As filed with the Securities and Exchange Commission on June 16, 2014.
Securities Act File No. 333-195863
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 1
to
Form N-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FS INVESTMENT CORPORATION
(Exact name of registrant as specified in charter)
Cira Centre
2929 Arch Street, Suite 675
Philadelphia, PA 19104
(215) 495-1150
(Address and telephone number, including area code, of principal executive offices)
Michael C. Forman
FS Investment Corporation
Cira Centre
2929 Arch Street, Suite 675
Philadelphia, PA 19104
(Name and address of agent for service)
COPIES TO:
James A. Lebovitz
Thomas J. Friedmann
Dechert LLP
Cira Centre
2929 Arch Street
Philadelphia, PA 19104
Tel: (215) 994-4000
Fax: (215) 994-2222
Approximate date of proposed public offering: From time to time after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended, other than securities offered in connection with a dividend reinvestment plan, check the following box. x
It is proposed that this filing will become effective (check appropriate box): ¨ when declared effective pursuant to section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities Being Registered |
Amount to be Registered |
Proposed Maximum Offering Price per Unit |
Proposed Maximum Aggregate Offering Price(1) |
Amount of Registration Fee(1)(2) | ||||
Common Stock, $0.001 par value per share (3) |
$ | $ | $ | |||||
Preferred Stock, $0.001 par value per share (3) |
||||||||
Warrants (3) |
||||||||
Subscription Rights (4) |
||||||||
Debt Securities (5) |
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Total |
$ | $1,500,000,000(6) | $193,200 | |||||
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(1) | Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, solely for the purpose of determining the registration fee. The proposed maximum offering price per security will be determined, from time to time, by the Registrant in connection with the sale by the Registrant of the securities registered under this registration statement. |
(2) | $128,800 was previously paid. |
(3) | Subject to Note 6 below, there is being registered hereunder an indeterminate number of shares of common stock, preferred stock or warrants as may be sold, from time to time. Warrants may represent rights to purchase common stock, preferred stock or debt securities. |
(4) | Subject to Note 6 below, there is being registered hereunder an indeterminate number of subscription rights as may be sold, from time to time, representing rights to purchase common stock. |
(5) | Subject to Note 6 below, there is being registered hereunder an indeterminate principal amount of debt securities as may be sold, from time to time. If any debt securities are issued at an original issue discount, then the offering price shall be in such greater principal amount as shall result in an aggregate price to investors not to exceed $1,500,000,000. |
(6) | In no event will the aggregate offering price of all securities issued from time to time pursuant to this registration statement exceed $1,500,000,000. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 16, 2014
PRELIMINARY PROSPECTUS
$1,500,000,000
Common Stock
Preferred Stock
Warrants
Subscription Rights
Debt Securities
We are a specialty finance company that invests primarily in the debt securities of private U.S. middle-market companies. Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation.
We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. Our investments and activities are managed by FB Income Advisor, LLC, or FB Advisor, a private investment firm that is registered as an investment adviser with the Securities and Exchange Commission, or the SEC, and is an affiliate of ours. FB Advisor has engaged GSO / Blackstone Debt Funds Management LLC, or GDFM, a registered investment adviser and a subsidiary of GSO Capital Partners LP, to act as our investment sub-adviser.
We may offer, from time to time, in one or more offerings or series, together or separately, up to $1,500,000,000 of our common stock, preferred stock, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, subscription rights or debt securities, which we refer to, collectively, as the securities. We may sell our common stock through underwriters or dealers, at-the-market to or through a market maker into an existing trading market or otherwise directly to one or more purchasers or through agents or through a combination of methods of sale. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus. In the event we offer common stock, the offering price per share of our common stock exclusive of any underwriting commissions or discounts will not be less than the net asset value per share of our common stock at the time we make the offering except (1) in connection with a rights offering to our existing stockholders, (2) with the consent of the majority of our common stockholders and approval of our board of directors or (3) under such circumstances as the SEC may permit. See Risk Factors for more information.
Our common stock is traded on the New York Stock Exchange, LLC, or the NYSE, under the ticker symbol FSIC. The last reported closing price for our common stock on June 13, 2014 was $10.34 per share. The net asset value of our common stock on March 31, 2014 (the last date prior to the date of this prospectus on which we publicly disclosed our net asset value) was $10.28 per share.
We invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as junk, have predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. They may also be difficult to value and illiquid.
Investing in our securities may be considered speculative and involves a high degree of risk, including the risk of a substantial loss of investment. See Risk Factors beginning on page 22 of this prospectus to read about the risks you should consider before buying our securities, including the risk of leverage.
This prospectus and any accompanying prospectus supplement contain important information about us that a prospective investor should know before investing in our securities. Please read this prospectus and any accompanying prospectus supplement before investing and keep them for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the SEC. This information is available free of charge by contacting us at Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104, by calling us collect at (215) 495-1150 or by visiting our website at www.fsinvestmentcorp.com. In addition, the contact information provided above may be used by you to make stockholder inquiries. The SEC also maintains a website at www.sec.gov that contains such information.
Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement.
The date of this prospectus is , 2014.
This prospectus is part of a registration statement that we have filed with the SEC using the shelf registration process. Under the shelf registration process, we may offer from time to time up to $1,500,000,000 of our common stock, preferred stock, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, subscription rights or debt securities on the terms to be determined at the time of the offering. We may sell our common stock through underwriters or dealers, at-the-market to or through a market maker, into an existing trading market or otherwise directly to one or more purchasers or through agents or through a combination of methods of sale. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The securities may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the securities that we may offer. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus, and the prospectus and prospectus supplement will together serve as the prospectus.
Any statement that we make in this prospectus will be modified or superseded by any inconsistent statement made by us in a subsequent prospectus supplement. The registration statement we filed with the SEC includes exhibits that provide more detailed descriptions of the matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC and any prospectus supplement, together with additional information described below under Available Information. In this prospectus, we use the term day to refer to a calendar day, and we use the term business day to refer to any day other than Saturday, Sunday, a legal holiday or a day on which banks in New York City are authorized or required to close, or any day that the NYSE is closed for trading.
You should rely only on the information contained in this prospectus and any accompanying prospectus supplement when considering whether to purchase any securities offered by this prospectus. We have not authorized any other person to provide you with different information from that contained in this prospectus and accompanying prospectus supplements. The information contained in this prospectus and accompanying prospectus supplements is complete and accurate only as of the date of this prospectus or such prospectus supplement. If there is a material change in our affairs, we will amend or supplement these documents only as required by law.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR |
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F-1 |
This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. To understand an offering fully, you should read the entire prospectus carefully, including the section entitled Risk Factors, before making a decision to invest in our securities.
Unless otherwise noted, the terms we, us, our, the Company and FSIC refer to FS Investment Corporation. In addition, the term FB Advisor refers to FB Income Advisor, LLC, the term GDFM refers to GSO / Blackstone Debt Funds Management LLC, a subsidiary of GSO Capital Partners LP, the term GSO refers to GSO Capital Partners LP, and the term Blackstone refers to The Blackstone Group L.P.
FS Investment Corporation
We are 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 1940 Act. As such, we are required to comply with certain regulatory requirements. See Regulation. In addition, we have elected to be treated for federal income tax purposes, and intend to qualify annually, as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.
We are managed by FB Advisor, a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, which oversees the management of our operations and is responsible for making investment decisions with respect to our portfolio. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and will make investment recommendations for approval by FB Advisor, according to guidelines set by FB Advisor. GDFM, a registered investment adviser under the Advisers Act, is a subsidiary of GSO, which oversaw approximately $66.0 billion in assets under management as of March 31, 2014. GSO is the credit platform of Blackstone.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We seek to meet our investment objectives by:
| utilizing the experience and expertise of the management teams of FB Advisor and GDFM, along with the broader resources of GSO, which include its access to the relationships and human capital of its parent, Blackstone, in sourcing, evaluating and structuring transactions; |
| employing a defensive investment approach focused on long-term credit performance and principal protection; |
| focusing primarily on debt investments in a broad array of private U.S. companies, including middle-market companies, which we define as companies with annual revenues of $50 million to $2.5 billion at the time of investment. In many market environments, we believe such a focus offers an opportunity for superior risk adjusted returns; |
| investing primarily in established, stable enterprises with positive cash flows; and |
| maintaining rigorous portfolio monitoring, in an attempt to anticipate and pre-empt negative credit events within our portfolio. |
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle-market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through
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secondary market transactions in the over-the-counter market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities.
The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security we may hold in our portfolio. The loans in which we invest may be rated by a nationally recognized statistical ratings organization, or NRSRO, and, in such case, generally will carry a rating below investment grade (rated lower than Baa3 by Moodys Investors Service, Inc., or Moodys, or lower than BBB- by Standard & Poors Corporation, or S&P). We also invest in non-rated debt securities.
