Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Investment Corporation (NYSE: FSIC), or the Company, was incorporated under the general corporation laws of the State
of Maryland on December 21, 2007 and formally commenced investment operations on January 2, 2009. The Company is an externally managed,
non-diversified,
closed-end
management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, the
Company has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of
March 31, 2017, the Company had two wholly-owned financing subsidiaries and five wholly-owned subsidiaries through which it holds interests in portfolio companies. The unaudited consolidated financial statements include both the Company’s
accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2017. All significant intercompany transactions have been eliminated in consolidation. Certain of the Company’s consolidated subsidiaries are subject to U.S.
federal and state income taxes.
The Company’s investment objectives are to generate current income and, to a lesser
extent, long-term capital appreciation by investing primarily in senior secured loans and second lien secured loans of private U.S. companies. The Company seeks to generate superior risk-adjusted returns by focusing on debt investments in a broad
array of private U.S. companies, including middle market companies, which the Company defines as companies with annual revenues of $50 million to $2.5 billion at the time of investment. The Company may purchase interests in loans or make
other debt investments, including investments in senior secured bonds, through secondary market transactions in the
“over-the-counter”
market or directly from
the Company’s target companies as primary market or directly originated investments. In connection with the Company’s debt investments, the Company may on occasion receive equity interests such as warrants or options as additional
consideration. The Company may also purchase or otherwise acquire interests in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity
or the cash value of common stock or other equity, in the Company’s target companies, generally in conjunction with one of the Company’s debt investments or through a
co-investment
with a financial
sponsor, such as an institutional investor or private equity firm. In addition, a portion of the Company’s portfolio may be comprised of corporate bonds, collateralized loan obligations, or CLOs, other debt securities and derivatives, including
total return swaps and credit default swaps. The Company’s investment adviser, FB Income Advisor, LLC, or FB Advisor, will seek to tailor the Company’s investment focus as market conditions evolve. Depending on market conditions, the
Company may increase or decrease its exposure to less senior portions of the capital structure or otherwise make opportunistic investments.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for
interim financial information and with the instructions for Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of
significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended
December 31, 2016 included in the Company’s annual report on Form
10-K
for the year ended December 31, 2016. Operating results for the three months ended March 31, 2017 are not necessarily
indicative of the results that may be expected for
27
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting
Policies (continued)
the year ending December 31, 2017. The December 31, 2016 consolidated balance sheet and
consolidated schedule of investments are derived from the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016. The Company is considered an investment company under GAAP and follows the
accounting and reporting guidance applicable to investment companies under Accounting Standards Update
No. 2013-08,
Financial Services—Investment Companies
. The Company has evaluated the
impact of subsequent events through the date the consolidated financial statements were issued and filed with the U.S. Securities and Exchange Commission, or the SEC.
Use of Estimates:
The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.
Capital Gains
Incentive Fee:
Pursuant to the terms of the amended and restated investment advisory agreement, dated July 17, 2014, or the investment advisory agreement, by and between the Company and FB Advisor, the incentive fee on capital gains is
determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee equals 20.0% of the Company’s incentive fee capital gains (i.e., the Company’s realized capital
gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital
gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the investment advisory agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the
capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital
gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FB Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet
date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
Subordinated Income Incentive Fee:
Pursuant to the terms of the investment advisory agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The
subordinated incentive fee on income under the investment advisory agreement, which is calculated and payable quarterly in arrears, equals 20.0% of the Company’s
“pre-incentive
fee net investment
income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the value of the Company’s net assets, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a
result, FB Advisor will not earn this incentive fee for any quarter until the Company’s
pre-incentive
fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s
pre-incentive
fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a
“catch-up”
fee equal to the amount of the
pre-incentive
fee net investment income in excess of the hurdle rate, until the Company’s
pre-incentive
fee net investment income for such quarter equals 2.34375%, or
9.375% annually, of net assets. Thereafter, FB Advisor will be entitled to receive 20.0% of
pre-incentive
fee net investment income.
28
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting
Policies (continued)
The subordinated
incentive fee on income is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s
pre-incentive
fee net investment income will be payable except to the
extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar
quarters. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which the Company’s
pre-incentive
fee net
investment income for such calendar quarter exceeds the applicable quarterly hurdle rate, subject to the
“catch-up”
provision, and (ii) (x) 20.0% of the cumulative net increase in net assets
resulting from operations for the then-current and eleven preceding calendar quarters
minus
(y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative
net increase in net assets resulting from operations” is the sum of
pre-incentive
fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of
the Company for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent
quarters are below the applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate.
Partial Loan Sales:
The Company follows the guidance in Accounting Standards Codification Topic 860,
Transfers and
Servicing
, or ASC Topic 860, when accounting for loan participations
and other partial loan sales. This guidance requires a participation or other partial loan sale to meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other
partial loan sales which do not meet the definition of a participating interest remain on the Company’s consolidated balance sheets and the proceeds are recorded as a secured borrowing until the participation or other partial loan sale meets
the definition. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value. See Note 8 for additional information.
Reclassifications:
Certain amounts in the unaudited consolidated financial statements as of and for the three months ended
March 31, 2016 and the audited consolidated financial statements as of and for the year ended December 31, 2016 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements as
of and for the three months ended March 31, 2017. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Company’s common stock during the three months ended March 31, 2017 and 2016:
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Three Months Ended March 31,
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2017
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2016
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Shares
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Amount
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Shares
|
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Amount
|
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Reinvestment of Distributions
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536,304
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$
|
5,350
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—
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—
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Net Proceeds from Share Transactions
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536,304
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$
|
5,350
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—
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—
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29
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
During the three months ended March 31, 2017, the Company issued 536,304 shares of
common stock pursuant to its distribution reinvestment plan, or DRP, for gross proceeds of $5,350 at an average price per share of $9.98. During the three months ended March 31, 2016, the administrator for the Company’s DRP purchased
619,897 shares of common stock in the open market at an average price per share of $9.05 (totaling $5,612) pursuant to the Company’s DRP and distributed such shares to participants in the Company’s DRP. During the period from April 1,
2017 to May 9, 2017, the Company issued an additional 553,349 shares of common stock pursuant to its DRP for gross proceeds of $5,235 at an average price per share of $9.46. For additional information regarding the terms of the DRP, see Note 5.
Note 4. Related Party Transactions
Compensation of the Investment Adviser
Pursuant to the investment advisory
agreement, FB Advisor is entitled to an annual base management fee equal to 1.75% of the average value of the Company’s gross assets (gross assets equal the total assets of the Company as set forth on the Company’s consolidated
balance sheets) and an incentive fee based on the Company’s performance. Base management fees are paid on a quarterly basis in arrears.
The incentive fee consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals
20.0% of the Company’s
“pre-incentive
fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the value of the
Company’s net assets, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FB Advisor will not earn this incentive fee for any quarter until the Company’s
pre-incentive
fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s
pre-incentive
fee net investment income in any
quarter exceeds the hurdle rate, FB Advisor will be entitled to a
“catch-up”
fee equal to the amount of the
pre-incentive
fee net investment income in excess
of the hurdle rate, until the Company’s
pre-incentive
fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of net assets. Thereafter, FB Advisor will be entitled to receive
20.0% of
pre-incentive
fee net investment income.
The subordinated incentive fee on
income is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s
pre-incentive
fee net investment income will be payable except to the extent that 20.0% of
the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. Accordingly, any
subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which the Company’s
pre-incentive
fee net investment income for such
calendar quarter exceeds the applicable quarterly hurdle rate, subject to the
“catch-up”
provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the
then-current and eleven preceding calendar quarters
minus
(y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets
resulting from operations” is the sum of
pre-incentive
fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the
then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the
applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate.
30
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party
Transactions (continued)
The second part of the incentive fee, which is referred to as the incentive fee on
capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equal the
Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate
amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the incentive fee based on net realized and unrealized gains; however, the
fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized.
Pursuant to an investment
sub-advisory
agreement, or the investment
sub-advisory
agreement, between FB Advisor and GSO /
Blackstone Debt Funds Management LLC, or GDFM, GDFM will receive 50% of all management and incentive fees payable to FB Advisor under the investment advisory agreement with respect to each year.
On April 16, 2014, the Company entered into an administration agreement with FB Advisor, or the administration agreement, which
governs the administrative services provided to the Company by FB Advisor. Pursuant to the administration agreement, the Company reimburses FB Advisor for expenses necessary to perform services related to the Company’s administration and
operations, including FB Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings, L.P. (which does business as FS Investments), or FS Investments, providing administrative services
to the Company on behalf of FB Advisor. The Company reimburses FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities under the administration
agreement. FB Advisor allocates the cost of such services to the Company based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors reviews the methodology employed in
determining how the expenses are allocated to the Company and the proposed allocation of administrative expenses among the Company and certain affiliates of FB Advisor. The Company’s board of directors then assesses the reasonableness of such
reimbursements for expenses allocated to the Company based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party service providers known to be available. In
addition, the Company’s board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company’s board of directors compares the
total amount paid to FB Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.
