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 June 30, 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 Companys accounts and the accounts of its wholly-owned
subsidiaries as of June 30, 2017. All significant intercompany transactions have been eliminated in consolidation. Certain of the Companys consolidated subsidiaries are subject to U.S. federal and state income taxes.
The Companys 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 Companys target companies as primary
market or directly originated investments. In connection with the Companys 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 Companys target companies, generally in conjunction with one of the Companys debt investments, including through the restructuring of such investments, or through a
co-investment
with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of the Companys 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 Companys investment adviser, FB Income Advisor, LLC, or FB Advisor, will seek to tailor the Companys 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 Companys 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 Companys annual report on Form
10-K
for the year ended December 31, 2016. Operating results
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)
for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The December 31, 2016
consolidated balance sheet and consolidated schedule of investments are derived from the Companys 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 ServicesInvestment 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 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, 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 Companys 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 Companys
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 Companys 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 Companys
pre-incentive
fee net investment income for
such quarter exceeds the hurdle rate of 1.875%. Once the Companys
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 Companys
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 Companys
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 Companys
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 Companys
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 and six months ended June 30, 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 and six months ended June 30, 2017. These reclassifications had no material impact on the Companys consolidated financial position, results of
operations or cash flows as previously reported.
Revenue Recognition:
In May 2014, the FASB issued ASU No. 2014-09,
Revenue
from Contracts with Customers
, which provides for revenue recognition based on the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. When it becomes effective, the new revenue
recognition guidance in ASU No. 2014-09 will replace most revenue recognition guidance under existing GAAP. In 2016, the FASB issued additional guidance that clarified, amended and technically corrected prior revenue recognition guidance. The new
revenue recognition guidance applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, excluding, among other things, financial instruments as well as certain other contractual rights
and obligations. For public entities, the new standards are effective during the interim and annual periods beginning after December 15, 2017, with early adoption permitted. The standards permit the use of either the retrospective or cumulative
effect transition method. The Company is currently evaluating the applicability of the new revenue recognition guidance to the Companys revenue recognition policies and assessing the impact of this guidance on the Companys consolidated
financial statements.
29
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Companys common stock during the six months ended June 30, 2017 and
2016:
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|
|
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|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Reinvestment of Distributions
|
|
|
1,089,653
|
|
|
$
|
10,584
|
|
|
|
641,574
|
|
|
$
|
5,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds from Share Transactions
|
|
|
1,089,653
|
|
|
$
|
10,584
|
|
|
|
641,574
|
|
|
$
|
5,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2017, the Company issued 1,089,653 shares of common stock pursuant
to its distribution reinvestment plan, or DRP, for gross proceeds of $10,584 at an average price per share of $9.71. During the six months ended June 30, 2016, the Company issued 641,574 shares of common stock pursuant to its DRP for gross
proceeds of $5,665 at an average price per share of $8.83 and the administrator for the Companys 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
Companys DRP and distributed such shares to participants in the Companys DRP. During the period from July 1, 2017 to August 8, 2017, the Company issued an additional 572,406 shares of common stock pursuant to its DRP for gross
proceeds of $5,323 at an average price per share of $9.30. 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 Companys gross assets (gross assets equal the total assets of the Company as set forth on the Companys consolidated balance sheets) and an incentive fee based on the Companys 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 Companys
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 Companys 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 Companys
pre-incentive
fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Companys
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 Companys
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
Companys
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
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)
quarter will be limited to the lesser of (i) 20.0% of the amount by which the Companys
pre-incentive
fee net investment income for such calendar
quarter exceeds the applicable quarterly hurdle rate, subject to the
catch-up
provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the
then-current and eleven preceding calendar quarters
minus
(y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the cumulative net increase in net assets
resulting from operations is the sum of
pre-incentive
fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the
then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the
applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate.
The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of
the end of each calendar year (or upon termination of the investment advisory agreement). This fee equals 20.0% of the Companys incentive fee capital gains, which equal 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 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 Companys administration and operations, including FB Advisors 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 Companys 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 Companys 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 Companys 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 Companys board of directors compares the total amount paid to FB Advisor for such services as a percentage of the Companys net assets to the same ratio as reported by other
comparable BDCs.
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)
The following table describes the fees and expenses accrued under the investment advisory
agreement and the administration agreement, as applicable, during the three and six months ended June 30, 2017 and 2016:
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Related Party
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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Source Agreement
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Description
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2017
|
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2016
|
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2017
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2016
|
|
FB Advisor
|
|
Investment Advisory Agreement
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|
Base Management Fee
(1)
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|
$
|
18,367
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|
|
$
|
17,574
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|
|
$
|
36,734
|
|
|
$
|
35,386
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|
FB Advisor
|
|
Investment Advisory Agreement
|
|
Subordinated Incentive Fee on Income
(2)
|
|
$
|
11,617
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|
|
$
|
14,210
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|
|
$
|
24,764
|
|
|
$
|
26,695
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FB Advisor
|
|
Administration Agreement
|
|
Administrative Services Expenses
(3)
|
|
$
|
742
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|
|
$
|
900
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$
|
1,476
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$
|
2,096
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(1)
|
During the six months ended June 30, 2017 and 2016, $36,389 and $36,227, respectively, in base management fees were paid to FB Advisor. As of June 30, 2017, $18,367 in base management fees were payable to FB
Advisor.
