On December 11, 2017, Franklin Square Holdings, L.P., an alternative
investment manager and sponsor of the Company (
FS Investments
), and KKR & Co. L.P. (
KKR
& Co.
) issued a press release announcing, among other things, a proposed transition of the
Companys investment advisory services to a new joint investment advisory relationship, as described in further detail below. A copy of the press release is attached to this report as Exhibit 99.1 and is incorporated herein by reference.
The Company currently receives investment advisory and administrative services from FB Income Advisor, LLC (
FB Income
Advisor
), the Companys investment adviser, pursuant to the Amended and Restated Investment Advisory Agreement, dated as of July 17, 2014, by and between the Company and FB Income Advisor (the
Current Investment Advisory
Agreement
) and the Administration Agreement, dated as of April 16, 2014, by and between the Company and FB Income Advisor (the
Current Administration Agreement
). GSO / Blackstone Debt Funds Management LLC
(
GDFM
) currently serves as the Companys investment
sub-adviser
pursuant to the Investment
Sub-Advisory
Agreement, dated as of April 3,
2008, by and between GDFM and FB Income Advisor (the
Current Investment
Sub-Advisory
Agreement
).
Transition of Investment Advisory Services
As the Company announced on December 11, 2017, GDFM intends to resign as the investment
sub-adviser
to the Company and terminate the Current Investment
Sub-Advisory
Agreement in April 2018 (the date of such termination, the
GDFM End
Date
). The Company and FB Income Advisor intend to transition the Companys investment advisory services to a new joint investment adviser entity (the
Joint Advisor
) that will be jointly operated by an entity formed
by FS Investments or one of its affiliates and KKR Credit Advisors (US) LLC (
KKR Credit
), an affiliate of KKR & Co. (the
Transition
).
In connection with the resignation of GDFM as the investment
sub-adviser
to the Company, FB Income Advisor, GDFM and certain of their affiliates have entered into a Transition Agreement, dated December 10, 2017 (the
Transition Agreement
), which
provides that GDFM will continue to act as the investment
sub-adviser
to the Company through the GDFM End Date and will cooperate with FB Income Advisor in implementing the Transition. Under the Transition
Agreement, GDFM has also agreed to restrictions on its ability to acquire the Companys shares of common stock, par value $0.001 per share (the
Shares
), and take certain other actions in respect of the Company. In addition,
GDFM has agreed (i) to vote the Shares beneficially owned by GDFM, or over which GDFM has voting control, to approve the Investment
Co-Advisory
Agreements (as defined herein) and the Joint Advisor
Investment Advisory Agreement (as defined herein) and (ii) not to transfer the Shares beneficially owned by GDFM until after the approval of the Investment
Co-Advisory
Agreements and the Joint Advisor
Investment Advisory Agreement.
Approval of Investment Advisory Agreements
In connection with the Transition, on November 28, 2017, the Board, including a majority of the members of the Board who are not parties
to the applicable investment advisory agreement or administrative services agreement described below or interested persons (as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the
1940
Act
)) of any such party, approved (i) the renewal of the Current Investment Advisory Agreement and the Current Administration Agreement for an additional
one-year
term commencing on December 10,
2017, (ii) an interim investment advisory agreement that meets the applicable requirements of Rule
15a-4
under the 1940 Act by and between the Company and KKR Credit (the
Interim Investment Advisory
Agreement
), (iii) investment advisory agreements by and between the Company and each of FB Income Advisor and KKR Credit (the
Investment
Co-Advisory
Agreements
), (iv)
administration agreements by and between the Company and each of FB Income Advisor and KKR Credit (the
Co-Advisor
Administration Agreements
), (v) an investment advisory agreement by and
between the Company and the Joint Advisor (the
Joint Advisor Investment Advisory Agreement
and together with the Investment
Co-Advisory
Agreements, the
Proposed Advisory
Agreements
), and (vi) an administration agreement by and between the Company and the Joint Advisor (the
Joint Advisor Administration Agreement
). The Company intends to seek stockholder approval to enter into the
Proposed Advisory Agreements, subject to the terms and conditions set forth below and the definitive agreement entered into among FS Investments, certain affiliates of FS Investments and KKR Credit. The Current Investment Advisory Agreement will
terminate when any Proposed Advisory Agreement becomes effective, and the Current Administration Agreement will terminate when the
Co-Advisor
Administration Agreements or the Joint Advisor Administration
Agreement become effective.