The following table describes the fees and expenses accrued under the investment advisory agreement and the administration agreement, as applicable, during the three months ended March 31, 2017 and
2016:
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Related Party
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Source Agreement
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Description
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Three Months Ended
March 31,
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2017
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2016
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FB Advisor
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Investment Advisory Agreement
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Base Management Fee
(1)
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$
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18,367
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$
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17,812
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FB Advisor
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Investment Advisory Agreement
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Subordinated Incentive Fee on Income
(2)
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$
|
13,147
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$
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12,485
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FB Advisor
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Administration Agreement
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Administrative Services Expenses
(3)
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$
|
734
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$
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1,196
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31
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party
Transactions (continued)
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(1)
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During the three months ended March 31, 2017 and 2016, $18,022 and $18,415, respectively, in base management fees were paid to FB Advisor. As of March 31,
2017, $18,367 in base management fees were payable to FB Advisor.
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(2)
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During the three months ended March 31, 2017 and 2016, $12,885 and $13,374, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of
March 31, 2017, a subordinated incentive fee on income of $13,147 was payable to FB Advisor.
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(3)
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During the three months ended March 31, 2017 and 2016, $650 and $1,124, respectively, of administrative services expenses related to the allocation of costs of
administrative personnel for services rendered to the Company by FB Advisor and the remainder related to other reimbursable expenses. The Company paid $904 and $1,164, respectively, in administrative services expenses to FB Advisor during the three
months ended March 31, 2017 and 2016.
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Potential Conflicts of Interest
FB Advisor’s senior management team is comprised of substantially the same personnel as the senior management teams of the investment
advisers to certain other BDCs, open- and
closed-end management
investment companies and a real estate investment trust sponsored by FS Investments, or the Fund Complex. As a result, such personnel
provide or expect to provide investment advisory services to certain others funds in the Fund Complex and such personnel may serve in similar or other capacities for the investment advisers to future investment vehicles in the Fund Complex. While
none of the investment advisers are currently providing investment advisory services to clients other than the funds in the Fund Complex, any, or all, may do so in the future. In the event that FB Advisor or its management team undertakes to provide
investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objectives and strategies, if necessary, so that the Company
will not be disadvantaged in relation to any other client of FB Advisor or its management team. For additional information regarding potential conflicts of interest, please see the Company’s annual report on Form 10-K for the year ended
December 31, 2016.
Exemptive Relief
As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to
co-invest
with
certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously
co-invest
in
transactions where price is the only negotiated term. In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, to
co-invest
in certain privately negotiated investment transactions with certain affiliates of FB Advisor, including FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III, FS
Investment Corporation IV and any future BDCs that are advised by FB Advisor or its affiliated investment advisers, or collectively the Company’s
co-investment
affiliates. The Company believes this relief
has and may continue to enhance its ability to further its investment objectives and strategy. The Company believes this relief may also increase favorable investment opportunities for it, in part, by allowing the Company to participate in larger
investments, together with its
co-investment
affiliates, than would be available to the Company if such relief had not been obtained. Because the Company did not seek exemptive relief to engage in
co-investment
32
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party
Transactions (continued)
transactions with GDFM and its affiliates, the Company is permitted to
co-invest
with GDFM and its affiliates only in accordance with existing regulatory
guidance (e.g., where price is the only negotiated term).
Trademark License Agreement
On April 16, 2014, in connection with the listing of its common stock on the NYSE, the Company entered into a trademark license
agreement, or the trademark license agreement, with FS Investments. Pursuant to the trademark license agreement, FS Investments granted the Company a
non-exclusive,
nontransferable, royalty-free right and
license to use the name “FS Investment Corporation” and certain other trademarks, or the licensed marks, as a component of the Company’s name (and in connection with marketing the investment advisory and other services that FB Advisor
may provide to the Company). Other than with respect to this limited license, the Company has no other rights to the licensed marks. The trademark license agreement may be terminated by FS Investments or the Company on sixty days’ prior written
notice and expires if FB Advisor or one of FS Investments’ affiliates ceases to serve as investment adviser to the Company. Furthermore, FS Investments may terminate the trademark license agreement at any time and in its sole discretion in the
event that FS Investments or the Company receives notice of any third-party claim arising out of the Company’s use of the licensed marks or if the Company attempts to assign or sublicense the trademark license agreement or any of the
Company’s rights or duties under the trademark license agreement without the prior written consent of FS Investments. FB Advisor is a third-party beneficiary of the trademark license agreement.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company has declared on its common stock during the three months
ended March 31, 2017 and 2016:
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Distribution
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For the Three Months Ended
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Per Share
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Amount
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Fiscal 2016
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March 31, 2016
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$
|
0.2228
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$
|
54,093
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Fiscal 2017
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March 31, 2017
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$
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0.2228
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$
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54,485
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On May 3, 2017, the Company’s board of directors declared a regular quarterly cash distribution
of $0.22275 per share, which will be paid on or about July 5, 2017 to stockholders of record as of the close of business on June 21, 2017. The timing and amount of any future distributions to stockholders are subject to applicable legal
restrictions and the sole discretion of the Company’s board of directors.
Pursuant to the Company’s DRP, the
Company will reinvest all cash dividends or distributions declared by the Company’s board of directors on behalf of stockholders who do not elect to receive their distributions in cash. As a result, if the Company’s board of directors
declares a distribution, then stockholders who have not elected to “opt out” of the DRP will have their distributions automatically reinvested in additional shares of the Company’s common stock.
With respect to each distribution pursuant to the DRP, the Company reserves the right to either issue new shares of common stock or
purchase shares of common stock in the open market in connection with
33
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
implementation of the DRP. Unless the Company, in its sole discretion, otherwise directs the plan administrator, (A) if the per share market price (as defined in the DRP) is equal to or
greater than the estimated net asset value per share (rounded up to the nearest whole cent) of the Company’s common stock on the payment date for the distribution, then the Company will issue shares of common stock at the greater of
(i) net asset value per share of common stock or (ii) 95% of the market price; or (B) if the market price is less than the net asset value per share, then, in the sole discretion of the Company, (i) shares of common stock will be
purchased in open market transactions for the accounts of participants to the extent practicable, or (ii) the Company will issue shares of common stock at net asset value per share. Pursuant to the terms of the DRP, the number of shares of
common stock to be issued to a participant will be determined by dividing the total dollar amount of the distribution payable to a participant by the price per share at which the Company issues such shares; provided, however, that shares purchased
in open market transactions by the plan administrator will be allocated to a participant based on the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market.
If a stockholder receives distributions in the form of common stock pursuant to the DRP, such stockholder generally will be subject to
the same federal, state and local tax consequences as if it elected to receive distributions in cash. If the Company’s common stock is trading at or below net asset value, a stockholder receiving distributions in the form of additional common
stock will be treated as receiving a distribution in the amount of cash that they would have received if they had elected to receive the distribution in cash. If the Company’s common stock is trading above net asset value, a stockholder
receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of the fair market value of the Company’s common stock. The stockholder’s basis for determining gain or loss upon the
sale of common stock received in a distribution will be equal to the total dollar amount of the distribution payable to the stockholder. Any stock received in a distribution will have a holding period for tax purposes commencing on the day following
the day on which the shares of common stock are credited to the stockholder’s account.
The Company may fund its cash
distributions to stockholders from any sources of funds legally available to it, including proceeds from the sale of shares of the Company’s common stock, borrowings, net investment income from operations, capital gains proceeds from the sale
of assets,
non-capital
gains proceeds from the sale of assets, and dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies. The Company
has not established limits on the amount of funds it may use from available sources to make distributions. During certain periods, the Company’s distributions may exceed its earnings. As a result, it is possible that a portion of the
distributions the Company makes may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from the Company’s investment activities. Each
year a statement on Form
1099-DIV
identifying the sources of the distributions (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of capital, which is a
nontaxable distribution) will be mailed to the Company’s stockholders. There can be no assurance that the Company will be able to pay distributions at a specific rate or at all.
34
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The following table reflects the sources of the cash distributions on a tax basis that
the Company has paid on its common stock during the three months ended March 31, 2017 and 2016:
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|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Source of Distribution
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Offering proceeds
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
Borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net investment income
(1)
|
|
|
54,485
|
|
|
|
100
|
%
|
|
|
54,093
|
|
|
|
100
|
%
|
|
Short-term capital gains proceeds from the sale of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Long-term capital gains proceeds from the sale of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-capital
gains proceeds from the sale of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Distributions on account of preferred and common equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,485
|
|
|
|
100
|
%
|
|
$
|
54,093
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the three months ended March 31, 2017 and 2016, 90.6% and 89.1%, respectively, of the Company’s gross investment income was attributable to cash income
earned, 1.4% and 2.9%, respectively, was attributable to
non-cash
accretion of discount and 8.0% and 8.0%, respectively, was attributable to PIK interest.
|
The Company’s net investment income on a tax basis for the three months ended March 31, 2017 and 2016 was $44,846 and $49,516,
respectively. As of March 31, 2017 and December 31, 2016, the Company had $143,951 and $153,590 of undistributed net investment income, respectively, and $173,189 and $73,184, respectively, of accumulated capital losses on a tax basis.
The difference between the Company’s GAAP-basis net investment income and its
tax-basis
net investment income is primarily due to the reclassification of unamortized original issue discount and prepayment fees recognized upon prepayment of loans from income for GAAP purposes to realized
gains or deferred to future periods for tax purposes and the impact of consolidating certain subsidiaries for purposes of computing GAAP-basis net investment income but not for purposes of computing
tax-basis
net investment income.