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(2)
|
During the six months ended June 30, 2017 and 2016, $26,032 and $25,859, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of June 30, 2017, a subordinated incentive fee on
income of $11,617 was payable to FB Advisor.
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(3)
|
During the six months ended June 30, 2017 and 2016, $1,334 and $1,944, 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 $1,433 and $2,144, respectively, in administrative services expenses to FB Advisor during the six months ended June 30, 2017 and 2016.
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Potential Conflicts of Interest
FB Advisors 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 Companys 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, see the Companys 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,
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)
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 Companys
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
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 Companys 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 Companys use of the licensed marks or if the Company attempts to assign or sublicense the trademark license agreement or any of the Companys 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 six months ended June 30, 2017 and 2016:
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Distribution
|
|
For the Three Months Ended
|
|
Per Share
|
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|
Amount
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
$
|
0.2228
|
|
|
$
|
54,093
|
|
June 30, 2016
|
|
$
|
0.2228
|
|
|
$
|
54,238
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
$
|
0.2228
|
|
|
$
|
54,485
|
|
June 30, 2017
|
|
$
|
0.2228
|
|
|
$
|
54,607
|
|
On August 2, 2017, the Companys board of directors declared a regular quarterly cash distribution
of $0.22275 per share, which will be paid on or about October 3, 2017 to stockholders of record as of the close of
33
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
business on September 20, 2017. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Companys
board of directors.
Pursuant to the Companys DRP, the Company will reinvest all cash dividends or distributions declared by the
Companys board of directors on behalf of stockholders who do not elect to receive their distributions in cash. As a result, if the Companys 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 Companys common stock.
With
respect to each distribution pursuant to the DRP, the Company reserves the right to either issue new shares of common stock or purchase shares of common stock in the open market in connection with implementation of the DRP. Unless the Company, in
its sole discretion, otherwise directs the plan administrator, (A) if the per share market price (as defined in the DRP) is equal to or greater than the estimated net asset value per share (rounded up to the nearest whole cent) of the
Companys 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 Companys 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 Companys 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 Companys common stock. The stockholders 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 stockholders 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 Companys 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 Companys 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
stockholders investment rather than a return of earnings
34
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
or gains derived from the Companys 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 Companys stockholders. There can be no assurance that the Company will be
able to pay distributions at a specific rate or at all.
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 six months ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Source of Distribution
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Distribution
Amount
|
|
|
Percentage
|
|
Offering proceeds
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
(1)
|
|
|
109,092
|
|
|
|
100
|
%
|
|
|
108,331
|
|
|
|
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
|
|
$
|
109,092
|
|
|
|
100
|
%
|
|
$
|
108,331
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the six months ended June 30, 2017 and 2016, 89.7% and 90.7%, respectively, of the Companys gross investment income was attributable to cash income earned, 1.3% and 2.1%, respectively, was attributable
to
non-cash
accretion of discount and 9.0% and 7.2%, respectively, was attributable to PIK interest.
|
The Companys net investment income on a tax basis for the six months ended June 30, 2017 and 2016 was $100,805 and $104,372,
respectively. As of June 30, 2017 and December 31, 2016, the Company had $145,303 and $153,590 of undistributed net investment income, respectively, and $169,245 and $73,184, respectively, of accumulated capital losses on a tax basis.
The difference between the Companys GAAP-basis net investment income and its
tax-basis
net
investment income is primarily due to the reclassification of unamortized original issue discount and prepayment fees recognized upon prepayment of loans from income for GAAP purposes to realized gains or deferred to future periods for tax purposes,
the impact of consolidating certain subsidiaries for purposes of computing GAAP-basis net investment income but not for purposes of computing
tax-basis
net investment income and income recognized for tax
purposes on certain transactions but not recognized for GAAP purposes.
35
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The following table sets forth a reconciliation between GAAP-basis net investment income and
tax-basis
net investment income during the six months ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
GAAP-basis net investment income
|
|
$
|
99,050
|
|
|
$
|
106,778
|
|
Income subject to tax not recorded for GAAP
|
|
|
(163
|
)
|
|
|
|
|
GAAP versus
tax-basis
impact of consolidation of certain
subsidiaries
|
|
|
5,856
|
|
|
|
|
|
Reclassification or deferral of unamortized original issue discount and prepayment fees
|
|
|
(4,100
|
)
|
|
|
(7,770
|
)
|
Other miscellaneous differences
|
|
|
162
|
|
|
|
5,364
|
|
|
|
|
|
|
|
|
|
|
Tax-basis
net investment income
|
|
$
|
100,805
|
|
|
$
|
104,372
|
|
|
|
|
|
|
|
|
|
|
The determination of the tax attributes of the Companys distributions is made annually as of the end of
the Companys fiscal year based upon the Companys 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 Companys distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form
1099-DIV.