If the stockholders of the Company approve the Joint Advisor Investment Advisory Agreement, then the Joint
Advisor would serve as investment adviser to the Company pursuant to the Joint Advisor Investment Advisory Agreement from and after the Joint Advisor Effective Date (as defined herein). The
Joint Advisor Effective Date
means such
date that (i) the stockholders of the Company and certain other BDCs sponsored by FS Investments, specifically, FS Investment Corporation II (
FSIC II
), FS Investment Corporation III (
FSIC III
) and FS
Investment Corporation IV (
FSIC IV
and, together with FSIC II, FSIC III and the Company, the
FSIC Funds
), and the stockholders of BDCs currently advised or
sub-advised
by
KKR Credit, specifically, Corporate Capital Trust, Inc. (
CCT
) and Corporate Capital Trust II (
CCT II
and, together with the FSIC Funds and CCT, the
Funds
), approve their respective investment
advisory agreements with the Joint Advisor, and (ii) Exemptive Relief (as defined herein) has been obtained.
If the stockholders of
the Company approve the Investment
Co-Advisory
Agreements, FB Income Advisor and KKR Credit would serve as investment
co-advisers
to the Company pursuant to the
Investment
Co-Advisory
Agreements from the later of the date of such approval and the Closing Date (as defined herein) until the Joint Advisor Effective Date. The
Closing Date
means the
first day of the month immediately following the month in which the last of the following occurs: (i) the stockholders of FSIC II approve (a) an investment advisory and administrative services agreement with the Joint Advisor and
(b) investment advisory and administrative services agreements with each of FSIC II Advisor, LLC, the current investment adviser to FSIC II (
FSIC II Advisor
), and KKR Credit and (ii) either (a) the stockholders of FSIC
III approve (1) an investment advisory and administrative services agreement with the Joint Advisor and (2) investment advisory and administrative services agreements with each of FSIC III Advisor, LLC, the current investment adviser to
FSIC III (
FSIC III Advisor
), and KKR Credit or (b) the stockholders of the Company approve all of the Proposed Advisory Agreements.
If the Joint Advisor Effective Date occurs on the same day as the Closing Date, then the Joint
Advisor would serve as investment adviser to the Company pursuant to the Joint Advisor Investment Advisory Agreement and the Investment
Co-Advisory
Agreements would not become effective. If the Joint Advisor
Effective Date occurs after the Closing Date, then FB Income Advisor and KKR Credit would serve as investment
co-advisers
to the Company pursuant to the Investment
Co-Advisory
Agreements from the later of the date approval of such agreements is obtained and the Closing Date until the Joint Advisor Effective Date, and the Investment
Co-Advisory
Agreements would automatically terminate upon the effectiveness of the Joint Advisor Investment Advisory Agreement.
Accordingly, in order for FB Income Advisor and KKR Credit to serve as investment
co-advisers
to the
Company pursuant to the Investment
Co-Advisory
Agreements, the stockholders of the Company must approve the Investment
Co-Advisory
Agreements, and the other conditions
to the Closing Date must be satisfied or (to the extent permitted) waived, and in order for the Joint Advisor to serve as investment adviser to the Company pursuant to the Joint Advisor Investment Advisory Agreement, the stockholders of the Company
must approve the Joint Advisor Investment Advisory Agreement, and the other conditions to the Joint Advisor Effective Date must be satisfied or (to the extent permitted) waived.
FB Income Advisor, together with FSIC II Advisor, FSIC III Advisor and FSIC IV Advisor, LLC, the investment adviser to FSIC IV (collectively,
the
FS Advisor Entities
), and KKR Credit have agreed to coordinate their activities during the period in which the Investment
Co-Advisory
Agreements and the Joint Advisor Investment Advisory
Agreement would be in effect to avoid duplication of efforts and ensure a balanced and effective allocation of responsibilities and net fee revenue earned by the FS Advisor Entities, KKR Credit and the Joint Advisor and efficiency in the provision
of the required services to the Company thereunder. In addition, the FS Advisor Entities and KKR Credit anticipate that in the event the Closing Date occurs prior to the approval of any of the Proposed Advisory Agreements, then the Company may enter
into the Interim Investment Advisory Agreement.
