 FS/KKR Advisor. The Company’s board of directors then assesses the reasonableness of such reimbursements for expenses allocated to it 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 FS/KKR Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

 

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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 FS/KKR Advisor, FS Investments, KKR Credit or any of their respective affiliates;

 

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

 

    our use of financial leverage;

 

    the ability of FS/KKR Advisor to locate suitable investments for us and to monitor and administer our investments;

 

    the ability of FS/KKR 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 FS/KKR Advisor and supervised by our board of directors, a majority of whom are independent. Under the FS/KKR Advisor investment advisory agreement, we have agreed to pay FS/KKR Advisor an annual base management fee based on the average weekly value of our gross assets and an incentive fee based on our performance.

Our investment activities were managed by FB Advisor until April 9, 2018 and thereafter have been managed by FS/KKR Advisor. FB Advisor previously engaged GDFM to act as our investment sub-adviser. GDFM resigned as our investment sub-adviser and terminated the investment sub-advisory agreement on April 9, 2018.

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 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.

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.

 

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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 our investment adviser.

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, including through the restructuring of such 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. FS/KKR 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 NRSRO and, in such case, generally will carry a rating below investment grade.

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. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.

 

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Expenses

Our primary operating expenses include the payment of management and incentive fees and other expenses under the FS/KKR investment advisory agreement and the FS/KKR administration agreement, interest expense from financing facilities and other indebtedness, and other expenses necessary for our operations. The management and incentive fees compensate FS/KKR Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.

FS/KKR Advisor oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. FS/KKR 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, FS/KKR 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 FS/KKR administration agreement, we reimburse FS/KKR Advisor for expenses necessary to perform services related to our administration and operations, including FS/KKR Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to us on behalf of FS/KKR Advisor. We reimburse FS/KKR Advisor no less than quarterly for all costs and expenses incurred by FS/KKR Advisor in performing its obligations and providing personnel and facilities under the FS/KKR administration agreement. FS/KKR 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 FS/KKR 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 FS/KKR Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.

We bear all other expenses of our operations and transactions, including all other expenses incurred by FS/KKR Advisor in performing services for us and administrative personnel paid by FS Investments and KKR Credit.

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 FS/KKR 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, 2018 and for the Year Ended December 31, 2017

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2018 and year ended December 31, 2017:

 

Net Investment Activity

   For the Three Months Ended
March 31, 2018
     For the Year Ended
December 31, 2017
 

Purchases

   $ 115,990      $ 1,284,317  

Sales and Repayments

     (215,945      (1,134,998
  

 

 

    

 

 

 

Net Portfolio Activity

   $ (99,955    $ 149,319  
  

 

 

    

 

 

 

 

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    For the Three Months Ended
March 31, 2018
    For the Year Ended
December 31, 2017
 

New Investment Activity by Asset Class

      Purchases             Percentage             Purchases             Percentage      

Senior Secured Loans—First Lien

  $ 98,395        85%     $ 954,681        74%  

Senior Secured Loans—Second Lien

    4,167        4%       77,269        6%  

Senior Secured Bonds

    6,426        6%       86,049        7%  

Subordinated Debt

    4,059        3%       118,937        9%  

Collateralized Securities

    235        0%       409        0%  

Equity/Other

    2,708        2%       46,972        4%  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 115,990        100%     $ 1,284,317        100%  
 

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2018 and December 31, 2017:

 

    March 31, 2018
(Unaudited)
    December 31, 2017  
      Amortized  
Cost(1)
    Fair Value       Percentage  
of Portfolio
      Amortized  
Cost(1)
      Fair Value       Percentage
  of Portfolio  
 

Senior Secured Loans—First Lien

  $ 2,470,709      $ 2,478,573        65%     $ 2,501,103      $ 2,520,994        64%  

Senior Secured Loans—Second Lien

    169,901        149,364        4%       222,232        197,588        5%  

Senior Secured Bonds

    159,091        163,165        4%       157,699        161,650        4%  

Subordinated Debt

    506,978        491,946        13%       500,626        489,761        13%  

Collateralized Securities

    46,815        52,579        1%       47,471        54,319        1%  

Equity/Other

    373,870        468,387        13%       387,715        501,922        13%  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   3,727,364      $   3,804,014        100%     $   3,816,846      $   3,926,234        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, 2018 and December 31, 2017:

 

                 March 31, 2018                       December 31, 2017          

Number of Portfolio Companies

   94   100

% Variable Rate (based on fair value)

   69.2%   69.4%

% Fixed Rate (based on fair value)

   18.4%   17.8%

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

   2.3%   2.3%

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

   10.1%   10.5%

Average Annual EBITDA of Portfolio Companies

   $82,400   $85,700

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

   99.6%   99.5%

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

   0.0%   0.2%

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

   10.0%   9.6%

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

   10.9%   10.5%

For the three months ended March 31, 2018, our total return based on net asset value was 0.54% and our total return based on market value was 1.13%. For the year ended December 31, 2017, our total return based on net asset value was 7.97% and our total return based on market value was (21.39)%.

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 the section entitled “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2017 for a discussion of the uncertainties, risks and assumptions associated with these statements. See footnotes 6 and 7 to the table included in Note 10 to

 

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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.

Direct Originations

The following tables present certain selected information regarding our direct originations for the three months ended March 31, 2018 and year ended December 31, 2017:

 

New Direct Originations

  For the Three Months Ended
March 31, 2018
    For the Year Ended
December 31, 2017
 

Total Commitments (including unfunded commitments)

  $                             79,590     $ 1,045,807  

Exited Investments (including partial paydowns)

    (186,236     (869,061
 

 

 

   

 

 

 

Net Direct Originations

  $ (106,646   $                     176,746  
 

 

 

   

 

 

 

 

    For the Three Months Ended
March 31, 2018
    For the Year Ended
December 31, 2017
 

New Direct Originations by Asset Class (including unfunded commitments)

  Commitment
Amount
    Percentage     Commitment Amount     Percentage  

Senior Secured Loans—First Lien

  $ 71,882        90%     $ 872,624        83%  

Senior Secured Loans—Second Lien

    4,167        5%       23,113        2%  

Senior Secured Bonds

    —        —          32,259        3%  

Subordinated Debt

    833       1%       92,000        9%  

Collateralized Securities

    —        —          —        —     

Equity/Other

    2,708        4%       25,811        3%  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $         79,590                    100%     $             1,045,807                    100%  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the Three
Months Ended
March 31, 2018
   For the
Year Ended
December 31, 2017

Average New Direct Origination Commitment Amount

   $13,265    $24,900

Weighted Average Maturity for New Direct Originations

   9/15/23    4/12/23

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

   10.9%    9.5%

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

   10.9%    9.7%

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

   10.6%    9.7%

The following table presents certain selected information regarding our direct originations as of March 31, 2018 and December 31, 2017:

 

Characteristics of All Direct Originations held in Portfolio

   March 31, 2018    December 31, 2017

Number of Portfolio Companies

   72    75

Average Annual EBITDA of Portfolio Companies

   $70,200    $68,600

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

   5.1x    4.9x

% of Investments on Non-Accrual

   0.0%   

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

   10.0%    9.6%

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

   10.9%    10.4%

 

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Portfolio Composition by Strategy

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, 2018 and December 31, 2017:

 

     March 31, 2018      December 31, 2017  

Portfolio Composition by Strategy

   Fair
Value
     Percentage of
Portfolio
     Fair
Value
     Percentage of
Portfolio
 

Direct Originations

   $ 3,495,945         92%      $ 3,606,608         92%  

Opportunistic

     292,321         8%        295,501         7%  

Broadly Syndicated/Other

     15,748         0%        24,125         1%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $         3,804,014                 100%      $         3,926,234                     100%  
  

 

 

    

 

 

    

 

 

    

 

 

 

See Note 6 to our unaudited consolidated financial statements included herein for additional information regarding the composition of our investment portfolio by industry classification.