As a BDC, we are subject to certain regulatory restrictions in making our 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, co-invest in transactions where price is the only negotiated point. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, 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 and any future BDCs that are advised by FB Advisor or its affiliated investment advisers, or collectively our co-investment affiliates. We believe this relief may not only enhance our ability to further our investment objectives and strategy, but may also increase favorable investment opportunities for us, in part by allowing us to participate in larger investments, together with our co-investment affiliates, than would be available to us if we had not obtained such relief. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
To seek to enhance our returns, we employ leverage as market conditions permit and at the discretion of FB Advisor, but in no event will leverage employed exceed 50% of the value of our assets, as required by the 1940 Act.
On April 16, 2014, our shares of common stock were listed on the NYSE and began trading under the ticker symbol FSIC.
Our Public Offering
In May 2012, we closed our continuous public offering of common stock to new investors. We sold 247,454,171 shares (as adjusted for stock distributions) of common stock for gross proceeds of $2.6 billion in our continuous public offering.
Portfolio Update
During the year ended December 31, 2013, we made investments in portfolio companies totaling approximately $2.6 billion. During the same period, we sold investments for proceeds of approximately $1.1 billion and received principal repayments of approximately $1.4 billion. As of December 31, 2013, our investment portfolio, with a total fair value of approximately $4.1 billion, consisted of interests in 165 portfolio companies (51% in first lien senior secured loans, 22% in second lien senior secured loans, 9% in senior secured
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bonds, 10% in subordinated debt, 4% in collateralized securities and 4% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of approximately $190.7 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 97.3% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 40.7% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage, was 10.1% based upon the amortized cost of our investments.
During the three months ended March 31, 2014, we made investments in portfolio companies totaling approximately $471.5 million. During the same period, we sold investments for proceeds of approximately $307.0 million and received principal repayments of approximately $259.1 million. As of March 31, 2014, our investment portfolio, with a total fair value of approximately $4.1 billion, consisted of interests in 148 portfolio companies (50% in first lien senior secured loans, 22% in second lien senior secured loans, 10% in senior secured bonds, 10% in subordinated debt, 3% in collateralized securities and 5% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $174.2 million. As of March 31, 2014, the investments in our portfolio were purchased at a weighted average price of 97.1% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 32.5% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 10.2% based upon the amortized cost of our investments. See Portfolio Companies for a list of the investments in our portfolio as of March 31, 2014. The portfolio yield does not represent an actual investment return to stockholders and may be higher than what stockholders will realize on an investment in our common stock because it does not reflect our expenses or any sales load that may have been paid by such stockholder.
About FB Advisor
FB Advisor is a subsidiary of our affiliate, Franklin Square Holdings, L.P., or Franklin Square Holdings, a national sponsor of alternative investment products designed for the individual investor. FB Advisor is registered as an investment adviser with the SEC under the Advisers Act and is led by substantially the same personnel that form the investment and operations team of FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC. FS Investment Advisor, LLC, FSIC II Advisor, LLC and FSIC III Advisor, LLC are registered investment advisers that manage Franklin Square Holdings other three affiliated BDCs, FS Energy and Power Fund, FS Investment Corporation II and FS Investment Corporation III, respectively. FS Global Advisor, LLC is a registered investment adviser that manages Franklin Square Holdings affiliated closed-end management investment company, FS Global Credit Opportunities Fund. See Risk FactorsRisks Related to FB Advisor and Its Affiliates and Certain Relationships and Related Party Transactions.
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In addition to managing our investments, the directors, officers and other personnel of FB Advisor also currently manage the following entities:
Name |
Entity | Investment Focus |
Gross Assets(1) |
|||||
FS Energy and Power Fund |
BDC | Primarily invests in debt and income-oriented equity securities of privately-held U.S. companies in the energy and power industry. | $ | 2,717,712,000 | ||||
FS Investment Corporation II |
BDC | Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. | $ | 3,734,428,000 | ||||
FS Investment Corporation III(2) |
BDC | Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. | | |||||
FS Global Credit Opportunities Fund(3) |
Closed-end management investment company |
Primarily invests in secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments. | $ | 63,946,000 |
(1) | As of March 31, 2014, except as otherwise noted below. |
(2) | FS Investment Corporation III commenced operations on April 2, 2014 upon meeting its minimum offering requirement of raising gross proceeds of $2.5 million in its continuous public offering from persons who were not affiliated with FS Investment Corporation III or its investment adviser, FSIC III Advisor, LLC. |
(3) | FS Global Credit Opportunities Fund commenced operations on December 12, 2013. Two funds affiliated with FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA and FS Global Credit Opportunities FundD, or together, the FSGCOF Offered Funds, which have the same investment objectives and strategies as FS Global Credit Opportunities Fund, currently offer common shares of beneficial interest to the public and invest substantially all of the net proceeds of their respective offerings in FS Global Credit Opportunities Fund. Gross assets shown as of December 31, 2013. |
Our chairman and chief executive officer, Michael C. Forman, has led FB Advisor since its inception. In 2007, he co-founded Franklin Square Holdings with the goal of delivering alternative investment solutions, advised by what Franklin Square Holdings believes to be best-in-class institutional asset managers, to individual investors nationwide. In addition to leading FB Advisor, Mr. Forman currently serves as chairman, president and chief executive officer of FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC II Advisor, LLC, FS Investment Corporation II, FSIC III Advisor, LLC, FS Investment Corporation III, FS Global Advisor, LLC, FS Global Credit Opportunities Fund and the FSGCOF Offered Funds.
FB Advisors senior management team has significant experience in private lending and private equity investing, and has developed an expertise in using all levels of a firms capital structure to produce income-generating investments, while focusing on risk management. The team also has extensive knowledge of the managerial, operational and regulatory requirements of publicly registered alternative asset entities, such as BDCs. We believe that the active and ongoing participation by Franklin Square Holdings and its affiliates in the credit markets, and the depth of experience and disciplined investment approach of FB Advisors management team, will allow FB Advisor to successfully execute our investment strategy.
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All investment decisions require the unanimous approval of FB Advisors investment committee, which is currently comprised of Mr. Forman, Gerald F. Stahlecker, our president, Zachary Klehr, our executive vice president, and Sean Coleman, our managing director. Our board of directors, including a majority of independent directors, oversees and monitors our investment performance and annually reviews the compensation we pay to FB Advisor and the compensation FB Advisor pays to GDFM to determine that the provisions of each of the investment advisory agreement and the investment sub-advisory agreement are carried out.
About GDFM
From time to time, FB Advisor may enter into sub-advisory relationships with registered investment advisers that possess skills that FB Advisor believes will aid it in achieving our investment objectives. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and makes investment recommendations for approval by FB Advisor, according to guidelines set by FB Advisor. GDFM also serves as the investment sub-adviser to FS Investment Corporation II and FS Investment Corporation III pursuant to the investment sub-advisory agreements between it and each of FSIC II Advisor, LLC and FSIC III Advisor, LLC, the investment advisers to FS Investment Corporation II and FS Investment Corporation III, respectively. Furthermore, GDFMs affiliate, GSO, serves as the investment sub-adviser to FS Energy and Power Fund and FS Global Credit Opportunities Fund pursuant to the investment sub-advisory agreements between it and each of FS Investment Advisor, LLC and FS Global Advisor, LLC, the investment advisers to FS Energy and Power Fund and FS Global Credit Opportunities Fund, respectively. GDFM is a Delaware limited liability company with principal offices located at 345 Park Avenue, New York, New York 10154.
GDFM is a wholly-owned subsidiary of GSO. GSO is the credit platform of Blackstone, a leading global alternative asset manager. As of March 31, 2014, GSO and its affiliates, excluding Blackstone, managed approximately $66.0 billion of assets across multiple strategies within the leveraged finance marketplace, including leveraged loans, high-yield bonds, distressed, mezzanine and private equity. As sub-adviser, GDFM makes recommendations to FB Advisor in a manner that is consistent with its existing investment and monitoring processes.
Blackstone is a leading global alternative asset manager and provider of financial advisory services. It is one of the largest independent managers of private capital in the world, with assets under management of approximately $271.8 billion as of March 31, 2014. Blackstones alternative asset management businesses include the management of private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation vehicles, separately managed accounts and publicly-traded closed-end mutual funds. Blackstone is a publicly traded limited partnership that has common units which trade on the NYSE under the ticker symbol BX. Information about Blackstone and its various affiliates, including certain ownership, governance and financial information, is disclosed in Blackstones periodic filings with the SEC, which can be obtained from Blackstones website at http://ir.blackstone.com or the SECs website at www.sec.gov. Information contained on Blackstones website and in Blackstones filings with the SEC are not incorporated by reference into this prospectus or any supplements to this prospectus, and you should not consider that information to be part of this prospectus or any supplements to this prospectus.