As of June 30, 2017 and December 31, 2016, the components of accumulated earnings on a tax basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
(Unaudited)
|
|
|
December 31,
2016
|
|
Distributable ordinary income
|
|
$
|
145,303
|
|
|
$
|
153,590
|
|
Distributable realized gains (accumulated capital losses)
(1)
|
|
|
(169,245
|
)
|
|
|
(73,184
|
)
|
Other temporary differences
|
|
|
(278
|
)
|
|
|
(300
|
)
|
Net unrealized appreciation (depreciation) on investments and secured borrowing and gain/loss on
foreign currency
(2)
|
|
|
38,912
|
|
|
|
(44,013
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,692
|
|
|
$
|
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 June 30, 2017, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $31,079 and $138,166, respectively.
|
(2)
|
As of June 30, 2017 and December 31, 2016, the gross unrealized appreciation on the Companys investments and secured borrowing and gain on foreign currency was $205,857 and $226,121, respectively. As of
June 30, 2017 and December 31, 2016, the gross unrealized depreciation on the Companys investments and secured borrowing and loss on foreign currency was $166,945 and $270,134, respectively.
|
The aggregate cost of the Companys investments for U.S. federal income tax purposes totaled $3,866,594 and $3,780,294 as of
June 30, 2017 and December 31, 2016, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $33,183 and $(53,478) as of June 30, 2017 and December 31, 2016, respectively.
36
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
As of June 30, 2017, the Company had a deferred tax liability of $16,800 resulting from
unrealized appreciation on investments held by the Companys wholly-owned taxable subsidiaries and a deferred tax asset of $22,969 resulting from net operating losses of the Companys wholly-owned taxable subsidiaries. As of June 30,
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 $6,169. For the six months ended
June 30, 2017, the Company did not record a provision for taxes related to wholly-owned taxable subsidiaries.
Note 6. Investment Portfolio
The following table summarizes the composition of the Companys investment portfolio at cost and fair value as of June 30,
2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
(Unaudited)
|
|
|
December 31, 2016
|
|
|
|
Amortized
Cost
(1)
|
|
|
Fair Value
|
|
|
Percentage
of Portfolio
|
|
|
Amortized
Cost
(1)
|
|
|
Fair Value
|
|
|
Percentage
of Portfolio
|
|
Senior Secured LoansFirst Lien
|
|
$
|
2,325,167
|
|
|
$
|
2,328,130
|
|
|
|
60
|
%
|
|
$
|
1,992,159
|
|
|
$
|
1,935,441
|
|
|
|
52
|
%
|
Senior Secured LoansSecond Lien
|
|
|
295,013
|
|
|
|
270,604
|
|
|
|
7
|
%
|
|
|
619,892
|
|
|
|
599,155
|
|
|
|
16
|
%
|
Senior Secured Bonds
|
|
|
167,559
|
|
|
|
170,314
|
|
|
|
4
|
%
|
|
|
205,657
|
|
|
|
159,470
|
|
|
|
4
|
%
|
Subordinated Debt
|
|
|
579,488
|
|
|
|
567,802
|
|
|
|
15
|
%
|
|
|
498,080
|
|
|
|
454,045
|
|
|
|
12
|
%
|
Collateralized Securities
|
|
|
49,191
|
|
|
|
57,967
|
|
|
|
1
|
%
|
|
|
59,225
|
|
|
|
72,058
|
|
|
|
2
|
%
|
Equity/Other
|
|
|
398,978
|
|
|
|
504,960
|
|
|
|
13
|
%
|
|
|
368,927
|
|
|
|
506,647
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,815,396
|
|
|
$
|
3,899,777
|
|
|
|
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.
|
In general, under the 1940 Act, the Company would be presumed to control a portfolio company if it owned more than 25% of its
voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an affiliated person of a portfolio company if it owned 5% or more of its voting securities.
As of June 30, 2017, the Company held investments in one portfolio company of which it is deemed to control. As of
June 30, 2017, the Company held investments in six portfolio companies of which it is deemed to be an affiliated person but is not deemed to control. For additional information with respect to such portfolio companies,
see footnotes (s) and (t) to the unaudited consolidated schedule of investments as of June 30, 2017 in this quarterly report on Form
10-Q.
As of December 31, 2016, the Company held investments in one portfolio company of which it is deemed to control. As of
December 31, 2016, the Company held investments in three portfolio companies of which it is deemed to be an affiliated person but is not deemed to control. For additional information with respect to such portfolio
companies, see footnotes (t) and (u) to the consolidated schedule of investments as of December 31, 2016 in this quarterly report on Form
10-Q.