The following table sets forth a reconciliation between GAAP-basis net investment income and
tax-basis
net investment income during the three months ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
GAAP-basis net investment income
|
|
$
|
52,590
|
|
|
$
|
49,938
|
|
|
Income subject to tax not recorded for GAAP
|
|
|
(71
|
)
|
|
|
—
|
|
|
GAAP versus
tax-basis
impact of consolidation of certain subsidiaries
|
|
|
3,033
|
|
|
|
1,054
|
|
|
Reclassification or deferral of unamortized original issue discount and prepayment fees
|
|
|
(10,818
|
)
|
|
|
(1,549
|
)
|
|
Other miscellaneous differences
|
|
|
112
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-basis
net investment income
|
|
$
|
44,846
|
|
|
$
|
49,516
|
|
|
|
|
|
|
|
|
|
|
|
35
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The determination of the tax attributes of the Company’s distributions is made
annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the
actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form
1099-DIV.
As of March 31, 2017 and December 31, 2016, the components of accumulated earnings on a tax basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
Distributable ordinary income
|
|
$
|
143,951
|
|
|
$
|
153,590
|
|
|
Distributable realized gains (accumulated capital losses)
(1)
|
|
|
(173,189
|
)
|
|
|
(73,184
|
)
|
|
Other temporary differences
|
|
|
(289
|
)
|
|
|
(300
|
)
|
|
Net unrealized appreciation (depreciation) on investments and secured borrowing and gain/loss on foreign currency
(2)
|
|
|
77,561
|
|
|
|
(44,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,034
|
|
|
$
|
36,093
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Under the Regulated Investment Company Modernization Act of 2010, net capital losses recognized for tax years beginning after December 22, 2010 may be carried
forward indefinitely, and their character is retained as short-term or long-term losses. As of March 31, 2017, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $31,503 and
$141,686, respectively.
|
|
(2)
|
As of March 31, 2017 and December 31, 2016, the gross unrealized appreciation on the Company’s investments and secured borrowing and gain on foreign
currency was $228,531 and $226,121, respectively. As of March 31, 2017 and December 31, 2016, the gross unrealized depreciation on the Company’s investments and secured borrowing and loss on foreign currency was $150,970 and $270,134,
respectively.
|
The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled
$3,855,340 and $3,780,294 as of March 31, 2017 and December 31, 2016, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $68,828 and $(53,478) as of March 31, 2017 and December 31, 2016,
respectively.
As of March 31, 2017, the Company had a deferred tax liability of $22,707 resulting from unrealized
appreciation on investments held by the Company’s wholly-owned taxable subsidiaries and a deferred tax asset of $23,151 resulting from net operating losses of the Company’s wholly-owned taxable subsidiaries. As of March 31, 2017,
certain wholly-owned taxable subsidiaries anticipated that they would be unable to fully utilize their generated net operating losses, therefore the deferred tax asset was offset by a valuation allowance of $444. For the three months ended
March 31, 2017, the Company did not record a provision for taxes related to wholly-owned taxable subsidiaries.
36
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio
The following table summarizes the composition of the Company’s investment
portfolio at cost and fair value as of March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017 (Unaudited)
|
|
|
December 31, 2016
|
|
|
|
|
Amortized
Cost
(1)
|
|
|
Fair
Value
|
|
|
Percentage
of
Portfolio
|
|
|
Amortized
Cost
(1)
|
|
|
Fair Value
|
|
|
Percentage
of
Portfolio
|
|
|
Senior Secured Loans—First Lien
|
|
$
|
2,236,177
|
|
|
$
|
2,234,229
|
|
|
|
57
|
%
|
|
$
|
1,992,159
|
|
|
$
|
1,935,441
|
|
|
|
52
|
%
|
|
Senior Secured Loans—Second Lien
|
|
|
391,953
|
|
|
|
373,122
|
|
|
|
9
|
%
|
|
|
619,892
|
|
|
|
599,155
|
|
|
|
16
|
%
|
|
Senior Secured Bonds
|
|
|
166,365
|
|
|
|
171,343
|
|
|
|
4
|
%
|
|
|
205,657
|
|
|
|
159,470
|
|
|
|
4
|
%
|
|
Subordinated Debt
|
|
|
602,845
|
|
|
|
585,325
|
|
|
|
15
|
%
|
|
|
498,080
|
|
|
|
454,045
|
|
|
|
12
|
%
|
|
Collateralized Securities
|
|
|
51,462
|
|
|
|
63,923
|
|
|
|
2
|
%
|
|
|
59,225
|
|
|
|
72,058
|
|
|
|
2
|
%
|
|
Equity/Other
|
|
|
380,057
|
|
|
|
496,226
|
|
|
|
13
|
%
|
|
|
368,927
|
|
|
|
506,647
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,828,859
|
|
|
$
|
3,924,168
|
|
|
|
100
|
%
|
|
$
|
3,743,940
|
|
|
$
|
3,726,816
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
|
As of March 31, 2017, the Company was deemed to “control” JW Aluminum Co., as defined in the
1940 Act, in which the Company has one senior secured loan investment and two equity/other investments. As of March 31, 2017, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of Advanced Lighting
Technologies, Inc., in which the Company has one senior secured bond investment and one equity/other investment, ASG Technologies Group, Inc., in which the Company has two senior secured loan investments and two equity/other investments, Aspect
Software, Inc., in which the Company has two senior secured loan investments, two unfunded senior secured loan commitments and one equity/other investment, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which the Company has one senior
secured loan investment and one equity/other investment, and Fronton Investor Holdings, LLC, in which the Company has an equity/other investment. As of March 31, 2017, except for these portfolio companies, the Company did not
“control” and was not an “affiliated person”, each as defined in the 1940 Act, of any of its portfolio companies.
As of December 31, 2016, the Company was deemed to “control” JW Aluminum Co., as defined in the 1940 Act, in which the Company has one senior secured loan investment and two equity/other
investments. As of December 31, 2016, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of ASG Technologies Group, Inc. (formerly Allen Systems Group, Inc.), in which the Company has two senior secured
loan investments and two equity/other investments, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which the Company has one senior secured loan investment and one equity/other investment, and Fronton Investor Holdings, LLC, in which the
Company has an equity/other investment. As of December 31, 2016, except for these portfolio companies, the Company did not “control” and was not an “affiliated person”, each as defined in the 1940 Act, of any of its
portfolio companies.
In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company
if it owned more than 25% of its voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its
voting securities.
The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the
form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, which
37
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2017, the Company had twenty unfunded
debt investments with aggregate unfunded commitments of $202,069, one unfunded commitment to purchase up to $315 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $21 in shares of common
stock of Chisholm Oil and Gas, LLC. As of December 31, 2016, the Company had seventeen unfunded debt investments with aggregate unfunded commitments of $186,233 and one unfunded commitment to purchase up to $362 in shares of preferred stock of
Altus Power America Holdings, LLC. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise. For additional details regarding the Company’s unfunded debt investments, see the
Company’s unaudited consolidated schedule of investments as of March 31, 2017 and the Company’s audited consolidated schedule of investments as of December 31, 2016.
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio
assets in such industries as of March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
(Unaudited)
|
|
|
December 31, 2016
|
|
|
Industry Classification
|
|
Fair
Value
|
|
|
Percentage of
Portfolio
|
|
|
Fair
Value
|
|
|
Percentage of
Portfolio
|
|
|
Automobiles & Components
|
|
$
|
30,388
|
|
|
|
1
|
%
|
|
$
|
27,525
|
|
|
|
1
|
%
|
|
Capital Goods
|
|
|
954,871
|
|
|
|
24
|
%
|
|
|
708,946
|
|
|
|
19
|
%
|
|
Commercial & Professional Services
|
|
|
518,563
|
|
|
|
13
|
%
|
|
|
514,682
|
|
|
|
14
|
%
|
|
Consumer Durables & Apparel
|
|
|
193,448
|
|
|
|
5
|
%
|
|
|
198,752
|
|
|
|
5
|
%
|
|
Consumer Services
|
|
|
330,286
|
|
|
|
9
|
%
|
|
|
343,211
|
|
|
|
9
|
%
|
|
Diversified Financials
|
|
|
205,028
|
|
|
|
5
|
%
|
|
|
184,355
|
|
|
|
5
|
%
|
|
Energy
|
|
|
288,713
|
|
|
|
7
|
%
|
|
|
432,047
|
|
|
|
12
|
%
|
|
Health Care Equipment & Services
|
|
|
247,201
|
|
|
|
6
|
%
|
|
|
199,064
|
|
|
|
5
|
%
|
|
Materials
|
|
|
278,197
|
|
|
|
7
|
%
|
|
|
263,849
|
|
|
|
7
|
%
|
|
Media
|
|
|
117,510
|
|
|
|
3
|
%
|
|
|
113,455
|
|
|
|
3
|
%
|
|
Retailing
|
|
|
140,828
|
|
|
|
4
|
%
|
|
|
110,262
|
|
|
|
3
|
%
|
|
Semiconductors & Semiconductor Equipment
|
|
|
5,093
|
|
|
|
0
|
%
|
|
|
5,328
|
|
|
|
0
|
%
|
|
Software & Services
|
|
|
247,605
|
|
|
|
6
|
%
|
|
|
265,501
|
|
|
|
7
|
%
|
|
Technology Hardware & Equipment
|
|
|
112,900
|
|
|
|
3
|
%
|
|
|
108,500
|
|
|
|
3
|
%
|
|
Telecommunication Services
|
|
|
161,523
|
|
|
|
4
|
%
|
|
|
161,544
|
|
|
|
4
|
%
|
|
Transportation
|
|
|
92,014
|
|
|
|
3
|
%
|
|
|
89,795
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,924,168
|
|
|
|
100
|
%
|
|
$
|
3,726,816
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to
transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and
minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are
inputs that reflect the assumptions market
38
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the
assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as
defined by current accounting guidance:
Level
1
: Inputs that are quoted prices (unadjusted) in
active markets for identical assets or liabilities.