Risk Factors
An investment in our securities involves a high degree of risk and may be considered speculative. You should carefully consider the information found in Risk Factors before deciding to invest in our securities. The following are some of the risks an investment in us involves:
| Our credit ratings may not reflect all risks of an investment in our securities. |
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| We invest primarily in senior secured loans and second lien secured loans of private U.S. middle-market companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. For our senior secured and second lien secured loans, the collateral securing these investments may decrease in value or lose its entire value over time or may fluctuate based on the performance of the portfolio company, which may lead to a loss in principal. Subordinated debt investments are typically unsecured, and this may involve a heightened level of risk, including a loss of principal or the loss of the entire investment. In addition, our senior secured and second lien secured loan investments are generally callable by the issuer at any time, which may decrease our returns on such investments. Our subordinated debt investments typically have customary call protections, but such investments generally may be called by the issuer prior to their stated maturity, which may decrease our returns on such investments. |
| We invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as junk, have predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. They may also be difficult to value and illiquid. |
| We are subject to financial market risks, including risks resulting from the current low interest rate environment and changes in such interest rates, which may have a substantial negative impact on our investments. |
| Investing in middle-market companies involves a number of significant risks, any one of which could have a material adverse effect on our operating results. |
| An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies. |
| A lack of liquidity in certain of our investments may adversely affect our business. |
| A significant portion of our portfolio is recorded at fair value as determined in good faith by our board of directors and, as a result, there is uncertainty as to the value of our portfolio investments. |
| Economic activity in the United States was adversely impacted by the global financial crisis of 2008 and future recessions, downturns, disruptions or instability could have a materially adverse effect on our business. |
| Future downgrades of the U.S. credit rating and global economic uncertainty could negatively impact our business, financial condition and results of operations. |
| FB Advisor, its affiliates and GDFM face conflicts of interest as a result of compensation arrangements, time constraints and competition for investments, which they will attempt to resolve in a fair and equitable manner, but which may result in actions that are not in your best interests. |
| The potential for FB Advisor to earn incentive fees under the investment advisory agreement may create an incentive for it to enter into investments that are riskier or more speculative than would otherwise be in our best interests, and, since the base management fee is based on gross assets, FB Advisor may have an incentive to increase portfolio leverage in order to earn higher base management fees. In addition, since GDFM receives a portion of the advisory fees paid to FB Advisor, GDFM may have an incentive to recommend investments that are riskier or more speculative. |
| As a result of the annual distribution requirement to maintain our qualification as a RIC, we will likely need to continually raise cash or borrow to fund new investments. At times, these sources of funding may not be available to us on acceptable terms, if at all. |
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| The agreements governing our and our wholly-owned financing subsidiaries credit facilities contain various covenants which, if not complied with, could accelerate repayment under the applicable facility, which would materially and adversely affect our liquidity, financial condition and our ability to pay distributions to our stockholders. In addition, these credit facilities expose us to the risks of borrowing, also known as leverage, which may be considered a speculative investment technique. Leverage increases the volatility of investments by magnifying the potential for gain and loss on amounts invested, therefore increasing the risks associated with investing in our securities. |
| We have elected to be treated, and intend to qualify annually, as a RIC for federal income tax purposes. Failure to maintain our qualification as a RIC would subject us to federal income tax on all of our income, which would have a material adverse effect on our financial performance. |
See Risk Factors beginning on page 22 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our securities.
Market Opportunity
We believe that there are and will continue to be significant investment opportunities in the senior secured and second lien secured loan asset class, as well as investments in debt securities of middle-market companies.
Attractive Opportunities in Senior Secured and Second Lien Secured Loans
We believe that opportunities in senior secured and second lien secured loans are significant because of the variable rate structure of most senior secured debt issues and because of the strong defensive characteristics of this investment class. Given current market conditions, we believe that debt issues with variable interest rates offer a superior return profile to fixed-rate securities, since variable interest rate structures are generally less susceptible to declines in value experienced by fixed-rate securities in a rising interest rate environment.
Senior secured debt issues also provide strong defensive characteristics. Because these loans have priority in payment among an issuers security holders (i.e., they are due to receive payment before bondholders and equityholders), they carry the least potential risk among investments in the issuers capital structure. Further, these investments are secured by the issuers assets, which may be seized in the event of a default, if necessary. They generally also carry restrictive covenants aimed at ensuring repayment before unsecured creditors, such as most types of public bondholders, and other security holders and preserving collateral to protect against credit deterioration.
Opportunity in Middle-Market Private Companies
In addition to investing in senior secured and second lien secured loans generally, we believe that the market for lending to private companies, particularly middle-market private companies within the United States, is underserved and presents a compelling investment opportunity. We believe that the following characteristics support our belief:
Large Target Market. According to The U.S. Census Bureau, in its most recently released economic census in 2007, there were approximately 40,000 middle-market companies in the U.S. with annual revenues between $50 million and $2.5 billion, compared with approximately 1,200 companies with revenues greater than $2.5 billion. These middle-market companies represent, we believe, a significant portion of the growth segment of the U.S. economy and often require substantial capital investment to grow their businesses. Middle-market companies have generated a significant number of investment opportunities for investment programs managed by our affiliates and GDFM over the past several years, and we believe that this market segment will continue to produce significant investment opportunities for us.
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Limited Investment Competition. Despite the size of the market, we believe that regulatory changes and other factors have diminished the role of traditional financial institutions and certain other capital providers in providing financing to middle-market companies. We believe that lending to middle-market companies, which are often private, generally requires a greater dedication of the lenders time and resources compared to lending to larger companies, due in part to the smaller size of each investment and the often fragmented nature of information available from these companies. In addition, middle-market companies may require more active monitoring and participation on the lenders part. We believe that many large financial organizations, which often have relatively high cost structures, are not suited to deal with these factors and instead emphasize services and transactions to larger corporate clients with a consequent reduction in the availability of financing to middle-market companies.
Attractive Market Segment. We believe that the underserved nature of such a large segment of the market can at times create a significant opportunity for investment. In many environments, we believe that middle-market companies are more likely to offer attractive economics in terms of transaction pricing, up-front and ongoing fees, prepayment penalties and security features in the form of stricter covenants and quality collateral than loans to larger companies. In addition, as compared to larger companies, middle-market companies often have simpler capital structures and carry less leverage, thus aiding the structuring and negotiation process and allowing us greater flexibility in structuring favorable transactions. We believe that these factors will result in advantageous conditions in which to pursue our investment objectives of generating current income and, to a lesser extent, long-term capital appreciation.
Characteristics of and Risks Related to Investments in Private Companies
We invest primarily in the debt of private middle-market U.S. companies. Investments in private companies pose significantly greater risks than investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress. As a result, these companies, which may present greater credit risk than public companies, may be unable to meet the obligations under their debt securities that we hold. Second, the investments themselves may often be illiquid. The securities of many of the companies in which we invest are not publicly-traded or actively-traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. In addition, such securities may be subject to legal and other restrictions on resale. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. These investments also may be difficult to value because little public information generally exists about private companies, requiring an experienced due diligence team to analyze and value the potential portfolio company. Finally, these companies often may not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of FB Advisor and/or GDFM to obtain adequate information through their due diligence efforts to evaluate the creditworthiness of, and risks involved in, investing in these companies, and to determine the optimal time to exit an investment. These companies and their financial information will also generally not be subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and other rules and regulations that govern public companies that are designed to protect investors.
Investment Strategy
Our principal focus is to invest in senior secured and second lien secured loans of private U.S. middle-market companies, and to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in
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our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities.
When identifying prospective portfolio companies, we focus primarily on the attributes set forth below, which we believe will help us generate higher total returns with an acceptable level of risk. While these criteria provide general guidelines for our investment decisions, we caution investors that, if we believe the benefits of investing are sufficiently strong, not all of these criteria necessarily will be met by each prospective portfolio company in which we choose to invest. These attributes are:
| Leading, defensible market positions. We seek to invest in companies that have developed strong positions within their respective markets and exhibit the potential to maintain sufficient cash flows and profitability to service our debt in a range of economic environments. We seek companies that can protect their competitive advantages through scale, scope, customer loyalty, product pricing or product quality versus their competitors, thereby minimizing business risk and protecting profitability. |
| Investing in stable companies with positive cash flow. We seek to invest in established, stable companies with strong profitability and cash flows. Such companies, we believe, are well-positioned to maintain consistent cash flow to service and repay our loans and maintain growth in their businesses or market share. We do not intend to invest to any significant degree in start-up companies, turnaround situations or companies with speculative business plans. |
| Proven management teams. We focus on companies that have experienced management teams with an established track record of success. We typically prefer our portfolio companies to have proper incentives in place to align managements goals with ours. |
| Private equity sponsorship. Often, we seek to participate in transactions sponsored by what we believe to be sophisticated and seasoned private equity firms. FB Advisors management team believes that a private equity sponsors willingness to invest significant sums of equity capital into a company is an endorsement of the quality of the investment. Further, by co-investing with such experienced private equity firms which commit significant sums of equity capital ranking junior in priority of payment to our debt investments, we may benefit from the due diligence review performed by the private equity firm, in addition to our own due diligence review. Further, strong private equity sponsors with significant investments at risk have the ability and a strong incentive to contribute additional capital in difficult economic times should operational or financial issues arise which could provide additional protections for our investments. |
| Allocation among various issuers and industries. We seek to allocate our portfolio broadly among issuers and industries, thereby attempting to reduce the risk of a downturn in any one company or industry having a disproportionate adverse impact on the value of our portfolio. |
| Viable exit strategy. While we attempt to invest in securities that may be sold in a privately negotiated over-the-counter market, providing us a means by which we may exit our positions, we expect that a large portion of our portfolio may not be sold on this secondary market. For any investments that are not able to be sold within this market, we focus primarily on investing in companies whose business models and growth prospects offer attractive exit possibilities, including repayment of our investments, an initial public offering of equity securities, a merger, a sale or a recapitalization, in each case with the potential for capital gains. |
See Investment Objectives and Strategy for additional information regarding our investment strategy.