Fees Under the Proposed Advisory Agreements
The Proposed Advisory Agreements include, among other things, a reduction in the base management fee the Company pays for advisory services
from 1.75% under the Current Investment Advisory Agreement to 1.50% of the average weekly value of the Companys gross assets, as well as a reduction in the Companys hurdle rate above which FB Income Advisor and KKR Credit (in
the aggregate) or the Joint Advisor, as applicable, earns its subordinated incentive fee on income. Under the Current Investment Advisory Agreement, (i) the hurdle rate is 1.875% per quarter and (ii) the
catch-up
feature begins at 2.34375%.
Under the Proposed Advisory Agreements, if
approved by the Companys stockholders, (i) the hurdle rate will be reduced to 1.75% per quarter and (ii) the
catch-up
feature will be reduced to begin at 2.1875%, each as further
described below. The aggregate incentive fee will consist of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears, will equal 20.0% of
the Companys
pre-incentive
fee net investment income for the immediately preceding quarter and will be subject to a hurdle rate, expressed as a rate of return on the value of the
Companys net assets at the end of the most recently completed calendar quarter, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, under the Proposed Advisory Agreements, FB Income Advisor and KKR Credit (in the
aggregate) or the Joint Advisor, as applicable, will not earn this incentive fee for any quarter until the Companys
pre-incentive
fee net investment income for such quarter exceeds the hurdle rate of
1.75%. Once the Companys
pre-incentive
fee net investment income in any quarter exceeds the hurdle rate, FB Income Advisor and KKR Credit (in the aggregate) or the Joint Advisor, as applicable, will be
entitled to a
catch-up
fee equal to the amount of the Companys
pre-incentive
fee net investment income in excess of the hurdle rate, until the
Companys
pre-incentive
fee net investment income for such quarter equals 2.1875%, or 8.75% annually, of net assets. This
catch-up
feature will allow FB
Income Advisor and KKR Credit (in the aggregate) or the Joint Advisor, as applicable, to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FB Income Advisor and KKR Credit (in the aggregate) or the Joint Advisor,
as applicable, will be entitled to receive 20.0% of the Companys
pre-incentive
fee net investment income.
Under the Investment Co-Advisory Agreements (in the aggregate) and the Joint Advisor Investment
Advisory Agreement, the subordinated incentive fee on income will be subject to a cap equal to (i) 20% of the per share pre-incentive fee return for the current quarter and the immediately preceding eleven quarters minus the cumulative per share
incentive fees accrued and/or payable for the immediately preceding eleven quarters multiplied by (ii) the weighted average number of Shares outstanding during the calendar quarter for which the subordinated incentive fee on income is being
calculated. For the purposes of this calculation, the per share pre-incentive fee return for any calendar quarter is equal to (i) the sum of the pre-incentive fee net investment income for the calendar quarter, realized gains and losses
for the calendar quarter and unrealized appreciation and depreciation of the Companys investments for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, base management fees for the calendar quarter, divided by
(ii) the weighted average number of Shares outstanding during such calendar quarter. In addition, the per share incentive fee for any calendar quarter is equal to (i) the incentive fee accrued and/or payable for such calendar quarter
divided by (ii) the weighted average number of Shares outstanding during such calendar quarter.
The second part of the incentive fee,
which is referred to as the incentive fee on capital gains, will be determined and payable in arrears as of the end of each calendar year (or upon termination of the applicable Proposed Advisory Agreement). Under the Investment
Co-Advisory
Agreements (in the aggregate) and the Joint Advisor Investment Advisory Agreement, the fee will equal (i) 20.0% of the Companys incentive fee capital gains (i.e., the
Companys 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 (ii) the
aggregate amount of any previously paid incentive fees on capital gains. The Company will accrue the incentive fee on capital gains, which, if earned, will be paid annually. The Company will accrue the incentive fee on capital gains based on net
realized and unrealized gains; however, under the terms of the applicable Proposed Advisory Agreement, the fee payable to FB Income Advisor and KKR Credit (in the aggregate) or the Joint Advisor, as applicable, will be based on realized gains and no
such fee will be payable with respect to unrealized gains unless and until such gains are actually realized. The other terms of the incentive fee are the same as those under the Current Investment Advisory Agreement.