Level
2
: Inputs that are quoted prices for
similar assets or liabilities in active markets.
Level
3
: Inputs that are unobservable for an asset
or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement.
As of March 31, 2017 and December 31, 2016, the
Company’s investments were categorized as follows in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
Valuation Inputs
|
|
March 31, 2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
Level 1—Price quotations in active markets
|
|
$
|
9,312
|
|
|
$
|
6,326
|
|
|
Level 2—Significant other observable inputs
|
|
|
—
|
|
|
|
—
|
|
|
Level 3—Significant unobservable inputs
|
|
|
3,914,856
|
|
|
|
3,720,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,924,168
|
|
|
$
|
3,726,816
|
|
|
|
|
|
|
|
|
|
|
|
The Company has elected the fair value option under ASC Topic 825,
Financial Instruments
, relating
to accounting for debt obligations at their fair value for its secured borrowings which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. The Company reports changes in the fair value of its
secured borrowing as a component of the net change in unrealized appreciation (depreciation) on secured borrowing in the consolidated statements of operations. The net gain or loss reflects the difference between the fair value and the principal
amount due on maturity.
The secured borrowing as of March 31, 2017 was valued using Level 3 inputs under the fair
value hierarchy. The Company’s approach to determining fair value of the Level 3 secured borrowing is consistent with its approach to determining fair value of the Level 3 investments that are associated with the secured borrowing.
See Note 2 and Note 8 for additional information.
As of March 31, 2017 and December 31, 2016, the Company’s
secured borrowing was categorized as follows in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
Valuation Inputs
|
|
March 31, 2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
Level 1—Price quotations in active markets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Level 2—Significant other observable inputs
|
|
|
—
|
|
|
|
—
|
|
|
Level 3—Significant unobservable inputs
|
|
|
2,891
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,891
|
|
|
$
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
39
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
The Company’s investments as of March 31, 2017 consisted primarily of debt
investments that were acquired directly from the issuer. Sixty-four senior secured loan investments, five senior secured bond investments and seventeen subordinated debt investments, for which broker quotes were not available, were valued by
independent valuation firms, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows,
call features and other relevant terms of the debt. Except as described below, all of the Company’s equity/other investments were also valued by independent valuation firms, which determined the fair value of such investments by considering,
among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited
instances, book value or liquidation value. Three equity investments, which were traded on an active public market, were valued at their respective closing price as of March 31, 2017. Two senior secured loan investments and two equity/other
investments, which were newly issued and purchased near March 31, 2017, were valued at cost as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. Except as described
above, the Company valued its other investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity
by such services.
The Company’s investments as of December 31, 2016 consisted primarily of debt investments that
were acquired directly from the issuer. Sixty senior secured loan investments, four senior secured bond investments and sixteen subordinated debt investments, for which broker quotes were not available, were valued by independent valuation firms,
which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features and other
relevant terms of the debt. Except as described below, all of the Company’s equity/other investments were also valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors,
contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Three equity investments, which were traded on
an active public market, were valued at their respective closing prices as of December 31, 2016. One senior secured loan investment, which was newly issued and purchased near December 31, 2016, was valued at cost as the Company’s
board of directors determined that the cost of this investment was the best indication of its fair value. Except as described above, the Company valued its other investments by using the midpoint of the prevailing bid and ask prices from dealers on
the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers, as applicable, against the actual prices at which the Company purchases and
sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value.
However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also
use other methods, including the use of an independent valuation firm, to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the
Company’s board of directors otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the
40
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
independent valuation firms against the actual prices at which the Company purchases and sells its investments. The valuation committee of the Company’s board of directors, or the valuation
committee, and the board of directors, reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation policy.
The following is a reconciliation for the three months ended March 31, 2017 and 2016 of investments for which significant
unobservable inputs (Level 3) were used in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2017
|
|
|
|
|
Senior
Secured
Loans—First
Lien
|
|
|
Senior
Secured
Loans—Second
Lien
|
|
|
Senior
Secured
Bonds
|
|
|
Subordinated
Debt
|
|
|
Collateralized
Securities
|
|
|
Equity/Other
|
|
|
Total
|
|
|
Fair value at beginning of period
|
|
$
|
1,935,441
|
|
|
$
|
599,155
|
|
|
$
|
159,470
|
|
|
$
|
454,045
|
|
|
$
|
72,058
|
|
|
$
|
500,321
|
|
|
$
|
3,720,490
|
|
|
Accretion of discount (amortization of premium)
|
|
|
425
|
|
|
|
1,076
|
|
|
|
160
|
|
|
|
414
|
|
|
|
2
|
|
|
|
1
|
|
|
|
2,078
|
|
|
Net realized gain (loss)
|
|
|
(53,064
|
)
|
|
|
200
|
|
|
|
(47,058
|
)
|
|
|
(1,130
|
)
|
|
|
(266
|
)
|
|
|
297
|
|
|
|
(101,021
|
)
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
54,770
|
|
|
|
1,906
|
|
|
|
51,165
|
|
|
|
26,515
|
|
|
|
(372
|
)
|
|
|
(19,795
|
)
|
|
|
114,189
|
|
|
Purchases
|
|
|
335,783
|
|
|
|
51,826
|
|
|
|
38,221
|
|
|
|
104,143
|
|
|
|
—
|
|
|
|
4,974
|
|
|
|
534,947
|
|
|
Paid-in-kind
interest
|
|
|
280
|
|
|
|
987
|
|
|
|
—
|
|
|
|
6,077
|
|
|
|
—
|
|
|
|
1,137
|
|
|
|
8,481
|
|
|
Sales and repayments
|
|
|
(39,406
|
)
|
|
|
(282,028
|
)
|
|
|
(30,615
|
)
|
|
|
(4,739
|
)
|
|
|
(7,499
|
)
|
|
|
(21
|
)
|
|
|
(364,308
|
)
|
|
Net transfers in or out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
2,234,229
|
|
|
$
|
373,122
|
|
|
$
|
171,343
|
|
|
$
|
585,325
|
|
|
$
|
63,923
|
|
|
$
|
486,914
|
|
|
$
|
3,914,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized
gains or losses relating to investments still held at the reporting date
|
|
$
|
5,805
|
|
|
$
|
1,814
|
|
|
$
|
1,594
|
|
|
$
|
26,172
|
|
|
$
|
(372
|
)
|
|
$
|
(17,179
|
)
|
|
$
|
17,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2016
|
|
|
|
|
Senior
Secured
Loans—First
Lien
|
|
|
Senior
Secured
Loans—Second
Lien
|
|
|
Senior
Secured
Bonds
|
|
|
Subordinated
Debt
|
|
|
Collateralized
Securities
|
|
|
Equity/
Other
|
|
|
Total
|
|
|
Fair value at beginning of period
|
|
$
|
2,173,829
|
|
|
$
|
624,814
|
|
|
$
|
240,754
|
|
|
$
|
438,414
|
|
|
$
|
85,007
|
|
|
$
|
465,769
|
|
|
$
|
4,028,587
|
|
|
Accretion of discount (amortization of premium)
|
|
|
496
|
|
|
|
354
|
|
|
|
1,769
|
|
|
|
443
|
|
|
|
—
|
|
|
|
26
|
|
|
|
3,088
|
|
|
Net realized gain (loss)
|
|
|
(75
|
)
|
|
|
219
|
|
|
|
(14,688
|
)
|
|
|
(405
|
)
|
|
|
—
|
|
|
|
1,170
|
|
|
|
(13,779
|
)
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
8,198
|
|
|
|
1,216
|
|
|
|
(24,721
|
)
|
|
|
(12,644
|
)
|
|
|
(3,509
|
)
|
|
|
(15,039
|
)
|
|
|
(46,499
|
)
|
|
Purchases
|
|
|
19,943
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,516
|
|
|
|
—
|
|
|
|
24,158
|
|
|
|
55,617
|
|
|
Paid-in-kind
interest
|
|
|
295
|
|
|
|
1,914
|
|
|
|
—
|
|
|
|
5,440
|
|
|
|
—
|
|
|
|
633
|
|
|
|
8,282
|
|
|
Sales and repayments
|
|
|
(110,016
|
)
|
|
|
(40,581
|
)
|
|
|
(10,453
|
)
|
|
|
(1,395
|
)
|
|
|
(3,013
|
)
|
|
|
(3,670
|
)
|
|
|
(169,128
|
)
|
|
Net transfers in or out of
Level 3
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,412
|
)
|
|
|
(1,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
2,092,670
|
|
|
$
|
587,936
|
|
|
$
|
192,661
|
|
|
$
|
441,369
|
|
|
$
|
78,485
|
|
|
$
|
471,635
|
|
|
$
|
3,864,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized
gains or losses relating to investments still held at the reporting date
|
|
$
|
9,389
|
|
|
$
|
1,110
|
|
|
$
|
(24,721
|
)
|
|
$
|
(12,644
|
)
|
|
$
|
(3,509
|
)
|
|
$
|
(11,951
|
)
|
|
$
|
(42,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
There was one transfer of an investment from Level 3 to Level 1 during the three months ended March 31, 2016. It is the Company’s policy to
recognize transfers between levels at the beginning of the reporting period.