In addition, in an order dated June 4, 2013, the SEC granted exemptive relief that, subject to the satisfaction of certain conditions, expands our ability to co-invest in certain privately negotiated investment transactions with our co-investment affiliates, which we believe will enhance our ability to further our investment objectives and strategy.
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Potential Competitive Strengths
We believe that we offer our investors the following potential competitive strengths:
Global platform with seasoned investment professionals. We believe that the breadth and depth of the experience of FB Advisors senior management team, together with the wider resources of GSOs investment team, which is dedicated to sourcing, structuring, executing, monitoring and harvesting a broad range of private investments, as well as the specific expertise of GDFM, provide us with a significant competitive advantage in sourcing and analyzing attractive investment opportunities.
Long-term investment horizon. Our long-term investment horizon gives us great flexibility, which we believe allows us to maximize returns on our investments. Unlike most private equity and venture capital funds, as well as many private debt funds, we are not required to return capital to our stockholders once we exit a portfolio investment. We believe that freedom from such capital return requirements, which allows us to invest using a longer-term focus, provides us with the opportunity to increase total returns on invested capital, compared to other private company investment vehicles.
GDFM transaction sourcing capability. FB Advisor seeks to leverage GDFMs significant access to transaction flow. GDFM seeks to generate investment opportunities through syndicate and club deals (generally, investments made by a small group of investment firms) and, subject to regulatory constraints as discussed under Regulation, and the allocation policies of GDFM and its affiliates, as applicable, also through GSOs direct origination channels. These include significant contacts to participants in the credit and leveraged finance marketplace, which it can draw upon in sourcing investment opportunities for us. With respect to syndicate and club deals, GDFM has built a network of relationships with commercial and investment banks, finance companies and other investment funds as a result of the long track record of its investment professionals in the leveraged finance marketplace. With respect to GDFMs origination channel, FB Advisor seeks to leverage the global presence of GSO to generate access to a substantial amount of directly originated transactions with attractive investment characteristics. We believe that the broad network of GDFM provides a significant pipeline of investment opportunities for us. GDFM also has a significant trading platform, which, we believe, allows us access to the secondary market for investment opportunities.
Disciplined, income-oriented investment philosophy. FB Advisor and GDFM employ a defensive investment approach focused on long-term credit performance and principal protection. This investment approach involves a multi-stage selection process for each investment opportunity, as well as ongoing monitoring of each investment made, with particular emphasis on early detection of deteriorating credit conditions at portfolio companies which would result in adverse portfolio developments. This strategy is designed to maximize current income and minimize the risk of capital loss while maintaining the potential for long-term capital appreciation.
Investment expertise across all levels of the corporate capital structure. FB Advisor and GDFM believe that their broad expertise and experience investing at all levels of a companys capital structure enable us to manage risk while affording us the opportunity for significant returns on our investments. We attempt to capitalize on this expertise in an effort to produce and maintain an investment portfolio that will perform in a broad range of economic conditions.
See Investment Objectives and StrategyPotential Competitive Strengths for a more detailed description of the competitive strengths we believe we offer our investors.
Plan of Distribution
We may offer, from time to time, up to $1.5 billion of our securities, on terms to be determined at the time of each such offering and set forth in a supplement to this prospectus.
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Securities may be offered at prices and on terms described in one or more supplements to this prospectus. We may sell our common stock through underwriters or dealers, at-the-market to or through a market maker, into an existing trading market or otherwise directly to one or more purchasers or through agents or through a combination of methods of sale. The supplement to this prospectus relating to the offering will identify any agents or underwriters involved in the sale of our securities, and will set forth any applicable purchase price, fee and commission or discount arrangement or the basis upon which such amount may be calculated. In compliance with the guidelines of the Financial Industry Regulatory Authority, Inc., or FINRA, the compensation to the underwriters or dealers in connection with the sale of our securities pursuant to this prospectus and the accompanying supplement to this prospectus may not exceed 8% of the aggregate offering price of the securities as set forth on the cover page of the supplement to this prospectus.
We may not sell securities pursuant to this prospectus without delivering a prospectus supplement describing the terms of the particular securities to be offered and the method of the offering of such securities. See Plan of Distribution for more information.
Use of Proceeds
Unless otherwise specified in a prospectus supplement, we intend to use substantially all of the proceeds from a sale of our securities, net of expenses, for general corporate purposes, which may include, among other things, making investments in private U.S. companies in accordance with our investment objectives and using the strategies described in this prospectus or repaying indebtedness. See Use of Proceeds for information regarding our outstanding borrowings as of March 31, 2014, the corresponding interest rate charged on such borrowings as of that date and the length of time that it may take us to invest any proceeds in new or existing portfolio companies. Pending investment of the proceeds raised in an offering, we intend to invest the net proceeds primarily in cash, cash equivalents or short-term securities consistent with our BDC election and our election for taxation as a RIC. See Use of Proceeds.
Advisory Fees
On April 16, 2014, we entered into the investment advisory agreement with FB Advisor. The investment advisory agreement amended and restated the investment advisory and administrative services agreement, dated February 12, 2008 (as amended on August 5, 2008), between us and FB Advisor, or the former investment advisory agreement. The investment advisory agreement became effective upon the listing of our common stock on the NYSE.
FB Advisor and GDFM are compensated for their services. Pursuant to the investment advisory agreement, FB Advisor is entitled to a fee consisting of two componentsa base management fee and an incentive fee based on our performance. The base management fee is payable quarterly in arrears, and is calculated at an annual rate of 2.0% of our average gross assets.
The incentive fee in the investment advisory agreement consists of two parts. The first part, which we refer to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears, will equal 20.0% of our pre-incentive fee net investment income for the immediately preceding quarter and will be subject to a hurdle rate, expressed as a rate of return on our net assets, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 2.0%. Once our 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 our pre-incentive fee net investment income for such quarter equals 2.5% of our net assets, or 10.0% annually. This catch-up feature allows FB Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.
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The subordinated incentive fee on income is subject to a total return requirement, which provides that no incentive fee in respect of our 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, or the total return requirement. 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 our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, 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 our pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation 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 quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.
The second part of the incentive fee, which we refer 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 will equal 20.0% of our incentive fee capital gains, which will equal our 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. We will accrue for the capital gains incentive fee, which, if earned, will be paid annually. We will accrue the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory agreement that we entered into with FB Advisor, the fee payable to FB Advisor will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized.
In anticipation of the listing of our common stock on the NYSE, FB Advisor recommended that the investment advisory agreement be amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on our net assets, from 8.0% to 7.5% and (ii) assuming the reduction to the hurdle rate is approved, reduce the base management fee from 2.0% to 1.75% of the average value of our gross assets. Our board of directors has approved this amendment, and we have called a special meeting of our stockholders scheduled for June 23, 2014, at which stockholders will be asked to vote on the proposal. Pending stockholder approval of this proposal, FB Advisor has agreed, effective April 1, 2014, to waive a portion of the base management fee to which it is entitled under the investment advisory agreement so that such fee equals 1.75% of the average value of our gross assets. There can be no assurance this waiver will continue in the future.
Our board of directors, including a majority of independent directors, oversees and monitors our investment performance and annually reviews the compensation we pay to FB Advisor and the compensation FB Advisor pays to GDFM to determine that the provisions of each of the investment advisory agreement and the investment sub-advisory agreement are carried out.
See Investment Advisory AgreementOverview of GDFM for a description of the investment sub-advisory agreement and the fees payable to GDFM by FB Advisor pursuant to such agreement.
Administration
On April 16, 2014, we entered into the administration agreement with FB Advisor relating to the administrative services previously provided by FB Advisor to us under the former investment advisory
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agreement. The administration agreement became effective upon the listing of our common stock on the NYSE. Pursuant to the administration agreement, FB Advisor is reimbursed for administrative expenses it incurs on our behalf. See Administrative Services.