37
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
The Companys investment portfolio may contain loans and other unfunded arrangements
that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the
underlying agreements. As of June 30, 2017, the Company had twenty unfunded debt investments with aggregate unfunded commitments of $166,818, one unfunded commitment to purchase up to $295 in shares of preferred stock of Altus Power America
Holdings, LLC and one unfunded commitment to purchase up to $16 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 Companys unfunded debt investments, see the Companys unaudited consolidated schedule of investments as of June 30, 2017 and the Companys 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 June 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
(Unaudited)
|
|
|
December 31, 2016
|
|
Industry Classification
|
|
Fair
Value
|
|
|
Percentage of
Portfolio
|
|
|
Fair
Value
|
|
|
Percentage of
Portfolio
|
|
Automobiles & Components
|
|
$
|
11,094
|
|
|
|
0
|
%
|
|
$
|
27,525
|
|
|
|
1
|
%
|
Capital Goods
|
|
|
1,026,606
|
|
|
|
26
|
%
|
|
|
708,946
|
|
|
|
19
|
%
|
Commercial & Professional Services
|
|
|
549,550
|
|
|
|
14
|
%
|
|
|
514,682
|
|
|
|
14
|
%
|
Consumer Durables & Apparel
|
|
|
177,297
|
|
|
|
5
|
%
|
|
|
198,752
|
|
|
|
5
|
%
|
Consumer Services
|
|
|
292,387
|
|
|
|
8
|
%
|
|
|
343,211
|
|
|
|
9
|
%
|
Diversified Financials
|
|
|
206,803
|
|
|
|
5
|
%
|
|
|
184,355
|
|
|
|
5
|
%
|
Energy
|
|
|
266,764
|
|
|
|
7
|
%
|
|
|
432,047
|
|
|
|
12
|
%
|
Health Care Equipment & Services
|
|
|
171,239
|
|
|
|
4
|
%
|
|
|
199,064
|
|
|
|
5
|
%
|
Materials
|
|
|
344,672
|
|
|
|
9
|
%
|
|
|
263,849
|
|
|
|
7
|
%
|
Media
|
|
|
123,085
|
|
|
|
3
|
%
|
|
|
113,455
|
|
|
|
3
|
%
|
Retailing
|
|
|
137,738
|
|
|
|
4
|
%
|
|
|
110,262
|
|
|
|
3
|
%
|
Semiconductors & Semiconductor Equipment
|
|
|
5,211
|
|
|
|
0
|
%
|
|
|
5,328
|
|
|
|
0
|
%
|
Software & Services
|
|
|
298,302
|
|
|
|
8
|
%
|
|
|
265,501
|
|
|
|
7
|
%
|
Technology Hardware & Equipment
|
|
|
36,000
|
|
|
|
1
|
%
|
|
|
108,500
|
|
|
|
3
|
%
|
Telecommunication Services
|
|
|
161,526
|
|
|
|
4
|
%
|
|
|
161,544
|
|
|
|
4
|
%
|
Transportation
|
|
|
91,503
|
|
|
|
2
|
%
|
|
|
89,795
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,899,777
|
|
|
|
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
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)
to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs
that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market
participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current
accounting guidance:
Level
1
: Inputs that are quoted prices (unadjusted) in active markets for identical assets
or liabilities.
Level
2
: Inputs that are quoted prices for similar assets or liabilities in active markets.
Level
3
: Inputs that are unobservable for an asset or liability.
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the
fair value measurement.
As of June 30, 2017 and December 31, 2016, the Companys investments were categorized as follows
in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
Valuation Inputs
|
|
June 30, 2017
(Unaudited)
|
|
|
December 31,
2016
|
|
Level 1Price quotations in active markets
|
|
$
|
8,645
|
|
|
$
|
6,326
|
|
Level 2Significant other observable inputs
|
|
|
|
|
|
|
|
|
Level 3Significant unobservable inputs
|
|
|
3,891,132
|
|
|
|
3,720,490
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,899,777
|
|
|
$
|
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 June 30, 2017 was valued using Level 3 inputs under the fair value hierarchy. The
Companys 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 June 30, 2017 and December 31, 2016, the Companys secured borrowing was categorized as
follows in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
Valuation Inputs
|
|
June 30, 2017
(Unaudited)
|
|
|
December 31,
2016
|
|
Level 1Price quotations in active markets
|
|
$
|
|
|
|
$
|
|
|
Level 2Significant other observable inputs
|
|
|
|
|
|
|
|
|
Level 3Significant unobservable inputs
|
|
|
2,893
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,893
|
|
|
$
|
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 Companys investments as of June 30, 2017 consisted primarily of debt
investments that were acquired directly from the issuer. Sixty-three senior secured loan investments, six senior secured bond investments and eighteen 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 borrowers 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 Companys 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 June 30, 2017. One senior secured loan investment, which was newly issued
and purchased near June 30, 2017, was valued at cost as the Companys 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 Companys 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 borrowers 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 Companys 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 Companys 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 Companys 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 Companys board of directors otherwise determines that the use of such other
methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firms against the actual prices at which the Company purchases and sells its investments.
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)
The valuation committee of the Companys 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 Companys valuation policy.
The following is a reconciliation for the six months
ended June 30, 2017 and 2016 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
|
|