|
The following is a reconciliation
for the three months ended March 31, 2017 of a secured borrowing for which significant unobservable inputs (Level 3) were used in determining market value:
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31, 2017
|
|
|
|
|
Secured Borrowing
|
|
|
Fair value at beginning of period
|
|
$
|
(2,880
|
)
|
|
Amortization of premium (accretion of discount)
|
|
|
(1
|
)
|
|
Net realized gain (loss)
|
|
|
—
|
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
(10
|
)
|
|
Repayments on secured borrowing
|
|
|
—
|
|
|
Paid-in-kind
interest
|
|
|
—
|
|
|
Proceeds from secured borrowing
|
|
|
—
|
|
|
Net transfers in or out of Level 3
|
|
|
—
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
(2,891
|
)
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized
gains or losses relating to investments still held at the reporting date
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
42
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
The valuation techniques and significant unobservable inputs used in recurring
Level 3 fair value measurements as of March 31, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value at
March 31, 2017
(Unaudited)
|
|
|
Valuation
Technique
(1)
|
|
Unobservable
Input
|
|
Range
|
|
Weighted
Average
|
|
Senior Secured Loans—First Lien
|
|
$
|
1,886,737
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
5.6% - 16.7%
|
|
9.7%
|
|
|
|
|
55,993
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
|
181,609
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
6.0% - 102.0%
|
|
100.4%
|
|
|
|
|
109,890
|
|
|
Cost
|
|
Cost
|
|
99.0% - 99.0%
|
|
99.0%
|
|
Senior Secured Loans—Second Lien
|
|
|
179,865
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
8.5% - 16.8%
|
|
10.5%
|
|
|
|
|
34,146
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
|
158,361
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
2.9% - 101.4%
|
|
95.7%
|
|
|
|
|
750
|
|
|
Cost
|
|
Cost
|
|
100.0% - 100.0%
|
|
100.0%
|
|
Senior Secured Bonds
|
|
|
121,085
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
8.5% - 9.8%
|
|
8.8%
|
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
4.8x - 6.3x
|
|
6.0x
|
|
.
|
|
|
|
|
|
|
|
Production Multiples (Mboe/d)
|
|
$40,000.0 - $42,500.0
|
|
$41,250.0
|
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Mmboe)
|
|
$11.5 - $12.5
|
|
$12.0
|
|
|
|
|
|
|
|
|
|
PV-10
Multiples (x)
|
|
0.8x - 0.9x
|
|
0.8x
|
|
|
|
|
50,258
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
72.5% - 109.3%
|
|
99.8%
|
|
Subordinated Debt
|
|
|
411,876
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
8.0% - 16.5%
|
|
13.8%
|
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
8.5x - 11.5x
|
|
8.8x
|
|
|
|
|
173,449
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
68.6% - 105.8%
|
|
93.2%
|
|
Collateralized Securities
|
|
|
63,923
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
7.7% - 100.0%
|
|
72.1%
|
|
Equity/Other
|
|
|
404,899
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
13.8% - 14.3%
|
|
14.0%
|
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
4.8x - 14.8x
|
|
8.0x
|
|
|
|
|
|
|
|
|
|
Production Multiples (Mboe/d)
|
|
$37,500.0 - $42,500.0
|
|
$38,804.8
|
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Mmboe)
|
|
$5.9 - $12.5
|
|
$11.1
|
|
|
|
|
|
|
|
|
|
Production Multiples (MMcfe/d)
|
|
$2,375.0 - $2,625.0
|
|
$2,500.0
|
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Bcfe)
|
|
$1.1 - $1.2
|
|
$1.1
|
|
|
|
|
|
|
|
|
|
PV-10
Multiples (x)
|
|
0.8x - 6.6x
|
|
3.5x
|
|
|
|
|
|
|
|
|
|
Undeveloped Acreage Multiples ($/Acre)
|
|
$8,000.0 - $10,000.0
|
|
$9,000.0
|
|
|
|
|
|
|
|
|
|
Capacity Multiple ($/kW)
|
|
$2,750.0 - $3,250.0
|
|
$3,000.0
|
|
|
|
|
|
|
|
Discounted Cash Flow
|
|
Discount Rate (%)
|
|
22.8% - 24.8%
|
|
23.8%
|
|
|
|
|
|
|
|
Option Valuation Model
|
|
Volatility (%)
|
|
32.5% - 42.5%
|
|
39.4%
|
|
|
|
|
81,961
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
|
54
|
|
|
Cost
|
|
Cost
|
|
100.0% - 100.0%
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,914,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Borrowing
|
|
$
|
(2,891
|
)
|
|
Market Comparables
|
|
Market Yield (%)
|
|
(6.1)% - (7.1)%
|
|
(6.6)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
|
(1)
|
Investments using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant
period end, which were provided by independent third-party pricing services and screened for validity by such services. For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in
isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For
investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option
valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.
|
|
(2)
|
Fair value based on expected outcome of proposed corporate transactions and/or other factors.
|
44
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value
at
December 31, 2016
|
|
|
Valuation
Technique
(1)
|
|
Unobservable
Input
|
|
Range
|
|
Weighted
Average
|
|
Senior Secured Loans—First Lien
|
|
$
|
1,575,465
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
5.5% - 17.3%
|
|
10.0%
|
|
|
|
|
93,703
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
|
203,773
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
18.2% - 104.1%
|
|
99.6%
|
|
|
|
|
62,500
|
|
|
Cost
|
|
Cost
|
|
100.0% - 100.0%
|
|
100.0%
|
|
Senior Secured Loans—Second Lien
|
|
|
458,403
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
8.8% - 26.0%
|
|
12.4%
|
|
|
|
|
140,752
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
8.8% - 101.0%
|
|
93.3%
|
|
Senior Secured Bonds
|
|
|
109,936
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
7.5% - 9.0%
|
|
7.8%
|
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
6.3x - 7.3x
|
|
6.5x
|
|
|
|
|
|
|
|
|
|
Production Multiples (Mboe/d)
|
|
$45,000.0 - $50,000.0
|
|
$47,500.0
|
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Mmboe)
|
|
$14.5 - $15.0
|
|
$14.8
|
|
|
|
|
|
|
|
|
|
PV-10
Multiples (x)
|
|
0.8x - 0.9x
|
|
0.9x
|
|
|
|
|
49,534
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
76.0% - 109.6%
|
|
98.5%
|
|
Subordinated Debt
|
|
|
321,853
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
8.0% - 15.3%
|
|
13.0%
|
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
7.3x - 10.3x
|
|
8.7x
|
|
|
|
|
132,192
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
60.8% - 125.5%
|
|
89.0%
|
|
Collateralized Securities
|
|
|
72,058
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
11.1% - 94.3%
|
|
72.7%
|
|
Equity/Other
|
|
|
453,246
|
|
|
Market Comparables
|
|
EBITDA Multiples (x)
|
|
4.5x - 16.3x
|
|
8.8x
|
|
|
|
|
|
|
|
|
|
Production Multiples (Mboe/d)
|
|
$2,225.0 - $50,000.0
|
|
$42,391.6
|
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Mmboe)
|
|
$0.7 - $15.0
|
|
$8.8
|
|
|
|
|
|
|
|
|
|
Undeveloped Acreage Multiples ($/Acre)
|
|
$8,000.0 - $10,000.0
|
|
$9,000.0
|
|
|
|
|
|
|
|
|
|
Capacity Multiple ($/kW)
|
|
$2,375.0 - $2,875.0
|
|
$2,625.0
|
|
|
|
|
|
|
|
Discounted Cash Flow
|
|
Discount Rate (%)
|
|
11.0% - 24.8%
|
|
19.9%
|
|
|
|
|
|
|
|
Option Valuation Model
|
|
Volatility (%)
|
|
34.5% - 41.0%
|
|
39.5%
|
|
|
|
|
47,075
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,720,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Borrowing
|
|
$
|
(2,880
|
)
|
|
Market Comparables
|
|
Market Yield (%)
|
|
(6.0)% - (7.1)%
|
|
(6.6)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Investments using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date
of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the
market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value
measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value
|
45
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial
Instruments (continued)
|
|
measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher
(lower) fair value measurement.
|
|
(2)
|
Fair value based on expected outcome of proposed corporate transactions or other various factors.