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FS/KKR Advisor uses, and FB Advisor historically used, an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FS/KKR uses, and FB Advisor historically used, 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, 2018 and December 31, 2017:

 

     March 31, 2018      December 31, 2017  

Investment Rating

   Fair
Value
     Percentage of
Portfolio
     Fair
Value
     Percentage of
Portfolio
 

1

    $ 416,496        11%       $ 418,237        11%  

2

     2,556,041        67%        3,113,283        79%  

3

     794,251        21%        370,286        10%  

4

     18,457        0%        10,157        0%  

5

     18,769        1%        14,271        0%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $         3,804,014                    100%       $             3,926,234                    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, 2018 and March 31, 2017

Revenues

Our investment income for the three months ended March 31, 2018 and 2017 was as follows:

 

     Three Months Ended March 31,  
     2018     2017  
     Amount      Percentage of
Total Income
    Amount      Percentage of
Total Income
 

Interest income

   $ 77,817        77   $ 78,024        74

Paid-in-kind interest income

     13,393        13     8,481        8

Fee income

     2,453        3     19,559        18

Dividend income

     7,355        7             
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment income(1)

   $     101,018        100   $     106,064        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Such revenues represent $86,232 and $96,078 of cash income earned as well as $14,786 and $9,986 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2018 and 2017, 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.

The decrease in interest income and increase in PIK interest income during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 can be attributed to the prepayment and restructuring of certain higher yielding assets into assets with a higher PIK paying component. 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.

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 fee income during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was primarily due to the decrease of structuring and prepayment activity during the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

The increase in dividend income during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was primarily due to a one-time dividend paid in respect of one of our investments during the three months ended March 31, 2018.

Expenses

Our operating expenses for the three months ended March 31, 2018 and 2017 were as follows:

 

     Three Months Ended March 31,  
             2018                     2017          

Management fees

   $ 17,854     $ 18,367  

Subordinated income incentive fees

     11,999       13,147  

Administrative services expenses

     734       734  

Accounting and administrative fees

     254       265  

Interest expense

     20,053       19,439  

Directors’ fees

     496       271  

Expenses associated with our independent audit and related fees

     111       111  

Legal fees

     244       118  

Printing fees

     293       149  

Stock transfer agent fees

     29       29  

Other

     955       844  
  

 

 

   

 

 

 

Total operating expenses

   $ 53,022     $ 53,474  

Management fee waiver

     (2,551      
  

 

 

   

 

 

 

Total net expenses

   $             50,471     $             53,474  
  

 

 

   

 

 

 

 

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The following table reflects selected expense ratios as a percent of average net assets for the three months ended March 31, 2018 and 2017:

 

     Three Months Ended March 31,  
             2018                      2017          

Ratio of operating expenses to average net assets

     2.32%        2.33%  

Ratio of management fee waiver to average net assets

     (0.11)%         
  

 

 

    

 

 

 

Ratio of net operating expenses to average net assets

     2.21%        2.33%  

Ratio of incentive fees and interest expense to average net assets(1)

     1.40%        1.42%  
  

 

 

    

 

 

 

Ratio of net operating expenses, excluding certain expenses, to average net assets

                 0.81%                    0.91%  
  

 

 

    

 

 

 

 

(1) Ratio data may be rounded in order to recompute the ending ratio of net operating expenses, excluding certain expenses, to average net assets.

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.

Net Investment Income

Our net investment income totaled $50,547 ($0.21 per share) and $52,590 ($0.22 per share) for the three months ended March 31, 2018 and 2017, respectively. The decrease in net investment income can be attributed primarily to lower fee income during the three months ended March 31, 2018 as discussed above which was partially offset by higher dividend income and the management fee waiver.

Net Realized Gains or Losses

Our net realized gains (losses) on investments and foreign currency for the three months ended March 31, 2018 and 2017 were as follows:

 

     Three Months Ended March 31,  
             2018                      2017          

Net realized gain (loss) on investments(1)

   $ (4,343)      $ (101,021)  

Net realized gain (loss) on foreign currency

     61        123  
  

 

 

    

 

 

 

Total net realized gain (loss)

   $             (4,282)      $             (100,898)  
  

 

 

    

 

 

 

 

(1) We sold investments and received principal repayments, respectively, of $31,747 and $184,198 during the three months ended March 31, 2018 and $169,253 and $195,055 during the three months ended March 31, 2017.