Conflicts of Interest
FB Advisor, GDFM and certain of their affiliates may experience conflicts of interest in connection with the management of our business affairs, including, but not limited to, the following:
| The directors, officers and other personnel of FB Advisor allocate their time between advising us and managing other investment activities and business activities in which they may be involved, including managing and operating FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund; |
| The compensation payable by us to FB Advisor and other affiliates is approved by our board of directors consistent with the exercise of the requisite standard of care applicable to directors under Maryland law. Such compensation is payable, in most cases, whether or not our stockholders receive distributions; |
| We may compete with certain affiliates for investments, including FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund, subjecting FB Advisor and its affiliates to certain conflicts of interest in evaluating the suitability of investment opportunities and making or recommending acquisitions on our behalf; |
| Regardless of the quality of the assets acquired, the services provided to us or whether we make distributions to our stockholders, FB Advisor and GDFM receive base management fees in connection with the management of our portfolio and may receive incentive fees in connection with the sale of our portfolio companies; |
| The personnel of GDFM allocate their time between assisting FB Advisor in identifying investment opportunities and making investment recommendations and performing similar functions for other business activities in which they may be involved, including in connection with GDFMs role as sub-adviser to FS Investment Corporation II and FS Investment Corporation III; |
| We may compete with other funds managed by affiliates of GDFM for investment opportunities, subjecting GDFM and its affiliates to certain conflicts of interest in evaluating the suitability of investment opportunities and making or recommending acquisitions to FB Advisor; |
| From time to time, to the extent consistent with the 1940 Act and the rules and regulations promulgated thereunder, we and other clients for which FB Advisor or GDFM provide investment management services or carry on investment activities may make investments at different levels of an investment entitys capital structure or otherwise in different classes of an issuers securities. These investments may give rise to inherent conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by us and such other clients; |
| FB Advisor, GDFM and their respective affiliates may give advice and recommend securities to other clients which may differ from advice given to, or securities recommended or bought for, us, even though their investment objectives may be similar to ours; |
| GSO and its affiliates may have existing business relationships or access to material, non-public information that would prevent GDFM from recommending certain investment opportunities that would otherwise fit within our investment objectives; |
| FB Advisor, GDFM and their respective affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may compete with us or may require substantial time and resources |
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of FB Advisor and GDFM. Affiliates of GDFM, whose primary business includes the origination of investments, engage in investment advisory business with accounts that compete with us. Affiliates of GDFM have no obligation to make their originated investment opportunities available to us; and |
| To the extent permitted by the 1940 Act and SEC staff interpretations, and subject to the allocation policies of FB Advisor, GDFM and any of their respective affiliates, as applicable, FB Advisor, GDFM and any of their respective affiliates may determine it is appropriate for us and one or more other investment accounts managed by FB Advisor, GDFM or any of their respective affiliates to participate in an investment opportunity. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. Any of these co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating accounts. To mitigate these conflicts, FB Advisor and/or GDFM, as applicable, will seek to execute such transactions for all of the participating investment accounts, including us, on a fair and equitable basis and in accordance with their respective allocation policies, taking into account such factors as the relative amounts of capital available for new investments and the investment programs and portfolio positions of us, the clients for which participation is appropriate and any other factors deemed appropriate. |
Distributions on Common Stock
Following the commencement of our operations, we declared our first distribution on January 29, 2009. Subject to our board of directors discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis. From time to time, we may also pay special interim distributions in the form of cash or shares of common stock at the discretion of our board of directors.
We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.
During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of an investors investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of capital, the latter of which is a nontaxable distribution) will be mailed to our stockholders. See Material U.S. Federal Income Tax Considerations.
Unless stockholders elect to receive their distributions in cash, we intend to make such distributions in additional shares of our common stock under our opt-out distribution reinvestment plan that became effective on June 2, 2014, or our new distribution reinvestment plan. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, investors participating in our new distribution reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes. No action is required on the part of a registered stockholder to have their cash distribution reinvested in shares of our common stock. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock.
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Dividends on Preferred Stock
We may issue preferred stock from time to time, although we have no immediate intention to do so. Any such preferred stock will be a senior security for purposes of the 1940 Act and, accordingly, subject to the leverage test under that Act. If we issue shares of preferred stock, holders of such preferred stock will be entitled to receive cash dividends at an annual rate that will be fixed or will vary for the successive dividend periods for each series. In general, the dividend periods for fixed rate preferred stock can range from weekly to quarterly and is subject to extension. The dividend rate could be variable and determined for each dividend period.
Distribution Reinvestment Plan
We have adopted our new distribution reinvestment plan, which became effective as of June 2, 2014, that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors declares a cash distribution, then our stockholders who have not elected to opt out of our new distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock rather than receiving the cash distribution. No action is required on the part of a registered stockholder to have their cash distribution reinvested in shares of our common stock. Registered stockholders must notify our transfer agent in writing if they wish to opt out of our new distribution reinvestment plan. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock. See Distribution Reinvestment Plan for more information.
Taxation
We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute as dividends to our stockholders. To qualify for and maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements and distribute to our stockholders, each tax year, at least 90% of our investment company taxable income, which is generally the sum of our net ordinary income plus the excess, if any, of realized net short-term capital gains in excess of realized net long-term capital losses. See Material U.S. Federal Income Tax Considerations.
Corporate Information
Our principal executive offices are located at Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104. We maintain a website at www.fsinvestmentcorp.com. Information contained on our website is not incorporated by reference into this prospectus or any supplements to this prospectus, and you should not consider that information to be part of this prospectus or any supplements to this prospectus.
Recent Developments
Listing on the NYSE
On April 16, 2014, our shares of common stock were listed on the NYSE, and began trading under the ticker symbol FSIC.
Listing Tender Offer
On April 16, 2014, we commenced a modified Dutch auction tender offer, or the listing tender offer, to purchase for cash up to $250.0 million in value of our shares of common stock from our stockholders, which expired at 5:00 p.m., New York City time on May 28, 2014. Pursuant to the listing tender offer, we accepted for
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purchase 23,255,813 shares of common stock at a purchase price of $10.75 per share, for an aggregate cost of approximately $250.0 million, excluding fees and expenses relating to the listing tender offer. See Managements Discussion and Analysis of Financial Condition and Results of OperationRecent DevelopmentsListing Tender Offer for more information.
Distributions
Our board of directors intends to declare two special cash distributions, each in the amount of $0.10 per share of our common stock, that will be paid on August 15, 2014 and November 14, 2014 to stockholders of record as of July 31, 2014 and October 31, 2014, respectively. The timing and amount of any future distributions (including the aforementioned special cash distributions) to stockholders are subject to restrictions under applicable law and the sole discretion of our board of directors. If we purchase tendered shares of our common stock before the record date for any future regular or special cash distribution, tendering stockholders will not receive such distributions.
ING Credit Facility
On April 3, 2014, we entered into a senior secured revolving credit facility, or the ING credit facility, with ING Capital LLC, as administrative agent, or ING, and the lenders party thereto. The ING credit facility provides for borrowings in U.S. dollars and certain agreed upon foreign currencies in an initial aggregate amount of up to $300.0 million, with an option for us to request, at one or more times after closing, that existing or new lenders, at their election, provide up to $100.0 million of additional commitments. We are permitted to use the proceeds of our borrowings under the ING credit facility to fund purchases of our common stock in the listing tender offer. Borrowings under the ING credit facility will accrue interest at a rate of (a) the London Interbank Offered Rate, or LIBOR, plus 2.50% per annum, or (b) at our election, the base rate plus 1.50%. The ING credit facility matures on April 3, 2018. See Managements Discussion and Analysis of Financial Condition and Results of OperationRecent DevelopmentsING Credit Facility for more information.
Trademark License Agreement
On April 16, 2014, in connection with the listing of our common stock on the NYSE, we entered into a trademark license agreement, or the Trademark License Agreement, with Franklin Square Holdings. See Certain Relationships and Related Party TransactionsTrademark License Agreement.
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The following table is intended to assist you in understanding the costs and expenses that an investor in shares of our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by you, us or FS Investment Corporation, or that we will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us.
Stockholder Transaction Expenses (as a percentage of offering price) |
||||
Sales load(1) |
| % | ||
Offering expenses(2) |
| % | ||
Distribution reinvestment plan expenses(3) |
None | |||
Total stockholder transaction expenses |
| % | ||
Annual expenses (as a percentage of average net assets attributable to |
||||
Base management fee(5) |
3.42 | % | ||
Incentive fees payable under the investment advisory agreement(6) |
0.16 | % | ||
Interest payments on borrowed funds(7) |
2.04 | % | ||
Other expenses(8) |
0.84 | % | ||
Total annual expenses(9) |
6.46 | % |
Example
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. Transaction expenses are not included in the following example. In the event that shares of common stock are sold to or through underwriters or agents, a corresponding prospectus supplement will restate this example to reflect the applicable sales load. See Plan of Distribution for additional information regarding stockholder transaction expenses.
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return: |
$ | 64 | $ | 190 | $ | 311 | $ | 601 |
The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. Assuming a 5.0% annual return, the incentive fee under the investment advisory agreement may not be earned or payable and is not included in the example. This illustration assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis in any of the indicated time periods. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, the example assumes reinvestment of all distributions at net asset value. Under our new distribution reinvestment plan, reinvestment of distributions may occur at a price per share that differs from the then current net asset value. See Distribution Reinvestment Plan for additional information.