Senior Secured
LoansFirst
Lien
|
|
|
Senior Secured
LoansSecond
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)
|
|
|
1,002
|
|
|
|
2,574
|
|
|
|
312
|
|
|
|
829
|
|
|
|
4
|
|
|
|
1
|
|
|
|
4,722
|
|
Net realized gain (loss)
|
|
|
(53,350
|
)
|
|
|
201
|
|
|
|
(47,058
|
)
|
|
|
(15,213
|
)
|
|
|
(379
|
)
|
|
|
631
|
|
|
|
(115,168
|
)
|
Net change in unrealized appreciation (depreciation)
|
|
|
59,681
|
|
|
|
(3,672
|
)
|
|
|
48,942
|
|
|
|
32,349
|
|
|
|
(4,057
|
)
|
|
|
(29,315
|
)
|
|
|
103,928
|
|
Purchases
|
|
|
574,566
|
|
|
|
58,786
|
|
|
|
39,252
|
|
|
|
139,139
|
|
|
|
15
|
|
|
|
21,871
|
|
|
|
833,629
|
|
Paid-in-kind
interest
|
|
|
629
|
|
|
|
1,672
|
|
|
|
11
|
|
|
|
13,023
|
|
|
|
|
|
|
|
3,073
|
|
|
|
18,408
|
|
Sales and repayments
|
|
|
(189,839
|
)
|
|
|
(388,112
|
)
|
|
|
(30,615
|
)
|
|
|
(56,370
|
)
|
|
|
(9,674
|
)
|
|
|
(267
|
)
|
|
|
(674,877
|
)
|
Net transfers in or out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
2,328,130
|
|
|
$
|
270,604
|
|
|
$
|
170,314
|
|
|
$
|
567,802
|
|
|
$
|
57,967
|
|
|
$
|
496,315
|
|
|
$
|
3,891,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
10,863
|
|
|
$
|
(3,511
|
)
|
|
$
|
(628
|
)
|
|
$
|
14,287
|
|
|
$
|
(3,259
|
)
|
|
$
|
(33,719
|
)
|
|
$
|
(15,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
|
|
Senior Secured
LoansFirst
Lien
|
|
|
Senior Secured
LoansSecond
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)
|
|
|
1,363
|
|
|
|
715
|
|
|
|
2,091
|
|
|
|
896
|
|
|
|
17
|
|
|
|
54
|
|
|
|
5,136
|
|
Net realized gain (loss)
|
|
|
10,385
|
|
|
|
219
|
|
|
|
(41,179
|
)
|
|
|
(637
|
)
|
|
|
|
|
|
|
9,785
|
|
|
|
(21,427
|
)
|
Net change in unrealized appreciation (depreciation)
|
|
|
31,454
|
|
|
|
5,645
|
|
|
|
4,857
|
|
|
|
(2,317
|
)
|
|
|
4,725
|
|
|
|
(1,969
|
)
|
|
|
42,395
|
|
Purchases
|
|
|
289,650
|
|
|
|
17,941
|
|
|
|
8,060
|
|
|
|
30,700
|
|
|
|
4,551
|
|
|
|
94,517
|
|
|
|
445,419
|
|
Paid-in-kind
interest
|
|
|
648
|
|
|
|
3,742
|
|
|
|
|
|
|
|
9,784
|
|
|
|
|
|
|
|
1,279
|
|
|
|
15,453
|
|
Sales and repayments
|
|
|
(418,152
|
)
|
|
|
(41,305
|
)
|
|
|
(34,768
|
)
|
|
|
(58,653
|
)
|
|
|
(6,554
|
)
|
|
|
(22,735
|
)
|
|
|
(582,167
|
)
|
Net transfers in or out of
Level 3
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,412
|
)
|
|
|
(1,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
2,089,177
|
|
|
$
|
611,771
|
|
|
$
|
179,815
|
|
|
$
|
418,187
|
|
|
$
|
87,746
|
|
|
$
|
545,288
|
|
|
$
|
3,931,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
32,338
|
|
|
$
|
5,539
|
|
|
$
|
(24,495
|
)
|
|
$
|
1,908
|
|
|
$
|
4,725
|
|
|
$
|
11,058
|
|
|
$
|
31,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
There was one transfer of an investment from Level 3 to Level 1 during the six months ended June 30, 2016. It is the Companys policy to recognize transfers between levels at the beginning of the
reporting period.
|
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)
The following is a reconciliation for the six months ended June 30, 2017 of a secured
borrowing for which significant unobservable inputs (Level 3) were used in determining market value:
|
|
|
|
|
|
|
For the Six Months Ended
June 30, 2017
|
|
|
|
Secured Borrowing
|
|
Fair value at beginning of period
|
|
$
|
(2,880
|
)
|
Amortization of premium (accretion of discount)
|
|
|
(3
|
)
|
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
|
|
$
|
(2,893
|
)
|
|
|
|
|
|
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 June 30, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value at
June 30, 2017
(Unaudited)
|
|
|
Valuation
Technique
(1)
|
|
Unobservable
Input
|
|
Range
|
|
Weighted
Average
|
Senior Secured LoansFirst Lien
|
|
$
|
2,158,038
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
5.8% - 16.8%
|
|
9.7%
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
7.5x - 8.0x
|
|
7.8x
|
|
|
|
20,576
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
138,087
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
4.0% - 101.6%
|
|
100.2%
|
|
|
|
11,429
|
|
|
Cost
|
|
Cost
|
|
100.0% - 100.0%
|
|
100.0%
|
Senior Secured LoansSecond Lien
|
|
|
100,726
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
8.3% - 15.9%
|
|
11.0%
|
|
|
|
30,183
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
139,695
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
3.3% - 101.6%
|
|
93.6%
|
Senior Secured Bonds
|
|
|
119,138
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
9.3% - 12.3%
|
|
9.6%
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
4.8x - 7.3x
|
|
7.0x
|
|
|
|
|
|
|
|
|
Production Multiples (Mboe/d)
|
|
$36,000.0 - $38,500.0
|
|
$37,250.0
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Mmboe)
|
|
$10.0 - $11.0
|
|
$10.5
|
|
|
|
|
|
|
|
|
PV - 10 Multiples (x)
|
|
0.7x - 0.8x
|
|
0.7x
|
|
|
|
51,176
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
74.3% - 107.6%
|
|
101.2%
|
Subordinated Debt
|
|
|
424,975
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
7.8% - 20.0%
|
|
14.7%
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
6.0x - 11.3x
|
|
8.8x
|
|
|
|
142,827
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
52.9% - 107.5%
|
|
97.7%
|
Collateralized Securities
|
|
|
57,967
|
|
|
Market Quotes
|
|
Indicative Dealer Quotes
|
|
7.7% - 99.6%
|
|
69.2%
|
Equity/Other
|
|
|
411,449
|
|
|
Market Comparables
|
|
Market Yield (%)
|
|
13.8% - 14.3%
|
|
14.0%
|
|
|
|
|
|
|
|
|
EBITDA Multiples (x)
|
|
1.9x - 15.3x
|
|
8.0x
|
|
|
|
|
|
|
|
|
Production Multiples (Mboe/d)
|
|
$36,000.0 - $40,000.0
|
|
$38,714.2
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Mmboe)
|
|
$10.0 - $11.0
|
|
$10.3
|
|
|
|
|
|
|
|
|
Production Multiples (MMcfe/d)