Net Change in Unrealized Appreciation (Depreciation)

Our net change in unrealized appreciation (depreciation) on investments, secured borrowing and unrealized gain (loss) on foreign currency for the three months ended March 31, 2018 and 2017 were as follows:

 

     Three Months Ended March 31,  
             2018                      2017          

Net change in unrealized appreciation (depreciation) on investments

   $ (32,738)      $ 112,433  

Net change in unrealized appreciation (depreciation) on secured borrowing

            (10)  

Net change in unrealized gain (loss) on foreign currency

     (602)        (722)  
  

 

 

    

 

 

 

Total net change in unrealized appreciation (depreciation)

   $             (33,340)      $             111,701  
  

 

 

    

 

 

 

During the three months ended March 31, 2018, the net change in unrealized appreciation (depreciation) was driven primarily by lower valuations in a few select investments.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2018, the net increase in net assets resulting from operations was $12,925 ($0.05 per share) compared to a net increase in net assets resulting from operations of $63,393 ($0.26 per share) during the three months ended March 31, 2017.

 

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Financial Condition, Liquidity and Capital Resources

Overview

As of March 31, 2018, we had $215,057 in cash and foreign currency, which we or our wholly-owned financing subsidiaries held in custodial accounts, and $260,392 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of March 31, 2018, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of March 31, 2018, we had nineteen unfunded debt investments with aggregate unfunded commitments of $133,294, one unfunded commitment to purchase up to $295 in shares of preferred stock and one unfunded commitment to purchase up to $4 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 FS/KKR 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, 2018:

 

Arrangement

 

Type of Arrangement

  Rate     Amount
Outstanding
    Amount
Available
   

Maturity Date

Hamilton Street Credit Facility(1)

  Revolving Credit Facility     L+2.50%     $ 102,000     $ 48,000     December 15, 2021

ING Credit Facility(1)

  Revolving Credit Facility     L+2.25%       115,108 (2)      212,392     March 16, 2021

Locust Street Credit Facility(1)

  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
     

 

 

   

 

 

   

Total

      $     1,722,108     $     260,392    

 

(1) The carrying amount outstanding under the facility approximates its fair value.
(2) Amount includes borrowing in Euros and Canadian dollars. Euro balance outstanding of €41,372 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.23 as of March 31, 2018 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $20,987 has been converted to U.S dollars at an exchange rate of CAD $1.00 to $0.78 as of March 31, 2018 to reflect total amount outstanding in U.S. dollars.

See Note 8 to our unaudited consolidated financial statements included herein for additional information regarding our financing arrangements.

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”

 

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(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. As previously announced by the Company, subject to market conditions, our board of directors currently intends to make a special distribution in the fourth quarter of 2018 that equates to the cumulative amount, if any, of net investment income earned during the twelve months following October 1, 2017 that is in excess of $0.76 per share. 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, 2018 or 2017 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.

The following table reflects the cash distributions per share that we have declared on our common stock during the three months ended March 31, 2018 and 2017:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2017

     

March 31, 2017

    $ 0.22275       $ 54,485  

Fiscal 2018

     

March 31, 2018

    $             0.19000       $             46,683  

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, 2018 and 2017.

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.

 

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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, FS/KKR 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.

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 FS/KKR 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;

 

    FS/KKR 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 FS/KKR 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 FS/KKR 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 FS/KKR 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 FS/KKR 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.

FS/KKR 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. FS/KKR 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 FS/KKR 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 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 FS/KKR Advisor’s management team, and has authorized FS/KKR 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 FS/KKR Advisor’s implementation of the valuation process.

See Note 7 to our unaudited consolidated financial statements included herein for additional information regarding the fair value of our financial instruments.

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. We record prepayment premiums on loans and securities as fee income when we receive such amounts.