(1) | In the event that the securities to which this prospectus relates are sold to or through underwriters or agents, a corresponding prospectus supplement will disclose the applicable sales load. |
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(2) | The related prospectus supplement will disclose the estimated amount of total offering expenses (which may include offering expenses borne by third parties on our behalf), the offering price and the offering expenses borne by us as a percentage of the offering price. |
(3) | The estimated expenses associated with our new distribution reinvestment plan are included in Other expenses. See Distribution Reinvestment Plan. |
(4) | Net assets attributable to common stock equals average net assets for the year ended December 31, 2013. |
(5) | Our contractual base management fee is payable quarterly in arrears and is calculated at an annual rate of 2.0% of the average value of our gross assets, which are assumed to equal 171.0% of our average net assets as described in Note 6 below. The base management fee shown in the table above is higher than 2.0% because the base management fee in the table is required to be calculated as a percentage of our average net assets, rather than gross assets. The calculation in the table above does not take into account that FB Advisor has agreed, effective April 1, 2014, to waive a portion of the base management fee to which it is entitled under the investment advisory agreement so that such fee equals 1.75% of the average value of our gross assets. Had the expenses in the table been calculated on a base management fee of 1.75%, the expenses shown would have been lower. There can be no assurance this waiver will continue in the future. See Investment Advisory AgreementOverview of FB AdvisorAdvisory Fees for a full explanation of how this base management fee is calculated and certain proposed amendments to the investment advisory agreement. |
(6) | Based on our current business plan, we anticipate that we may have capital gains and interest income that could result in the payment of an incentive fee to FB Advisor for the fiscal year ending December 31, 2014. However, the incentive fee payable to FB Advisor is based on our performance and will not be paid unless we achieve certain performance targets. |
The incentive fee in the investment advisory agreement consists of two parts. The first part, which we refer to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears, will equal 20.0% of our pre-incentive fee net investment income for the immediately preceding quarter and will be subject to a hurdle rate, expressed as a rate of return on our net assets, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. Because the example above assumes a 5.0% annual return, as required by the SEC, no subordinated incentive fee on income would be payable in the fiscal year ending December 31, 2014.
The second part of the incentive fee, which we refer 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 our incentive fee capital gains, which will equal our 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 amount in the table assumes that the incentive fee on capital gains will be approximately 0.16% of average net assets and is based on the actual realized capital gains for the year ended December 31, 2013 and the unrealized appreciation of our investments as of such date and assumes that all such unrealized appreciation is converted to realized capital gains on such date. Such amounts are expressed as a percentage of the average net assets as of such date. See Investment Advisory AgreementOverview of FB AdvisorAdvisory Fees for a full explanation of how this incentive fee is calculated and certain proposed amendments to the investment advisory agreement.
(7) | See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital Resources for a discussion of our financing facilities. |
The figure in the table assumes we borrow the full amount available under each financing facility as of December 31, 2013 and that the annualized weighted average borrowing costs under the financing facilities, including amortized costs and expenses, is 2.87%. Because the total assumed borrowing ($1.875 billion) represents 71.0% of our average net assets for the fiscal year ending December 31, 2013 ($2.6 billion), the borrowing cost as a percentage of net assets set forth in the table above is 2.04% (or 71.0% of 2.87%).
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(8) | Other expenses include accounting, legal and auditing fees, as well as the reimbursement of the compensation of administrative personnel and fees payable to our directors who do not also serve in an executive officer capacity for us or FB Advisor. The amount presented in the table reflects actual amounts incurred during the year ended December 31, 2013. |
(9) | Total annual expenses as a percentage of net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the Total annual expenses percentage be calculated as a percentage of net assets (defined as total assets less indebtedness), rather than the total assets, including assets that have been funded with borrowed monies. If the Total annual expenses percentage were calculated instead as a percentage of total assets, our Total annual expenses would be 3.8% of total assets. |
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You should read this selected consolidated financial data in conjunction with our Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The selected financial data as of and for the three months ended March 31, 2014 and 2013 has been derived from our unaudited consolidated financial statements and the selected financial data as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 has been derived from our audited consolidated financial statements.
Dollar amounts are presented in thousands, except for per share data.
Three Months
Ended March 31, |
Year Ended December 31, | |||||||||||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||
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Statements of operations data: |
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Investment income |
$ | 114,796 | $ | 110,044 | $ | 474,566 | $ | 303,222 | $ | 115,484 | $ | 30,670 | $ | 4,420 | ||||||||||||||
Operating expenses |
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Total expenses |
58,919 | 59,315 | 229,590 | 169,315 | 44,120 | 21,278 | 2,509 | |||||||||||||||||||||
Less: Expense reimbursement from sponsor |
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Net expenses |
58,919 | 59,315 | 229,590 | 169,315 | 44,120 | 21,278 | 2,269 | |||||||||||||||||||||
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Net investment income (loss) |
55,877 | 50,729 | 244,976 | 133,907 | 71,364 | 9,392 | 2,151 | |||||||||||||||||||||
Total net realized and unrealized gain (loss) on investments |
24,183 | 31,747 | 20,864 | 196,292 | (17,894 | ) | 18,872 | 9,305 | ||||||||||||||||||||
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Net increase (decrease) in net assets resulting from operations |
$ | 80,060 | $ | 82,476 | $ | 265,840 | $ | 330,199 | $ | 53,470 | $ | 28,264 | $ | 11,456 | ||||||||||||||
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Per share data (as adjusted for stock distributions, as applicable): |
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Net investment income (loss)basic and diluted(1) |
$ | 0.22 | $ |
0.20 |
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$ | 0.96 | $ | 0.59 | $ | 0.76 | $ | 0.40 | $ | 0.48 | |||||||||||||
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Net increase (decrease) in net assets resulting from operationsbasic and diluted(1) |
$ | 0.32 | $ | 0.33 | $ | 1.04 | $ | 1.45 | $ | 0.57 | $ | 1.21 | $ | 2.57 | ||||||||||||||
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Distributions declared(2) |
$ | 0.2025 | $ | 0.2160 | $ | 0.83 | $ | 0.86 | $ | 0.91 | $ | 0.87 | $ | 0.67 | ||||||||||||||
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Balance sheet data: |
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Total assets |
$ | 4,503,667 | $ | 4,527,860 | $ | 4,444,577 | $ | 4,346,753 | $ | 2,144,225 | $ | 782,005 | $ | 110,068 | ||||||||||||||
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Credit facilities and repurchase agreement payable |
$ | 1,688,482 | $ | 1,678,646 | $ | 1,673,682 | $ | 1,649,713 | $ | 554,286 | $ | 297,201 | $ | | ||||||||||||||
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Total net assets |
$ | 2,685,169 | $ | 2,560,676 | $ | 2,640,992 | $ | 2,511,738 | $ | 1,498,892 | $ | 389,232 | $ | 93,197 | ||||||||||||||
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Other data: |
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Total return(3) |
3.14 | % | 3.31 | % | 10.43 | % | 15.83 | % | 8.93 | % | 13.08 | % | 33.33 | % | ||||||||||||||
Number of portfolio company investments at period end |
148 | 245 | 165 | 263 | 183 | 144 | 50 | |||||||||||||||||||||
Total portfolio investments for the period |
$ | 471,491 | $ | 649,916 | $ | 2,641,733 | $ | 3,863,334 | $ | 1,978,499 | $ | 849,242 | $ | 106,098 | ||||||||||||||
Proceeds from sales and prepayments of investments |
$ | 566,115 | $ | 543,817 | $ | 2,510,887 | $ | 1,971,447 | $ | 858,661 | $ | 240,054 | $ | 16,717 | ||||||||||||||
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(1) | The per share data were derived by using the weighted average shares outstanding during the applicable period. |
(2) | The per share data for distributions reflect the actual amount of distributions paid per share during the applicable period. |
(3) | The total return 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 which were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total return does not consider the effect of the sales load from the sale of our common stock in our continuous public offering that we closed to new investors in May 2012. The total return includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return should not be considered a representation of our future total return, which may be greater or less than the return shown in the table due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our 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 our investment portfolio during the applicable period and are calculated in accordance with U.S. generally accepted accounting principles, or GAAP. These return figures do not represent an actual return to stockholders. |
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Investing in our securities involves a number of significant risks. In addition to the other information contained in this prospectus and the applicable prospectus supplement, you should consider carefully the following information before making an investment in our securities. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, the net asset value and the trading value of our common stock could decline or the value of our preferred stock, warrants, subscription rights or debt securities may decline, and investors may lose all or part of their investment.
Risks Related to Offerings Pursuant to this Prospectus
Our shares of common stock may trade at a discount from net asset value, which could limit our ability to raise additional equity capital.
Shares of closed-end investment companies, including BDCs, may trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict whether shares of our common stock will trade at, above, or below net asset value. In the recent past, including during much of 2009, the stocks of BDCs as an industry traded below net asset value and at near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. If our common stock is trading at a price below its net asset value per share, we will generally not be able to issue additional shares of our common stock at their market price without first obtaining approval for such issuance from our stockholders and our independent directors. At our 2013 annual stockholders meeting, our stockholders approved the sale of shares of our common stock at a price below the then-current net asset value per share, subject to certain conditions, during the period beginning on July 17, 2013 and expiring on July 17, 2014. We may not be able to obtain the necessary approvals to sell shares of common stock below net asset value after that date.