Subordinated Incentive Fee on Income Total Return Requirement
FB Income Advisor has agreed to waive subordinated incentive fees on income that would otherwise be payable under the Current Investment
Advisory Agreement, in the amount that would cause the total subordinated incentive fee on income paid in any calendar quarter to not exceed the amount that would be payable if cumulative net increase in net assets resulting from
operations was defined to remove the addition of base management fees payable under the Current Investment Advisory Agreement for quarters ending after January 1, 2018.
Exemptive Relief
Concurrently with the Companys anticipated efforts to obtain stockholder approval of the Proposed Advisory Agreements, KKR Credit intends
to seek exemptive relief in the form of either interpretive guidance from the U.S. Securities and Exchange Commission (the
SEC
) confirming that KKR Credits current
co-investment
exemptive relief order will extend to the FSIC Funds or a new
co-investment
exemptive relief order issued by the SEC to KKR Credit that will cover the FSIC Funds (the
Exemptive Relief
), in
each case that would permit the Company following the effectiveness of the Joint Advisor Investment Advisory Agreement to
co-invest
in privately negotiated investment transactions with certain accounts managed
by KKR Credit.
Changes to the Board
On the date that is the later of the Closing Date and the date on which the stockholders of the Company approve either or both the Investment
Co-Advisory
Agreements and the Joint Advisor Investment Advisory Agreement (such applicable date, the
Board Appointment Date
), then, subject to nomination by and approval of the Board, FB Income
Advisor (acting collectively with the other FS Advisor Entities) and KKR Credit have agreed that they will each be entitled to recommend the appointment of one interested director to the Board, to the extent that the applicable party
does not have an appointee on the Board at such time. In the event that either FB Income Advisor (acting collectively with the other FS Advisor Entities) or KKR Credit has more than one appointee serving as an interested director to the
Board, such party will use its reasonable best efforts to cause the resignation of such excess number of its appointed interested directors as promptly as practicable, but no later than twelve months following the Board Appointment Date.
In addition, FB Income Advisor has agreed that KKR Credit will be entitled to recommend, subject to the approval by the independent directors and approval by the Board, the appointment of one independent director to the Board
on the Board Appointment Date.
Other Matters
FB Income Advisor contemplates potentially entering into additional ancillary agreements in connection with the Transition and the other
transactions discussed in this report. These include, without limitation, a sourcing and administrative services agreement by and among the FS Advisor Entities, KKR Credit and one of KKR Credits broker-dealer affiliates, pursuant to which KKR
Credit and one of its broker-dealer affiliates would provide services to FB Income Advisor, to ensure continuity of services and to provide additional access to investment opportunities prior to the effectiveness of the Proposed Advisory Agreements
or the Interim Investment Advisory Agreement.
FS Investments and KKR Credit intend to evaluate the possibility of merging one or more of the
Funds, which would be subject to board and stockholder approvals. However, there can be no assurance that any merger will be consummated at all.
The foregoing descriptions are qualified in their entirety by the terms and conditions of the applicable definitive agreements. Additional
information about the agreements and transactions discussed in this report or otherwise under consideration by FS Investments, the Company, KKR Credit, the other FSIC Funds, CCT and CCT II may be found in the reports filed from time to time by these
companies and their affiliates with the SEC.
Changes to Investment Committee
Gerald Stahlecker, Michael Forman and Zachary Klehr are resigning from FB Income Advisors investment committee. Following the date
hereof, FB Income Advisors investment committee will be comprised of Sean Coleman, Brian Gerson and Michael Kelly. Below is biographical information relating to Mr. Coleman and Mr. Kelly. Biographical information relating to
Mr. Gerson is set forth above under Item 5.02 and is incorporated herein by reference.