Effective January 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, using the cumulative effect method applied to in-scope contracts with customers that have not been completed as of the date of adoption. We did not identify any in-scope contracts that had not been completed as of the date of adoption and, as a result, we did not recognize a cumulative effect on stockholders’ equity in connection with the adoption of the new revenue recognition guidance.

 

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The new revenue recognition guidance applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, excluding, among other things, financial instruments as well as certain other contractual rights and obligations. Under the new revenue recognition guidance, which we have applied to all new in-scope contracts as of the date of adoption, structuring and other upfront fees are recognized as revenue based on the transaction price as the performance obligation is fulfilled. The related performance obligation consists of structuring activities and is satisfied over time as such activities are performed. Consideration is variable and is constrained from being included in the transaction price until the uncertainty associated with the variable consideration is resolved, typically as of the trade date of the related transaction. Payment is typically due on the settlement date of the related transaction.

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.

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, 2018 and 2017, we did not incur any interest or penalties.

See Note 2 to our unaudited consolidated financial statements included herein for additional information regarding our significant accounting policies.

Contractual Obligations

We have entered into agreements with FS/KKR Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under FS/KKR Advisor investment advisory agreement are equal to (a) an annual base management fee based on the average weekly value of our gross assets and (b) an incentive fee based on our performance. FS/KKR Advisor is reimbursed for administrative expenses incurred on our behalf. See Notes 4 and 11 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 similar agreements with FB Advisor during the three months ended March 31, 2018 and 2017.

 

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A summary of our significant contractual payment obligations for the repayment of outstanding indebtedness at March 31, 2018 is as follows:

 

          Payments Due By Period  
     Maturity Date(1)    Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Hamilton Street Credit Facility(2)

   December 15, 2021    $         102,000                    $         102,000         

ING Credit Facility(3)

   March 16, 2021    $ 115,108             $         115,108                

Locust Street Credit Facility(4)

   November 1, 2020    $ 425,000             $ 425,000                

4.000% Notes due 2019

   July 15, 2019    $ 400,000             $ 400,000                

4.250% Notes due 2020

   January 15, 2020    $ 405,000             $ 405,000                

4.750% Notes due 2022

   May 15, 2022    $ 275,000                    $ 275,000         

 

(1) Amounts outstanding under the financing arrangements will mature, and all accrued and unpaid interest thereunder will be due and payable, on the maturity date.

 

(2) At March 31, 2018, $48,000 remained unused under the Hamilton Street credit facility

 

(3) At March 31, 2018, $212,392 remained unused under the ING credit facility. Amounts outstanding under the ING credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 16, 2021. Amount includes borrowing in Euros and Canadian dollars. Euro balance outstanding of €41,372 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.23 as of March 31, 2018 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $20,987 has been converted to U.S dollars at an exchange rate of CAD $1.00 to $0.78 as of March 31, 2018 to reflect total amount outstanding in U.S. dollars.

 

(4) At March 31, 2018, no amounts remained unused under the financing arrangement.

Off-Balance Sheet Arrangements

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

 

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, 2018, 69.2% of our portfolio investments (based on fair value) paid variable interest rates, 18.4% paid fixed interest rates, 2.3% were income producing equity or other investments, and the remaining 10.1% 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 FS/KKR 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 and Locust Street credit facility, 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.

 

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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, 2018 (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

   $ (25,063   $ (5,493   $ (19,570     (6.6 )% 

No change

                        

Up 100 basis points

     26,134       5,493       20,641       7.0

Up 300 basis points

     78,448       16,480       61,968       21.0

Up 500 basis points

             130,829               27,467               103,362               35.0

 

(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, 2018 and 2017, 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.”

 

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, 2018.

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, 2018 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.

Investing in our securities involves a number of significant risks. In addition to the other information contained in this quarterly report on Form 10-Q, investors should consider carefully the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2017 and our additional filings with the SEC before making an investment in our securities. All of the risk factors identified in Item 1A of our annual report on Form 10-K for the year ended December 31, 2017 that relate to our former investment adviser, FB Advisor, are generally applicable to our current investment adviser, FS/KKR Advisor.