|
|
$6,500.0 - $7,500.0
|
|
$7,000.0
|
|
|
|
|
|
|
|
|
Proved Reserves Multiples (Bcfe)
|
|
$1.6 - $1.8
|
|
$1.7
|
|
|
|
|
|
|
|
|
Capacity Multiple ($/kW)
|
|
$2,750.0 - $3,250.0
|
|
$3,000.0
|
|
|
|
|
|
|
|
|
PV - 10 Multiples (x)
|
|
0.7x - 3.1x
|
|
2.7x
|
|
|
|
|
|
|
Discounted Cash Flow
|
|
Discount Rate (%)
|
|
22.8% - 24.8%
|
|
23.8%
|
|
|
|
|
|
|
Option Valuation Model
|
|
Volatility (%)
|
|
30.0% - 41.0%
|
|
37.3%
|
|
|
|
84,866
|
|
|
Other
(2)
|
|
Other
(2)
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,891,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Borrowing
|
|
$
|
(2,893
|
)
|
|
Market Comparables
|
|
Market Yield (%)
|
|
(5.9)% - (6.9)%
|
|
(6.4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
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)
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value at
December 31, 2016
|
|
|
Valuation
Technique
(1)
|
|
Unobservable
Input
|
|
Range
|
|
Weighted
Average
|
Senior Secured LoansFirst 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 LoansSecond 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
|
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)
|
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 or other various factors.
|
Note 8.
Financing Arrangements
The following tables present summary information with respect to the Companys outstanding financing
arrangements as of June 30, 2017 and December 31, 2016. For additional information regarding these financing arrangements, see the notes to the Companys 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 June 30, 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%
|
|
$
|
59,914
|
(1)
|
|
$
|
267,586
|
|
|
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 41,984 has been converted to U.S. dollars at an exchange rate of 1.00 to $1.14 as of June 30, 2017 to reflect total
amount outstanding in U.S. dollars.
|
The Companys average borrowings and weighted average interest rate, including the
effect of
non-usage
fees, for the six months ended June 30, 2017 were $1,776,261 and 4.08%, respectively. As of June 30, 2017, the Companys weighted average effective interest rate on
borrowings, including the effect of
non-usage
fees, was 4.18%.
45
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of 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 Companys 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 Companys 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 June 30, 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 June 30, 2017, $1,462 of such deferred financing costs had yet to be amortized to interest expense.
46
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three and six months ended June 30, 2017 and 2016, the components of total
interest expense for the Hamilton Street credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct interest expense
|
|
$
|
1,397
|
|
|
|
|
|
|
$
|
2,779
|
|
|
|
|
|
Non-usage
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
81
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
1,478
|
|
|
|
|
|
|
$
|
2,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid for interest expense
(1)
|
|
$
|
2,319
|
|
|
|
|
|
Average borrowings under the facility
|
|
$
|
150,000
|
|
|
|
|
|
Effective interest rate on borrowings (including the effect of
non-usage
fees)
|
|
|
3.68
|
%
|
|
|
|
|
Weighted average interest rate (including the effect of
non-usage
fees)
(2)
|
|
|
3.68
|
%
|
|
|
|
|
(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 Companys obligations under the ING credit facility are guaranteed by all of the Companys subsidiaries, other than its special-purpose financing subsidiaries. The Companys 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
47
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
to March 16, 2020 and the final maturity date to March 16, 2021, (iii) increased the size of the accordion provision to permit increases to the lenders aggregate commitments under
the ING credit facility up to $600,000 and (iv) decreased the Applicable Margin (as defined therein) to 1.25% with respect to any ABR Loan (as defined therein) and 2.25% with respect to any Eurocurrency Loan (as defined therein).
As of June 30, 2017 and December 31, 2016, $59,914 and $44,932, respectively, was outstanding under the ING credit facility, which
includes borrowings in Euro in an aggregate amount of 41,984 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 June 30, 2017, $2,502 of such
deferred financing costs had yet to be amortized to interest expense.
For the three and six months ended June 30, 2017 and 2016, the
components of total interest expense for the ING credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct interest expense
|
|
$
|
754
|
|
|
$
|
411
|
|
|
$
|
1,777
|
|
|
$
|
1,234
|
|
Non-usage
fees
|
|
|
524
|
|
|
|
601
|
|
|
|
776
|
|
|
|
838
|
|
Amortization of deferred financing costs
|
|
|
178
|
|
|
|
282
|
|
|
|
486
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
1,456
|
|
|
$
|
1,294
|
|
|
$
|
3,039
|
|
|
$
|
2,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid for interest expense
(1)
|
|
$
|
2,080
|
|
|
$
|
2,052
|
|
Average borrowings under the facility
|
|
$
|
118,404
|
|
|
$
|
88,264
|
|
Effective interest rate on borrowings (including the effect of
non-usage
fees)
|
|
|
7.02
|
%
|
|
|
6.74
|
%
|
Weighted average interest rate (including the effect of
non-usage
fees)
(2)
|
|
|
4.29
|
%
|
|
|
4.64
|
%
|
(1)
|
Interest under the ING credit facility is paid at the end of each interest period (but no less frequently than quarterly) in arrears for Eurocurrency Loans and quarterly in arrears for ABL Loans.