We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock. If we receive such approval from stockholders in the future, we may issue shares of our common stock at a price below the then current net asset value per share of common stock. Any such issuance could materially dilute your interest in our common stock and reduce our net asset value per share.
We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock in one or more offerings for a twelve-month period. Such approval may allow us to access the capital markets in a way that we typically are unable to do as a result of restrictions that, absent stockholder approval, apply to BDCs under the 1940 Act.
Any sale or other issuance of shares of our common stock at a price below net asset value per share would result in an immediate dilution to your interest in our common stock and a reduction of our net asset value per share. This dilution would occur as a result of a proportionately greater decrease in a stockholders interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because the number of future shares of common stock that may be issued below our net asset value per share and the price and timing of such issuances are not currently known, we cannot predict the actual dilutive effect of any such issuance. We also cannot determine the resulting reduction in our net asset value per share of any such issuance at this time. We caution you that such effects may be material, and we undertake to describe the material risks and dilutive effects of any offering that we make at a price below our then current net asset value in the future in a prospectus supplement issued in connection with any such offering.
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We may be unable to invest a significant portion of the net proceeds of any offering on acceptable terms in an acceptable timeframe.
Delays in investing the net proceeds of any offering may impair our performance. We cannot assure you that we will be able to identify any investments that meet our investment objectives or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of any offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.
In addition, even if GDFM identifies privately-negotiated investment opportunities that meet our investment objectives, because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Prior to investing in securities of portfolio companies, we will invest the net proceeds of any offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, which may produce returns that are significantly lower than the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objectives. As a result, any distributions that we pay while our portfolio is not fully invested in securities meeting our investment objectives may be lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objectives.
We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flows from operations, net investment income or earnings are not sufficient to fund declared distributions.
We may fund distributions from the uninvested proceeds of an offering and borrowings, and we have not established limits on the amount of funds we may use from such proceeds or borrowings to make any such distributions. We have paid and may continue to pay distributions from the sale of assets to the extent distributions exceed our earnings or cash flows from operations. Distributions from offering proceeds or from borrowings could reduce the amount of capital we ultimately invest in our portfolio companies.
A stockholders interest in us will be diluted if we issue additional shares, which could reduce the overall value of an investment in us.
Our investors do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 450,000,000 shares of common stock. Pursuant to our charter, a majority of our entire board of directors may amend our charter to increase the number of authorized shares of stock without stockholder approval. After an investor purchases shares, our board of directors may elect to sell additional shares in the future, issue equity interests in private offerings or issue share-based awards to our independent directors or employees of FB Advisor. To the extent we issue additional equity interests after an investor purchases our shares, an investors percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, an investor may also experience dilution in the book value and fair value of his or her shares.
Stockholders may experience dilution in their ownership percentage if they do not participate in our new distribution reinvestment plan.
All distributions declared in cash payable to stockholders that are participants in our new distribution reinvestment plan will generally be automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in our new distribution reinvestment plan may experience dilution over time. Stockholders who do not participate in our new distribution reinvestment plan may experience accretion to the net asset value of their shares if our shares are trading at a premium to net asset value and dilution if our shares
23
are trading at a discount to net asset value. The level of accretion or discount would depend on various factors, including the proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the distribution payable to a stockholder.
Certain provisions of our charter and bylaws as well as provisions of the Maryland General Corporation Law could deter takeover attempts and have an adverse impact on the value of our common stock.
The Maryland General Corporation Law, or the MGCL, and our charter and bylaws contain certain provisions that may have the effect of discouraging, delaying or making difficult a change in control of our company or the removal of our incumbent directors. Under the Business Combination Act of the MGCL, certain business combinations between us and an interested stockholder (defined generally to include any person who beneficially owns 10% or more of the voting power of our outstanding shares) or an affiliate thereof is prohibited for five years and thereafter is subject to special stockholder voting requirements, to the extent that such statute is not superseded by applicable requirements of the 1940 Act. However, our board of directors has adopted a resolution exempting from the Business Combination Act any business combination between us and any person to the extent that such business combination receives the prior approval of our board of directors, including a majority of our directors who are not interested persons as defined in the 1940 Act. Under the Control Share Acquisition Act of the MGCL, control shares acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by officers or by directors who are employees of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of shares of our common stock, but such provision may be repealed at any time (before or after a control share acquisition). However, we will amend our bylaws to repeal such provision (so as to be subject to the Control Share Acquisition Act) only if our board of directors determines that it would be in our best interests and if the staff of the SEC does not object to our determination that our being subject to the Control Share Acquisition Act does not conflict with the 1940 Act. The Business Combination Act (if our board of directors should repeal the resolution) and the Control Share Acquisition Act (if we amend our bylaws to be subject to that Act) may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter: (a) classifying our board of directors into three classes serving staggered three-year terms, (b) providing that a director may be removed only for cause and only by vote of at least two-thirds of the votes entitled to be cast, and (c) authorizing our board of directors to (i) classify or reclassify shares of our stock into one or more classes or series, (ii) cause the issuance of additional shares of our stock, and (iii) amend our charter from time to time, without stockholder approval, to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may discourage, delay, defer, make more difficult or prevent a transaction or a change in control that might otherwise be in your best interest.
The net asset value of our common stock may fluctuate significantly.
The net asset value and liquidity, if any, of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include: (i) changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs; (ii) loss of RIC or BDC status; (iii) changes in earnings or variations in operating results; (iv) changes in the value of our portfolio of investments; (v) changes in accounting guidelines governing valuation of our investments; (vi) any shortfall in revenue or net income or any increase in losses from levels expected by investors; (vii) departure of our investment adviser or sub-adviser or certain of their respective key personnel; (viii) general economic trends and other external factors; and (ix) loss of a major funding source.
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The existence of a large number of outstanding shares and stockholders prior to completion of the listing of our common stock on a national securities exchange could negatively affect our stock price.
As of June 10, 2014, we had 239,026,360 shares of common stock outstanding. Prior to the listing of our common stock on the NYSE on April 16, 2014, the ability of stockholders to liquidate their investments was limited. A large volume of sales of these shares could decrease the prevailing market prices of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales are not effected, the mere perception of the possibility of these sales could depress the market price of our common stock and have a negative effect on our ability to raise capital in the future. In addition, anticipated downward pressure on our common stock price due to actual or anticipated sales of common stock from this market overhang could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our stock to decline.
The market price of our securities may fluctuate significantly.
The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
| significant volatility in the market price and trading volume of securities of publicly traded RICs, BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies; |
| price and volume fluctuations in the overall stock market from time to time; |
| changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to RICs or BDCs; |
| loss of our BDC or RIC status; |
| changes in our earnings or variations in our operating results; |
| changes in the value of our portfolio of investments; |
| any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; |
| departure of FB Advisors or GDFMs key personnel; |
| operating performance of companies comparable to us; |
| short-selling pressure with respect to shares of our common stock or BDCs generally; |
| future sales of our securities convertible into or exchangeable or exercisable for our common stock or the conversion of such securities; |
| uncertainty surrounding the strength of the economy; |
| general economic trends and other external factors; and |
| loss of a major funding source. |
In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been brought against that company. If the market price of our securities fluctuates significantly, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert managements attention and resources from our business.
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If we issue preferred stock, debt securities or convertible debt securities, the net asset value and market value of our common stock may become more volatile.
We cannot assure you that the issuance of preferred stock and/or debt securities would result in a higher yield or return to the holders of our common stock. The issuance of preferred stock, debt securities or convertible debt would likely cause the net asset value and market value of our common stock to become more volatile. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our common stock would be reduced. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to exceed the net rate of return on our portfolio, the use of leverage would result in a lower rate of return to the holders of common stock than if we had not issued the preferred stock or debt securities. Any decline in the net asset value of our investment would be borne entirely by the holders of our common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in net asset value to the holders of our common stock than if we were not leveraged through the issuance of preferred stock. This decline in net asset value would also tend to cause a greater decline in the market price for our common stock.
There is also a risk that, in the event of a sharp decline in the value of our net assets, we would be in danger of failing to maintain required asset coverage ratios which may be required by the preferred stock, debt securities, convertible debt or units or of a downgrade in the ratings of the preferred stock, debt securities, convertible debt or units or our current investment income might not be sufficient to meet the dividend requirements on the preferred stock or the interest payments on the debt securities. In order to counteract such an event, we might need to liquidate investments in order to fund redemption of some or all of the preferred stock, debt securities or convertible debt. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, debt securities, convertible debt or any combination of these securities. Holders of preferred stock, debt securities or convertible debt may have different interests than holders of common stock and may at times have disproportionate influence over our affairs.
Holders of any preferred stock that we may issue will have the right to elect members of the board of directors and have class voting rights on certain matters.
The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair our ability to maintain our qualification as a RIC for U.S. federal income tax purposes.
We may in the future issue securities for which there is no public market and for which we expect no public market to develop.
In order to raise additional capital, we may issue debt or other securities for which no public market exists, and for which no public market is expected to develop. To the extent we issue securities for which no public market exists and for which no public market develops, a purchaser of such securities may not be able to liquidate the investment without considerable delay, if at all. If a market should develop for our debt and other securities, the price may be highly volatile, and our debt and other securities may lose value.