Sean Coleman
serves as a managing
director of the Company and as managing director of investment management of FS Investments and its affiliated investment advisers. Mr. Coleman also serves on the investment committee of the investment advisers to the funds sponsored by FS
Investments. Mr. Coleman is primarily responsible for reviewing and assessing the fit of potential investments within each funds investment portfolio, performing due diligence on the same and monitoring existing investments. Before
joining FS Investments and its affiliated investment advisers in October 2013, Mr. Coleman worked at Golub Capital, where he served in various capacities, including as a managing director in the direct lending group and as chief financial
officer and treasurer of its BDC. Before he joined Golub Capital in September 2005, Mr. Coleman worked in merchant and investment banking, including at Goldman, Sachs & Co. and Wasserstein Perella & Co. Mr. Coleman earned
a Bachelor of Arts in History from Princeton University and an M.B.A. with Distinction from Harvard Business School, where he received the Loeb Award for academic excellence in finance.
Michael Kelly
currently serves as president of FS Investments and has presided in such role since July 2017. Mr. Kelly also serves
as chief investment officer of FS Investments and executive vice president of its affiliated investments advisers, and has presided in such roles since January 2015. Among other things, Mr. Kelly oversees the investment management function at
FS Investments and its affiliated investment advisers. Before joining FS Investments and its affiliated investment advisers, Mr. Kelly was the chief executive officer of ORIX USA Asset Management (
ORIX
), where he led the
companys acquisition of Robeco, a $250 billion global asset management company and the largest acquisition in ORIXs
50-year
history. Mr. Kelly started his career on Wall Street at Salomon
Brothers and went on to join hedge fund pioneers Omega Advisors and Tiger Management. Mr. Kelly then helped build and lead the hedge fund firm, FrontPoint Partners, where he first served as chief investment officer and eventually
co-chief
executive officer. Mr. Kelly is a graduate of Cornell University and earned his M.B.A. at Stanford University. Mr. Kelly is a
co-founder
and board member of
the Spotlight Foundation, and serves as a trustee of the Tiger Foundation and the Stanford Business School Trust.
Additional Information and Where to
Find It
This communication relates to the Proposed Advisory Agreements for the FSIC Funds (collectively, the
Proposals
). In connection with the Proposals, each FSIC Fund intends to file relevant materials with the SEC, including a proxy statement on Schedule 14A (
Proxy Statement
). STOCKHOLDERS OF THE FSIC FUNDS ARE
URGED TO READ ALL RELEVANT DOCUMENTS FILED WITH THE SEC, INCLUDING ANY PROXY STATEMENT, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSALS. Investors and security holders will be able to obtain the documents filed with the SEC free
of charge at the SECs web site, http://www.sec.gov and from FS Investments website at www.fsinvestments.com.
Participants in the
Solicitations
The FSIC Funds and their respective directors, trustees, executive officers and certain other members of management and
employees, including employees of FS Investments, KKR Credit and their respective affiliates, may be deemed to be participants in the solicitation of proxies from the stockholders of the FSIC Funds in
connection with the Proposals. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of the FSIC Funds stockholders in
connection with the Proposals will be contained in the Proxy Statements when such documents become available. These documents may be obtained free of charge from the sources indicated above.
Cautionary Statement Concerning Forward-Looking Statements
This report contains statements which constitute forward-looking statements as that term is defined in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, including statements with regard to future events or the future performance or
operations of the Company, FB Income Advisor, GDFM, FS Investments, KKR & Co., KKR Credit, CCT, CCT II and other BDCs sponsored by FS Investments. Words such as anticipates, believes, expects,
exploring, intends, projects, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in
predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. Factors that could cause actual results to differ materially include changes in the
economy, risks associated with possible disruption of the Companys operations or the economy generally due to terrorism or natural disasters, future changes in laws or regulations and conditions in the Companys operating area, the
failure of the Companys stockholders to approve the Proposals, the failure or inability to obtain the Exemptive Relief from the SEC and the failure to consummate the transactions contemplated by the definitive agreement entered into among FS
Investments, certain affiliates of FS Investments and KKR Credit. Some of these factors are enumerated in the filings the relevant entities make with the SEC and will also be contained in the Proxy Statements when such documents become available.
The inclusion of forward-looking statements should not be regarded as a representation that any plans, estimates or expectations will be achieved. Any forward-looking statements speak only as of the date of this report. Except as required by the
federal securities laws, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on any
forward-looking statements.