|
Note 8. Financing Arrangements
The following tables present summary information with respect to the Company’s outstanding financing arrangements as of March 31, 2017 and December 31, 2016. For additional information
regarding these financing arrangements, please see the notes to the Company’s audited consolidated financial statements contained in its annual report on Form
10-K
for the year ended December 31,
2016 and the additional disclosure set forth in this Note 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
2017
(Unaudited)
|
|
Arrangement
|
|
Type of Arrangement
|
|
Rate
|
|
Amount
Outstanding
|
|
|
Amount
Available
|
|
|
Maturity Date
|
|
Hamilton Street Credit Facility
|
|
Revolving Credit Facility
|
|
L+2.50%
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
December 15, 2021
|
|
ING Credit Facility
|
|
Revolving Credit Facility
|
|
L+2.25%
|
|
$
|
180,128
|
(1)
|
|
$
|
147,372
|
|
|
March 16, 2021
|
|
Locust Street Credit Facility
|
|
Term Loan Credit Facility
|
|
L+2.68%
|
|
$
|
425,000
|
|
|
$
|
—
|
|
|
November 1, 2020
|
|
4.000% Notes due 2019
|
|
Unsecured Notes
|
|
4.00%
|
|
$
|
400,000
|
|
|
$
|
—
|
|
|
July 15, 2019
|
|
4.250% Notes due 2020
|
|
Unsecured Notes
|
|
4.25%
|
|
$
|
405,000
|
|
|
$
|
—
|
|
|
January 15, 2020
|
|
4.750% Notes due 2022
|
|
Unsecured Notes
|
|
4.75%
|
|
$
|
275,000
|
|
|
$
|
—
|
|
|
May 15, 2022
|
|
Partial Loan Sale
|
|
Secured Borrowing
|
|
L+4.50%
(1% floor)
|
|
$
|
2,857
|
|
|
$
|
—
|
|
|
July 29, 2022
|
|
(1)
|
Amount includes borrowing in U.S. dollars and Euros. Euro balance outstanding of €42,188 has been converted to U.S. dollars at an exchange rate of €1.00 to
$1.07 as of March 31, 2017 to reflect total amount outstanding in U.S. dollars.
|
46
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The Company’s average borrowings and weighted average interest rate, including the
effect of
non-usage
fees, for the three months ended March 31, 2017 were $1,791,799 and 4.03%, respectively. As of March 31, 2017, the Company’s weighted average effective interest rate on
borrowings, including the effect of
non-usage
fees, was 4.01%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Arrangement
|
|
Type of Arrangement
|
|
Rate
|
|
Amount
Outstanding
|
|
|
Amount
Available
|
|
|
Maturity Date
|
|
Hamilton Street Credit Facility
|
|
Revolving Credit Facility
|
|
L+2.50%
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
December 15, 2021
|
|
ING Credit Facility
|
|
Revolving Credit Facility
|
|
L+2.50%
|
|
$
|
44,932
|
(1)
|
|
$
|
255,068
|
|
|
April 3, 2018
|
|
Locust Street Credit Facility
|
|
Term Loan Credit Facility
|
|
L+2.68%
|
|
$
|
425,000
|
|
|
$
|
—
|
|
|
November 1, 2020
|
|
4.000% Notes due 2019
|
|
Unsecured Notes
|
|
4.00%
|
|
$
|
400,000
|
|
|
$
|
—
|
|
|
July 15, 2019
|
|
4.250% Notes due 2020
|
|
Unsecured Notes
|
|
4.25%
|
|
$
|
405,000
|
|
|
$
|
—
|
|
|
January 15, 2020
|
|
4.750% Notes due 2022
|
|
Unsecured Notes
|
|
4.75%
|
|
$
|
275,000
|
|
|
$
|
—
|
|
|
May 15, 2022
|
|
Partial Loan Sale
|
|
Secured Borrowing
|
|
L+4.50%
(1% floor)
|
|
$
|
2,857
|
|
|
$
|
—
|
|
|
July 29, 2022
|
|
(1)
|
Borrowings in Euros. Euro balance outstanding of €42,575 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.06 as of December 31, 2016
to reflect total amount outstanding in U.S. dollars.
|
The Company’s average borrowings and weighted average
interest rate, including the effect of
non-usage
fees, for the year ended December 31, 2016 were $1,793,749 and 3.84%, respectively. As of December 31, 2016, the Company’s weighted average
effective interest rate on borrowings, including the effect
of non-usage fees,
was 4.16%.
Hamilton Street Credit Facility
On December 15, 2016, Hamilton Street Funding LLC, or Hamilton Street, a wholly owned, special purpose financing subsidiary of the Company, entered into a revolving credit facility, or the Hamilton
Street credit facility, pursuant to (a) a Loan and Security Agreement, dated as of December 15, 2016, by and among Hamilton Street, as borrower, each of the lenders from time to time party thereto, each of the lender agents from time to
time party thereto, HSBC Bank USA, National Association, as administrative agent, and U.S. Bank National Association, as collateral agent, account bank and custodian, and (b) certain other related transaction documents.
The Hamilton Street credit facility provides for a five-year credit facility with a four-year revolving period, during which Hamilton
Street is permitted to borrow, repay and reborrow advances in U.S. dollars and certain agreed foreign currencies in an initial aggregate amount of up to $150,000, subject to its compliance with the terms of the Hamilton Street credit facility
(including maintenance of the required borrowing base). The Hamilton Street credit facility has an accordion option that would permit the parties to increase the commitments by an additional $50,000 to $200,000. After the revolving period,
outstanding advances under the Hamilton Street credit facility must be repaid by 5% each month until the maturity date at which time all remaining outstanding advances must be repaid.
As of March 31, 2017 and December 31, 2016, $150,000 was outstanding under the Hamilton Street credit facility. The carrying
amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $1,637 in connection with obtaining the Hamilton Street credit facility, which the Company has recorded as deferred financing costs on its
consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2017, $1,543 of such deferred financing costs had yet to be amortized to interest expense.
47
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three months ended March 31, 2017 and 2016, the components of total
interest expense for the Hamilton Street credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Direct interest expense
|
|
$
|
1,382
|
|
|
|
—
|
|
|
Non-usage
fees
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of deferred financing costs
|
|
|
81
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
1,463
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average
borrowings, effective interest rate and weighted average interest rate for the Hamilton Street credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash paid for interest expense
(1)
|
|
|
—
|
|
|
|
—
|
|
|
Average borrowings under the facility
|
|
$
|
150,000
|
|
|
|
—
|
|
|
Effective interest rate on borrowings (including the effect of
non-usage
fees)
|
|
|
3.69
|
%
|
|
|
—
|
|
|
Weighted average interest rate (including the effect of
non-usage
fees)
(2)
|
|
|
3.69
|
%
|
|
|
—
|
|
|
(1)
|
Interest under the Hamilton Street credit facility is paid quarterly in arrears.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
Borrowings of Hamilton Street are considered borrowings of the Company for purposes of complying with the asset coverage requirements
applicable to BDCs under the 1940 Act.
ING Credit Facility
On April 3, 2014, the Company entered into a senior secured revolving credit facility with ING Capital LLC, or ING, as administrative agent, and the lenders party thereto, or the ING credit facility.
The ING credit facility originally provided for borrowings in U.S. dollars and certain agreed upon foreign currencies in an initial aggregate amount of up to $300,000, with an option for the Company to request, at one or more times after closing,
that existing or new lenders, at their election, provide up to $100,000 of additional commitments. The ING credit facility provides for the issuance of letters of credit in an aggregate face amount not to exceed $25,000. The Company’s
obligations under the ING credit facility are guaranteed by all of the Company’s subsidiaries, other than its special-purpose financing subsidiaries. The Company’s obligations under the ING credit facility are secured by a first priority
security interest in substantially all of the assets of the Company and the subsidiary guarantors thereunder other than the equity interests of its special-purpose financing subsidiaries.
On March 16, 2017, the Company, certain subsidiary guarantors of the Company, the several banks and other financial institutions or
entities from time to time party thereto and ING entered into a second amendment, or the Amendment, to the ING credit facility. The Amendment, among other things, (i) increased the lenders’ aggregate commitments under the ING credit
facility to $327,500, (ii) extended the term of the revolving period to March 16, 2020 and the final maturity date to March 16, 2021, (iii) increased the size of the accordion
48
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
provision to permit increases to the lenders’ aggregate commitments under the ING credit facility up to $600,000 and (iv) decreased the Applicable Margin (as defined therein) to 1.25%
with respect to any ABR Loan (as defined therein) and 2.25% with respect to any Eurocurrency Loan (as defined therein).
As of
March 31, 2017 and December 31, 2016, $180,128 and $44,932, respectively, was outstanding under the ING credit facility, which includes borrowings in Euro in an aggregate amount of €42,188 and €42,575, respectively. The carrying
amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $6,106 in connection with obtaining and amending the ING credit facility, which the Company has recorded as deferred financing costs on
its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2017, $2,680 of such deferred financing costs had yet to be amortized to interest expense.