Risks Related to FS/KKR Advisor and Its Affiliates

There may be conflicts of interest related to obligations FS/KKR Advisor’s senior management and investment teams have to our affiliates and to other clients.

The members of the senior management and investment teams of FS/KKR Advisor serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment vehicles managed by the same personnel. For example, FS/KKR Advisor is the investment adviser to FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV, Corporate Capital Trust, Inc. and Corporate Capital Trust II, and the officers, managers and other personnel of FS/KKR Advisor may serve in similar or other capacities for the investment advisers to future investment vehicles affiliated with FS Investments or KKR Credit. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests or in the best interest of our stockholders. Our investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For example, we rely on FS/KKR Advisor to manage our day-to-day activities and to implement our investment strategy. FS/KKR Advisor and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities which are unrelated to us. As a result of these activities, FS/KKR Advisor, its employees and certain of its affiliates will have conflicts of interest in allocating their time between us and other activities in which they are or may become involved, including the management of other entities affiliated with FS Investments or KKR Credit. FS/KKR Advisor and its employees will devote only as much of its or their time to our business as FS/KKR Advisor and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In February 2018, our board of directors authorized a stock repurchase program. Under the program, we may repurchase up to $50 million in the aggregate of our outstanding common stock in the open market at prices below the then-current net asset value per share. The timing, manner, price and amount of any share repurchases will be determined by us, in our discretion, based upon the evaluation of economic and market conditions, our stock price, applicable legal and regulatory requirements and other factors. The program went into effect on March 28, 2018 and will be in effect through February 21, 2019, unless extended or until the aggregate repurchase amount that has been approved by our board of directors has been expended. The program does not require us to repurchase any specific number of shares. The program may be suspended, extended, modified or discontinued at any time. As of May 9, 2018, we had repurchased a total of 3,324,358 shares our common stock at an average price per share (inclusive of commissions paid) of $7.52 (totaling $25 million).

 

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Repurchases of our common stock under our stock repurchase program for the periods below were as follows (dollar amounts in the table below are presented in thousands, except for share and per share amounts).

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per Share(1)
     Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
     Maximum Number (or
Approximate Dollar
Value) of Shares that May
Yet Be Purchased Under
the Plans or Programs
 

January 1, 2018 through January 31, 2018

     —         —         —          

February 1, 2018 through February 28, 2018

     —         —         —          

March 1, 2018 through March 31, 2018

                 137,560       $ 7.2881                             137,560       $                         48,997  
  

 

 

    

 

 

    

 

 

    
     137,560       $         7.2881         137,560      
  

 

 

    

 

 

    

 

 

    

 

(1) Amount includes commissions paid.

 

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. (Included as Exhibit A in the First Supplemental Indenture in Exhibit 4.3) (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. (Included as Exhibit A in the Second Supplemental Indenture in Exhibit 4.5) (Incorporated by reference to Exhibit 4.1 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. (Included as Exhibit A to the Third Supplemental Indenture in Exhibit 4.7) (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 30, 2015.)
10.1    Investment Advisory Agreement, dated as of April 9, 2018, by and between FS Investment Corporation and FS/KKR Advisor, LLC. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 9, 2018.)
10.2    Administration Agreement, dated as of April 9, 2018, by and between FS Investment Corporation and FS/KKR Advisor, LLC. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 9, 2018.)
10.3    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.)
10.4    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.)
10.5    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.)
10.6    Custodian Agreement, dated as of November 14, 2011, by and between the Company and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.9 filed with the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 filed on November 14, 2011.)
10.7    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.)

 

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10.8    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.)
10.9    Locust Street Funding LLC Class A Floating Rate Secured Note, due 2021. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.10    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.)
10.11    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.)
10.12    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.)
10.13    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.)
10.14    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.)
10.15    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.)
10.16    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.)
10.17*    Consent and Modification Letter to Senior Secured Revolving Credit Agreement, dated as of March 16, 2018, among FS Investment Corporation, the several banks and other financial institutions or entities from time to time party thereto and ING Capital LLC, as administrative agent.
10.18    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.)
10.19    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.)
10.20    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.)
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, 2018.

 

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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