|
(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
48
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
amended the financing arrangement on April 28, 2016 to, among other things, reduce the amount of outstanding available debt financing from $725,000 to $650,000. On November 1, 2016, in
connection with the entrance into the Locust Street credit facility (as defined below), (i) the Class A Notes issued by Locust Street to Race Street were redeemed, (ii) the amended and restated global master repurchase agreement
between Locust Street and JPM was terminated and (iii) the JPM Facility was prepaid and terminated.
For the three and six months
ended June 30, 2016, the components of total interest expense for the JPM Facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2016
|
|
|
Six Months Ended
June 30, 2016
|
|
Direct interest expense
|
|
$
|
5,522
|
|
|
$
|
11,885
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
5,522
|
|
|
$
|
11,885
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2016, the cash paid for interest expense, average borrowings, effective
interest rate and weighted average interest rate for the JPM Facility were as follows:
|
|
|
|
|
|
|
Six Months Ended
June 30, 2016
|
|
Cash paid for interest expense
(1)
|
|
$
|
13,762
|
|
Average borrowings under the facility
|
|
$
|
723,352
|
|
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 June 30, 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
49
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
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 June 30, 2017, $3,744 of such deferred financing costs had yet to be amortized to interest expense.
For the three and six months ended June 30, 2017 and 2016, the components of total interest expense for the Locust Street credit facility
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct interest expense
|
|
$
|
4,071
|
|
|
|
|
|
|
$
|
7,863
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
279
|
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
4,350
|
|
|
|
|
|
|
$
|
8,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid for interest expense
(1)
|
|
$
|
6,651
|
|
|
|
|
|
Average borrowings under the facility
|
|
$
|
425,000
|
|
|
|
|
|
Effective interest rate on borrowings
|
|
|
3.68
|
%
|
|
|
|
|
Weighted average interest rate
(2)
|
|
|
3.68
|
%
|
|
|
|
|
(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 Companys 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 Companys 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 Companys 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.
50
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
In addition, on the occurrence of a change of control repurchase event, as
defined in the indenture, the Company will generally be required to make an offer to purchase the outstanding 4.000% notes at a price equal to 100% of the principal amount of such notes plus accrued and unpaid interest to the repurchase date.
The indenture contains certain covenants, including covenants requiring the Company to comply with the asset coverage requirements of
Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of the 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 June 30, 2017 and December 31, 2016, $400,000 of the 4.000% notes was outstanding. As of June 30, 2017, the fair value of
the 4.000% notes was approximately $406,203. 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 June 30, 2017, $228 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 June 30, 2017, $2,285 of such discount had yet to be amortized to interest expense.
For the
three and six months ended June 30, 2017 and 2016, the components of total interest expense for the 4.000% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct interest expense
|
|
$
|
4,000
|
|
|
$
|
3,845
|
|
|
$
|
8,000
|
|
|
$
|
7,633
|
|
Amortization of deferred financing costs and discount
|
|
|
309
|
|
|
|
307
|
|
|
|
611
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
4,309
|
|
|
$
|
4,152
|
|
|
$
|
8,611
|
|
|
$
|
8,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
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.
|
51
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
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
Companys issuance of $325,000 aggregate principal amount of its 4.250% notes due 2020, or the 4.250% notes. On December 8, 2016, the Company issued an additional $80,000 aggregate principal amount of the 4.250% notes as additional notes
under the second supplemental indenture.
The 4.250% notes will mature on January 15, 2020 and may be redeemed in whole or in part at
the Companys 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 Companys 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 June 30, 2017 and December 31, 2016, $405,000 of the 4.250% notes was outstanding. As of June 30, 2017, the fair value of
the 4.250% notes was approximately $413,841. The Company incurred costs of $1,750 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 June 30, 2017, $1,166 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 June 30, 2017, $1,695 of such discount had yet to be amortized to interest expense.
For the
three and six months ended June 30, 2017 and 2016, the components of total interest expense for the 4.250% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct interest expense
|
|
$
|
4,303
|
|
|
$
|
3,453
|
|
|
$
|
8,606
|
|
|
$
|
6,906
|
|
Amortization of deferred financing costs and discount
|
|
|
280
|
|
|
|
241
|
|
|
|
559
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
4,583
|
|
|
$
|
3,694
|
|
|
$
|
9,165
|
|
|
$
|
7,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
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 six months ended June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
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
|
%
|
(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 Companys 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 Companys 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 Companys 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 June 30, 2017 and December 31, 2016, $275,000 of the 4.750% notes was outstanding. As of June 30, 2017, the fair value of
the 4.750% notes was approximately $285,098. 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 June 30, 2017, $330 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 June 30, 2017, $2,313 of such discount had yet to be amortized to interest expense.