For the three months ended March 31, 2017 and 2016, the components of total interest expense for the ING credit facility were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Direct interest expense
|
|
$
|
1,023
|
|
|
$
|
823
|
|
|
Non-usage
fees
|
|
|
252
|
|
|
|
237
|
|
|
Amortization of deferred financing costs
|
|
|
308
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
1,583
|
|
|
$
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average
borrowings, effective interest rate and weighted average interest rate for the ING credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash paid for interest expense
(1)
|
|
$
|
1,353
|
|
|
$
|
1,421
|
|
|
Average borrowings under the facility
|
|
$
|
133,941
|
|
|
$
|
114,174
|
|
|
Effective interest rate on borrowings (including the effect of
non-usage
fees)
|
|
|
3.68
|
%
|
|
|
10.70
|
%
|
|
Weighted average interest rate (including the effect of
non-usage
fees)
(2)
|
|
|
3.81
|
%
|
|
|
3.67
|
%
|
|
(1)
|
Interest under the ING credit facility is paid at the end of each interest period in arrears for borrowings in Euro and quarterly in arrears for base rate borrowings.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
JPM Financing
On July 21, 2011, through its two wholly-owned,
special-purpose financing subsidiaries, Locust Street Funding LLC, or Locust Street, and Race Street Funding LLC, or Race Street, the Company entered into a debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which was
subsequently amended several times, or the JPM Facility. Prior to its termination, the Company and JPM had most recently amended the financing arrangement on April 28, 2016 to, among other things, reduce the amount of outstanding available
debt financing from $725,000 to $650,000. On November 1, 2016, in connection with the entrance into
49
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
the Locust Street credit facility (as defined below), (i) the Class A Notes issued by Locust Street to Race Street were redeemed, (ii) the amended and restated global master
repurchase agreement between Race Street and Locust Street was terminated and (iii) the JPM Facility was prepaid and terminated.
For the three months ended March 31, 2016, the components of total interest expense for the JPM Facility were as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2016
|
|
|
Direct interest expense
|
|
$
|
6,363
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
6,363
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016, the cash paid for interest expense, average borrowings,
effective interest rate and weighted average interest rate for the JPM Facility were as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2016
|
|
|
Cash paid for interest expense
(1)
|
|
$
|
9,967
|
|
|
Average borrowings under the facility
|
|
$
|
774,451
|
|
|
Effective interest rate on borrowings
|
|
|
3.25
|
%
|
|
Weighted average interest rate
(2)
|
|
|
3.25
|
%
|
|
(1)
|
Interest under the JPM Facility is paid quarterly in arrears.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
Amounts outstanding under the JPM Facility were considered borrowings of the Company for purposes of complying with the asset coverage
requirements applicable to BDCs under the 1940 Act.
JPM Term Loan Facility
On November 1, 2016, Locust Street entered into a loan agreement, or the Locust Street loan agreement and, together with the related
transaction documents, the Locust Street term loan facility, with JPM, as lender and administrative agent, Citibank, N.A., as collateral agent and securities intermediary, and Virtus Group, LP, as collateral administrator, pursuant to which JPM
advanced $625,000 to Locust Street. Advances outstanding under the Locust Street term loan facility bear interest at a rate equal to LIBOR for a three-month interest period plus a spread of 2.6833% per annum. Interest is payable in arrears beginning
on January 15, 2017 and each quarter thereafter. Under the Locust Street loan agreement, Locust Street agreed to repay $200,000 of the aggregate principal amount of the advances on or before January 31, 2017, which repayment was satisfied
in full in December 2016. All remaining outstanding advances under the Locust Street loan agreement will mature, and all accrued and unpaid interest thereunder, will be due and payable, on November 1, 2020.
As of March 31, 2017 and December 31, 2016, $425,000 was outstanding under the Locust Street term loan. The carrying amount of
the amount outstanding under the facility approximates its fair value. The Company incurred costs of $4,481 in connection with obtaining the Locust Street term loan, which the Company has recorded as deferred financing costs on its consolidated
balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2017, $4,023 of such deferred financing costs had yet to be amortized to interest expense.
50
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three months ended March 31, 2017 and 2016, the components of total
interest expense for the Locust Street credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Direct interest expense
|
|
$
|
3,792
|
|
|
|
—
|
|
|
Non-usage
fees
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of deferred financing costs
|
|
|
276
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
4,068
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average
borrowings, effective interest rate and weighted average interest rate for the Locust Street credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash paid for interest expense
(1)
|
|
$
|
2,738
|
|
|
|
—
|
|
|
Average borrowings under the facility
|
|
$
|
425,000
|
|
|
|
—
|
|
|
Effective interest rate on borrowings (including the effect of
non-usage
fees)
|
|
|
3.57
|
%
|
|
|
—
|
|
|
Weighted average interest rate (including the effect of
non-usage
fees)
(2)
|
|
|
3.57
|
%
|
|
|
—
|
|
|
(1)
|
Interest under the Locust Street credit facility is paid quarterly in arrears.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
Amounts outstanding under the Locust Street term loan are considered borrowings of the Company for purposes of complying with the asset
coverage requirements applicable to BDCs under the 1940 Act.
4.000% Notes due 2019
On July 14, 2014, the Company and U.S. Bank National Association, or U.S. Bank, entered into an indenture, or the base indenture, and
a first supplemental indenture thereto, or together with the base indenture and any supplemental indentures thereto, the indenture, relating to the Company’s issuance of $400,000 aggregate principal amount of its 4.000% notes due 2019, or the
4.000% notes.
The 4.000% notes will mature on July 15, 2019 and may be redeemed in whole or in part at the
Company’s option at any time or from time to time at the applicable redemption price set forth in the indenture. The 4.000% notes bear interest at a rate of 4.000% per year, payable semi-annually on January 15 and
July 15 of each year, commencing on January 15, 2015. The 4.000% notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is
expressly subordinated in right of payment to the 4.000% notes and rank
pari passu
with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
In addition, on the occurrence of a “change of control repurchase event,” as defined in the indenture, the Company will
generally be required to make an offer to purchase the outstanding 4.000% notes at a price equal to 100% of the principal amount of such notes plus accrued and unpaid interest to the repurchase date.
51
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The indenture contains certain covenants, including covenants requiring the Company to
comply with the asset coverage requirements of Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of
the 4.000% notes and U.S. Bank if the Company is no longer subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, or the Exchange Act. These covenants are subject to limitations and exceptions that are described
in the indenture.
As of March 31, 2017 and December 31, 2016, $400,000 of the 4.000% notes was outstanding. As of
March 31, 2017, the fair value of the 4.000% notes was approximately $403,360. The Company incurred costs of $569 in connection with issuing the 4.000% notes, which the Company has recorded as deferred financing costs on its consolidated
balance sheets and amortizes to interest expense over the life of the 4.000% notes. As of March 31, 2017, $257 of such deferred financing costs had yet to be amortized to interest expense. In connection with issuing the 4.000% notes, the
Company has charged $5,608 of discount against the carrying amount of such notes. As of March 31, 2017, $2,565 of such discount had yet to be amortized to interest expense.
For the three months ended March 31, 2017 and 2016, the components of total interest expense for the 4.000% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Direct interest expense
|
|
$
|
4,000
|
|
|
$
|
3,788
|
|
|
Amortization of deferred financing costs and discount
|
|
|
302
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
4,302
|
|
|
$
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average
borrowings, effective interest rate and weighted average interest rate for the 4.000% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash paid for interest expense
(1)
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
|
Average borrowings under the 4.000% notes
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
Effective interest rate on borrowings
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
Weighted average interest rate
(2)
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
(1)
|
Interest under the 4.000% notes is paid semi-annually in arrears.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
4.250% Notes due 2020
On December 3, 2014, the Company and U.S. Bank
entered into a second supplemental indenture to the base indenture relating to the Company’s issuance of $325,000 aggregate principal amount of its 4.250% notes due 2020, or the 4.250% notes. On December 8, 2016, the Company issued an
additional $80,000 aggregate principal amount of the 4.250% notes as additional notes under the second supplemental indenture.
52
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The 4.250% notes will mature on January 15, 2020 and may be redeemed in whole or in
part at the Company’s option at any time or from time to time at the applicable redemption price set forth in the indenture. The 4.250% notes bear interest at a rate of 4.250% per year, payable semi-annually on January 15 and
July 15 of each year, commencing on July 15, 2015. The 4.250% notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly
subordinated in right of payment to the 4.250% notes and rank
pari passu
with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
In addition, on the occurrence of a “change of control repurchase event,” as defined in the indenture, the Company will
generally be required to make an offer to purchase the outstanding 4.250% notes at a price equal to 100% of the principal amount of such notes plus accrued and unpaid interest to the repurchase date.
The indenture contains certain covenants, including covenants requiring the Company to comply with the asset coverage requirements of
Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of the 4.250% notes and U.S. Bank if the Company
is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to limitations and exceptions that are described in the indenture.
As of March 31, 2017 and December 31, 2016, $405,000 of the 4.250% notes was outstanding. As of March 31, 2017, the fair value of the 4.250% notes was approximately $409,396. The Company
incurred costs of $1,747 in connection with issuing the 4.250% notes, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the 4.250% notes. As of
March 31, 2017, $1,277 of such deferred financing costs had yet to be amortized to interest expense. In connection with issuing the 4.250% notes, the Company has charged $3,690 of discount against the carrying amount of such notes. As of
March 31, 2017, $1,861 of such discount had yet to be amortized to interest expense.
