Filed pursuant to Rule 497
File No. 333-149374
GM Drives Home the Advantages of Secured Loans
| When giant U.S. automaker General Motors went into bankruptcy, many stakeholders were left in the dust. Shares of GM, which peaked above $90 in 2000, became worthless. They were completely wiped out. Their value went to $0. Holders of GM unsecured bonds — mutual funds, pension funds, hedge funds and retail investors — did not fare much better. When the federal government stepped in to bail out GM, the company’s $27 billion in unsecured bonds were exchanged for 10% of the stock of the restructured GM and warrants to purchase additional equity. These bondholders, who certainly expected that a bond in an industry powerhouse would pay their entire investment back, virtually saw a complete loss of principal. Bleak indeed.
Remarkably there was one bright spot in GM’s capital structure: secured loans. GM and Saturn secured these obligations with a first priority security interest in its equipment, fixtures, documents, general intangibles, all books and records, and their proceeds. So what happened to these loans?
During recent bankruptcy court proceedings, it was determined that all amounts outstanding under GM’s secured debt, close to $6 billion, were to be repaid in full. In other words, while equity and bondholders forfeited billions, investors in the term loan were made whole, even in the direst financial circumstances.
GM’s term loan was a senior secured loan, similar to those held in FS Investment Corporation (FSIC). The main difference is that FSIC targets private companies. Senior secured debt is highest in the pecking order to be honored should a company hit hard times and struggle to repay debt. This, coupled with the fact that loans are secured by the borrower’s assets, means that senior secured loans are the safest of all corporate investments in a downside scenario, as one can see plainly in the case of GM. For added protection, the interest rates on FSIC’s loans float with prevailing rates, protecting investors/ lenders from rising rates, which tend to devalue bonds. Finally, companies in FSIC’s portfolio undergo exhaustive analysis from the specialists at GSO/Blackstone Debt Funds Management LLC (an affiliate of the Blackstone Group L.P. and one of the largest credit investors in the world) to ensure that their businesses are healthy enough to comfortably manage their debt.
We believe GM’s case underscores the importance of seniority when one is considering investing in corporate debt.
Note: The collateral securing senior secured loans may decrease in value, lose its entire value over time or fluctuate based on the performance of the company, which may lead to a loss of principal. |
“There was one bright spot in GM’s capital structure...” |
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An investment in FS Investment Corporation is subject to significant risks and may be considered speculative. A more detailed description of the risk factors is found in the section of the prospectus entitled “Risk Factors.” You should read and understand all of these risk factors before making your decision to invest in shares of our common stock.
This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by the prospectus.
This sales and advertising literature must be read in conjunction with the prospectus in order to fully understand all of the implications and risks of the offering of securities to which it relates. A copy of the prospectus must be made available to you in connection with this offering.
Franklin Square Capital Partners is not affiliated with Franklin Resources/Franklin Templeton Investments or the Franklin Funds.