53
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three and six months ended June 30, 2017 and 2016, the components of total
interest expense for the 4.750% notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct interest expense
|
|
$
|
3,265
|
|
|
$
|
3,266
|
|
|
$
|
6,531
|
|
|
$
|
6,531
|
|
Amortization of deferred financing costs and discount
|
|
|
134
|
|
|
|
136
|
|
|
|
268
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
3,399
|
|
|
$
|
3,402
|
|
|
$
|
6,799
|
|
|
$
|
6,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid for interest expense
(1)
|
|
$
|
6,531
|
|
|
$
|
6,531
|
|
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 June 30, 2017 and December 31, 2016, the Company recognized a secured borrowing at fair value of $2,893 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 Companys 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 six months ended June 30, 2017, there were no new partial loan sales, fundings on revolving and delayed draw secured
borrowings or repayments on secured borrowings.
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 and six months ended June 30, 2017 and 2016, the components of total
interest expense for the secured borrowing were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct interest expense
|
|
$
|
40
|
|
|
|
|
|
|
$
|
80
|
|
|
|
|
|
Amortization of discount
|
|
|
2
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
42
|
|
|
|
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid for interest expense
(1)
|
|
$
|
80
|
|
|
|
|
|
Average secured borrowing
|
|
$
|
2,857
|
|
|
|
|
|
Effective interest rate on secured borrowing
|
|
|
5.67
|
%
|
|
|
|
|
Weighted average interest rate
(2)
|
|
|
5.57
|
%
|
|
|
|
|
(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
Companys 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 Companys 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
Companys 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 Companys 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 Companys unfunded commitments.
55
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 six months ended June 30, 2017 and the year ended
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
|
|
Year Ended
December 31,
2016
|
|
|
|
(Unaudited)
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|
|
Per Share Data:
(1)
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|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
9.41
|
|
|
$
|
9.10
|
|
Results of operations
(2)
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
0.40
|
|
|
|
0.85
|
|
Net realized and unrealized appreciation (depreciation) on investments and secured borrowing and
gain/loss on foreign currency
|
|
|
(0.06
|
)
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
0.34
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
Stockholder distributions
(3)
|
|
|
|
|
|
|
|
|
Distributions from net investment income
|
|
|
(0.45
|
)
|
|
|
(0.89
|
)
|
Distributions from net realized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from stockholder distributions
|
|
|
(0.45
|
)
|
|
|
(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
|
|
$
|
9.30
|
|
|
$
|
9.41
|
|
|
|
|
|
|
|
|
|
|
Per share market value, end of period
|
|
$
|
9.15
|
|
|
$
|
10.30
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding, end of period
|
|
|
245,153,010
|
|
|
|
244,063,357
|
|
|
|
|
|
|
|
|
|
|
Total return based on net asset
value
(5)
|
|
|
3.61
|
%
|
|
|
13.19
|
%
|
|
|
|
|
|
|
|
|
|
Total return based on market
value
(6)
|
|
|
(6.90
|
)%
|
|
|
25.91
|
%
|
|
|
|
|
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
2,280,704
|
|
|
$
|
2,297,377
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment income to average net
assets
(7)
|
|
|
8.60
|
%
|
|
|
9.32
|
%
|
|
|
|
|
|
|
|
|
|
Ratio of total operating expenses to average net assets
(7)
|
|
|
9.18
|
%
|
|
|
9.69
|
%
|
|
|
|
|
|
|
|
|
|
Portfolio turnover
(8)
|
|
|
17.56
|
%
|
|
|
29.65
|
%
|
|
|
|
|
|
|
|
|
|
Total amount of senior securities outstanding, exclusive of treasury securities
|
|
$
|
1,717,771
|
|
|
$
|
1,702,789
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per unit
(9)
|
|
|
2.33
|
|
|
|
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 Companys DRP. The issuance of common
|
56
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights (continued)
|
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 Companys DRP is an increase to the net
asset value of less than $0.01 per share during the six months ended June 30, 2017 and year ended December 31, 2016.
|
(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 Companys common stock. The historical calculation of total return based on net asset value in the table should not be considered a representation of the Companys 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 Companys 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 Companys 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 Companys 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
Companys 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 Companys common stock. The historical calculation of
total return based on market value in the table should not be considered a representation of the Companys 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 Companys 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 Companys 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. Ratios for the six months ended June 30, 2017 are annualized. Annualized ratios for the six months ended June 30, 2017
are not necessarily indicative of the ratios that may be expected for the year ending December 31, 2017. The following is a schedule of supplemental ratios for the six months ended June 30, 2017 and year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
(Unaudited)
|
|
|
Year Ended
December 31, 2016
|
|
Ratio of subordinated income incentive fees to average net assets
|
|
|
2.15
|
%
|
|
|
2.33
|
%
|
Ratio of interest expense to average net assets
|
|
|
3.39
|
%
|
|
|
3.33
|
%
|
Ratio of excise taxes to average net assets
|
|
|
|
|
|
|
0.25
|
%
|
57
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights (continued)
(8)
|
Portfolio turnover for the six months ended June 30, 2017 is not annualized.
|
(9)
|
Asset coverage per unit is the ratio of the carrying value of the Companys total consolidated assets, less liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior
securities representing indebtedness.
|
Note 11. Recent Developments
FB Advisor has agreed, effective October 1, 2017 and through September 30, 2018, to (a) waive a portion of the base management
fee to which it is entitled under the investment advisory agreement so that the fee received equals 1.50% of the average value of the Companys gross assets and (b) continue to calculate the subordinated incentive fee on income to which it
is entitled under the investment advisory agreement as if the base management fee was 1.75% of the average value of the Companys gross assets.
58