For the three months ended
March 31, 2017 and 2016, the components of total interest expense for the 4.250% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Direct interest expense
|
|
$
|
4,303
|
|
|
$
|
3,453
|
|
|
Amortization of deferred financing costs and discount
|
|
|
279
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
4,582
|
|
|
$
|
3,694
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average
borrowings, effective interest rate and weighted average interest rate for the 4.250% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash paid for interest expense
(1)
|
|
$
|
8,607
|
|
|
$
|
6,906
|
|
|
Average borrowings under the 4.250% notes
|
|
$
|
405,000
|
|
|
$
|
325,000
|
|
|
Effective interest rate on borrowings
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
Weighted average interest rate
(2)
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
53
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
|
(1)
|
Interest under the 4.250% notes is paid semi-annually in arrears.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
4.750% Notes due 2022
On April 30, 2015, the Company and U.S. Bank
entered into a third supplemental indenture to the base indenture relating to the Company’s issuance of $275,000 aggregate principal amount of its 4.750% notes due 2022, or the 4.750% notes.
The 4.750% notes will mature on May 15, 2022 and may be redeemed in whole or in part at the Company’s option at any time or
from time to time at the applicable redemption price set forth in the indenture. The 4.750% notes bear interest at a rate of 4.750% per year payable semi-annually on May 15 and November 15 of each year, commencing on
November 15, 2015. The 4.750% notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the
4.750% notes and rank
pari passu
with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
In addition, on the occurrence of a “change of control repurchase event,” as defined in the indenture, the Company will generally be required to make an offer to purchase the outstanding 4.750%
notes at a price equal to 100% of the principal amount of such notes plus accrued and unpaid interest to the repurchase date.
The indenture contains certain covenants, including covenants requiring the Company to comply with the asset coverage requirements of
Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of the 4.750% notes and U.S. Bank if the Company
is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to limitations and exceptions that are described in the indenture.
As of March 31, 2017 and December 31, 2016, $275,000 of the 4.750% notes was outstanding. As of March 31, 2017, the fair value of the 4.750% notes was approximately $282,034. The Company
incurred costs of $469 in connection with issuing the 4.750% notes, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the 4.750% notes. As of
March 31, 2017, $346 of such deferred financing costs had yet to be amortized to interest expense. In connection with issuing the 4.750% notes, the Company has charged $3,344 of discount against the carrying amount of such notes. As of
March 31, 2017, $2,431 of such discount had yet to be amortized to interest expense.
For the three months ended
March 31, 2017 and 2016, the components of total interest expense for the 4.750% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Direct interest expense
|
|
$
|
3,266
|
|
|
$
|
3,265
|
|
|
Amortization of deferred financing costs and discount
|
|
|
134
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
3,400
|
|
|
$
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
54
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three months ended March 31, 2017 and 2016, the cash paid for interest
expense, average borrowings, effective interest rate and weighted average interest rate for the 4.750% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash paid for interest expense
(1)
|
|
|
—
|
|
|
|
—
|
|
|
Average borrowings under the 4.750% notes
|
|
$
|
275,000
|
|
|
$
|
275,000
|
|
|
Effective interest rate on borrowings
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
|
Weighted average interest rate
(2)
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
|
(1)
|
Interest under the 4.750% notes is paid semi-annually in arrears.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
Partial Loan Sale
Certain partial loan sales do not qualify for sale
accounting under ASC Topic 860 because these sales do not meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the
definition of a participating interest remain as an investment on the consolidated balance sheets and the portion sold is recorded as a secured borrowing in the liabilities section of the consolidated balance sheets. For these partial loan sales,
the interest earned on the entire loan balance is recorded within interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the consolidated statements of operations.
As of March 31, 2017 and December 31, 2016, the Company recognized a secured borrowing at fair value of $2,891 and $2,880,
respectively, and the fair value of the loan that is associated with the secured borrowing was $15,080 and $14,993, respectively. The secured borrowing was the result of the Company’s completion of a partial sale of a senior secured loan
associated with one portfolio company that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and the partial loan sale was treated as a secured borrowing.
During the three months ended March 31, 2017, there were no new partial loan sales, fundings on revolving and delayed draw secured
borrowings or repayments on secured borrowings.
For the three months ended March 31, 2017 and 2016, the components of
total interest expense for the secured borrowing were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Direct interest expense
|
|
$
|
40
|
|
|
|
—
|
|
|
Amortization of discount
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
41
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
55
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three months ended March 31, 2017 and 2016, the cash paid for interest
expense, average borrowings, effective interest rate and weighted average interest rate for the secured borrowing were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash paid for interest expense
(1)
|
|
$
|
41
|
|
|
|
—
|
|
|
Average secured borrowing
|
|
$
|
2,857
|
|
|
|
—
|
|
|
Effective interest rate on secured borrowing
|
|
|
5.53
|
%
|
|
|
—
|
|
|
Weighted average interest rate
(2)
|
|
|
5.50
|
%
|
|
|
—
|
|
|
(1)
|
Interest under the secured borrowing is paid quarterly in arrears.
|
|
(2)
|
The weighted average interest rate presented for periods of less than one year is annualized.
|
Note 9. Commitments and Contingencies
The Company enters into contracts
that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management of FB Advisor has reviewed
the Company’s existing contracts and expects the risk of loss to the Company to be remote.
The Company is not currently
subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of
business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that
any such proceedings will have a material effect upon its financial condition or results of operations.
See Note 6 for a
discussion of the Company’s unfunded commitments.
56
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2017 and the year ended
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
|
|
Year Ended
December 31,
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
Per Share Data:
(1)
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
9.41
|
|
|
$
|
9.10
|
|
|
Results of operations
(2)
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
0.22
|
|
|
|
0.85
|
|
|
Net realized and unrealized appreciation (depreciation) on investments and secured borrowing and gain/loss on foreign
currency
|
|
|
0.04
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
0.26
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder distributions
(3)
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income
|
|
|
(0.22
|
)
|
|
|
(0.89
|
)
|
|
Distributions from net realized gain on investments
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from stockholder distributions
|
|
|
(0.22
|
)
|
|
|
(0.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
(4)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from capital share transactions
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
9.45
|
|
|
$
|
9.41
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value, end of period
|
|
$
|
9.80
|
|
|
$
|
10.30
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding, end of period
|
|
|
244,599,661
|
|
|
|
244,063,357
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return based on net asset value
(5)
|
|
|
2.76
|
%
|
|
|
13.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total return based on market value
(6)
|
|
|
(2.61
|
)%
|
|
|
25.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
2,311,635
|
|
|
$
|
2,297,377
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment income to average net assets
(7)
|
|
|
2.29
|
%
|
|
|
9.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total operating expenses to average net assets
(7)
|
|
|
2.33
|
%
|
|
|
9.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover
(8)
|
|
|
9.49
|
%
|
|
|
29.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total amount of senior securities outstanding, exclusive of treasury securities
|
|
$
|
1,837,985
|
|
|
$
|
1,702,789
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per unit
(9)
|
|
|
2.26
|
|
|
|
2.35
|
|
|
(1)
|
Per share data may be rounded in order to recompute the ending net asset value per share.
|
|
(2)
|
The per share data was derived by using the weighted average shares outstanding during the applicable period.
|
|
(3)
|
The per share data for distributions reflect the actual amount of distributions paid per share during the applicable period.
|
|
(4)
|
The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock pursuant to the
Company’s DRP. The issuance of common stock at a price that is greater than the net asset value per share results in an increase in net asset value per share. The per share impact of the Company’s DRP is an increase to the net asset value
of less than $0.01 per share during the three months ended March 31, 2017 and year ended December 31, 2016.
|
57
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights (continued)
|
(5)
|
The total return based on net asset value for each period presented was calculated by taking the net asset value per share as of the end of the applicable period,
adding the cash distributions per share that were declared during the period and dividing the total by the net asset value per share at the beginning of the period. Total return based on net asset value does not consider the effect of any sales
commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The historical calculation of total return based on net asset value in the table should not be considered a representation of the
Company’s future total return based on net asset value, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its
investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which
the Company encounters competition in its markets and general economic conditions. As a result of these factors,
|
|
|
results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent
the total return on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.
|
|
(6)
|
The total return based on market value for each period presented was calculated based on the change in market price during the applicable period, including the impact
of distributions reinvested in accordance with the Company’s DRP. Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the
Company’s common stock. The historical calculation of total return based on market value in the table should not be considered a representation of the Company’s future total return based on market value, which may be greater or less than
the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires,
the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets, general economic conditions and fluctuations
in per share market value. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods.
|
|
(7)
|
Weighted average net assets during the applicable period are used for this calculation. The following is a schedule of supplemental ratios for the three months ended
March 31, 2017 and year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
(Unaudited)
|
|
|
Year Ended
December 31, 2016
|
|
|
Ratio of subordinated income incentive fees to average net assets
|
|
|
0.57
|
%
|
|
|
2.33
|
%
|
|
Ratio of interest expense to average net assets
|
|
|
0.85
|
%
|
|
|
3.33
|
%
|
|
Ratio of excise taxes to average net assets
|
|
|
—
|
|
|
|
0.25
|
%
|
|
(8)
|
Portfolio turnover for the three months ended March 31, 2017 is not annualized.
|
|
(9)
|
Asset coverage per unit is the ratio of the carrying value of the Company’s total consolidated assets, less liabilities and indebtedness not represented by senior
securities, to the aggregate amount of senior securities representing indebtedness.
|
58