The trading market or market value of our publicly issued debt or convertible debt securities may fluctuate.
If we publicly issue debt or convertible debt securities, they may or may not have an established trading market. We cannot assure you that a trading market for our publicly issued debt or convertible debt securities
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will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt or convertible debt securities. These factors include, but are not limited to, the following:
| the time remaining to the maturity of these debt securities; |
| the outstanding principal amount of debt securities with terms identical to these debt securities; |
| the ratings assigned by national statistical ratings agencies; |
| the general economic environment; |
| the supply of debt securities trading in the secondary market, if any; |
| the redemption or repayment features, if any, of these debt securities; |
| the level, direction and volatility of market interest rates generally; and |
| market rates of interest higher or lower than rates borne by the debt securities. |
You should also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities. Our debt securities may include convertible features that cause them to more closely bear risks associated with an investment in our common stock.
Terms relating to redemption may materially adversely affect your return on any debt securities that we may issue.
If we issue debt securities that are redeemable at our option, we may choose to redeem the debt securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In addition, if the debt securities are subject to mandatory redemption, we may be required to redeem the debt securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In this circumstance, a holder of our debt securities may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the debt securities being redeemed.
Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares.
In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to this prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering.
In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial.
These dilutive effects may be exacerbated if we were to conduct multiple subscription rights offerings, particularly if such offerings were to occur over a short period of time. In addition, subscription rights offerings and the prospect of future subscription rights offerings may create downward pressure on the secondary market price of our common stock due to the potential for the issuance of shares at a price below our net asset value, without a corresponding change to our net asset value.
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Our credit ratings may not reflect all risks of an investment in our debt securities.
Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our debt securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the market value of or trading market for the publicly issued debt securities.
Risks Related to Our Investments
Our investments in prospective portfolio companies may be risky, and we could lose all or part of our investment.
Our investments in senior secured loans, second lien secured loans, subordinated debt and equity of private U.S. companies, including middle-market companies, may be risky and there is no limit on the amount of any such investments in which we may invest.
Senior Secured Loans and Second Lien Secured Loans. There is a risk that any collateral pledged by portfolio companies in which we have taken a security interest may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. To the extent our debt investment is collateralized by the securities of a portfolio companys subsidiaries, such securities may lose some or all of their value in the event of the bankruptcy or insolvency of the portfolio company. Also, in some circumstances, our security interest may be contractually or structurally subordinated to claims of other creditors. In addition, deterioration in a portfolio companys financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Loans that are under-collateralized involve a greater risk of loss. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loans terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies.
Subordinated Debt. Our subordinated debt investments will generally rank junior in priority of payment to senior loans and will generally be unsecured. This may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These investments may involve additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject us and our stockholders to non-cash income. Since we will not receive any principal repayments prior to the maturity of some of our subordinated debt investments, such investments will be of greater risk than amortizing loans.
Equity Investments. We expect to make select equity investments. In addition, when we invest in senior secured and second lien secured loans or subordinated debt, we may acquire warrants to purchase equity securities. The equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
Non-U.S. securities. We may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies, to the extent permitted by the 1940 Act. Because evidences of ownership of such securities usually are held outside the United States, we would be subject to additional risks if we invested in non-U.S. securities, which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict the payment of principal and interest on the non-U.S. securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Since non-U.S. securities may be purchased with and payable in foreign currencies, the value of these assets as measured in U.S. dollars may be affected unfavorably by changes in currency rates and exchange control regulations.
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In addition, we invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as junk, have predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. They may also be difficult to value and illiquid.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any proceeds. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
If one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. In situations where a bankruptcy carries a high degree of political significance, our legal rights may be subordinated to other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrowers business or in instances where we exercise control over the borrower or render significant managerial assistance.
We generally will not control our portfolio companies.
We do not expect to control most of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements with such portfolio companies may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.
We are exposed to risks associated with changes in interest rates.
We are subject to financial market risks, including changes in interest rates. General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, accordingly, have a material adverse effect on our investment objectives and our rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt for our financing needs, if any. Loans under which we borrow money will typically provide for adjustments in the loan interest rate along with changes in market interest rates. However, such adjustments may lag actual market interest rate movements or adjustments under our borrowings. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds will increase, which could materially reduce our net investment income.
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Interest rates have recently been at or near historic lows. In the event of a rising interest rate environment, payments under floating rate debt instruments generally would rise and there may be a significant number of issuers of such floating rate debt instruments that would be unable or unwilling to pay such increased interest costs and may otherwise be unable to repay their loans. Investments in floating rate debt instruments may also decline in value in response to rising interest rates if the interest rates of such investments do not rise as much, or as quickly, as market interest rates in general. Similarly, during periods of rising interest rates, fixed rate debt instruments may decline in value because the fixed rates of interest paid thereunder may be below market interest rates.
A reduction in the interest rates on new investments relative to interest rates on current investments could also have a material adverse impact on our net interest income. An increase in interest rates could decrease the value of any investments we will hold which earn fixed interest rates. Also, an increase in interest rates on investments available to investors could make investment in our common stock less attractive if we are not able to increase our distributions, which could materially reduce the value of our common stock.
Second priority liens on collateral securing debt investments that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
Certain debt investments that we make to portfolio companies may be secured on a second priority basis by the same collateral securing first priority debt of such companies. The first priority liens on the collateral will secure the portfolio companys obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by such company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the debt obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against such companys remaining assets, if any.
The rights we may have with respect to the collateral securing the debt investments we make in our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of any collateral securing our first lien or second lien secured loans. A prolonged recession may further decrease the value of such collateral and result in losses of value in our portfolio and a decrease in our revenues, net income and net asset value. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to
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us on terms we deem acceptable. These events could prevent us from increasing investments and harm our operating results.
A covenant breach by our portfolio companies may harm our operating results.
A portfolio companys failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio companys ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.
Investing in middle-market companies involves a number of significant risks, any one of which could have a material adverse effect on our operating results.
Investments in middle-market companies involve some of the same risks that apply generally to investments in larger, more established companies. However, such investments have more pronounced risks in that they:
| may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral pledged under such securities and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment; |
| have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tends to render them more vulnerable to competitors actions and changing market conditions, as well as general economic downturns; |
| are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; |
| generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and members of FB Advisor may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; and |
| may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity. |
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to, among other things, lender liability or fraudulent conveyance claims.
We could, in certain circumstances, become subject to potential liabilities that may exceed the value of our original investment in a portfolio company that experiences severe financial difficulties. For example, we may be adversely affected by laws related to, among other things, fraudulent conveyances, voidable preferences, lender liability, and the bankruptcy courts discretionary power to disallow, subordinate or disenfranchise particular claims or re-characterize investments made in the form of debt as equity contributions.
Our portfolio companies may be highly leveraged.
Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies may be subject to restrictive financial and operating
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covenants and the leverage may impair these companies ability to finance their future operations and capital needs. As a result, these companies flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged companys income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.
We may not realize gains from our equity investments.
Certain investments that we may make may include warrants or other equity-linked securities. In addition, we may make direct equity investments in portfolio companies. The equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We may be unable to exercise any put rights we acquire, which grant us the right to sell our equity securities back to the portfolio company, for the consideration provided in our investment documents if the issuer is in financial distress.
An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.
Our investments are primarily in privately-held companies. Investments in private companies pose significantly greater risks than investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and the ability to withstand financial distress. As a result, these companies, which may present greater credit risk than public companies, may be unable to meet their obligations under their debt securities that we hold. Second, the investments themselves often may be illiquid. The securities of many of the companies in which we invest are not publicly-traded or actively-traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. In addition, such securities may be subject to legal and other restrictions on resale. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. These investments may also be difficult to value because little public information generally exists about private companies, requiring an experienced due diligence team to analyze and value the potential portfolio company. Finally, these companies may not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of FB Advisor and/or GDFM to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. These companies and their financial information will generally not be subject to the Sarbanes-Oxley Act and other rules and regulations that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. See Investment Objectives and StrategyCharacteristics of and Risks Related to Investments in Private Companies.
A lack of liquidity in certain of our investments may adversely affect our business.
We invest in certain companies whose securities are not publicly-traded or actively-traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly-traded securities. The illiquidity of certain of our investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. The reduced liquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
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We may not have the funds or ability to make additional investments in our portfolio companies.
We may not have the funds or ability to make additional investments in our portfolio companies. After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected return on the investment.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments, net of prepayment fees, could negatively impact our return on equity.
Our investments may include original issue discount instruments.
To the extent that we invest in original issue discount instruments and the accretion of original issue discount constitutes a portion of our income, we will be exposed to risks associated with the requirement to include such non-cash income in taxable and accounting income prior to receipt of cash, including the following:
| Original issue discount instruments may have unreliable valuations because the accruals require judgments about collectability; |
| For accounting purposes, cash distributions to investors representing original issue discount income do not come from paid-in capital, although they may be paid from the offering proceeds. Thus, although a distribution of original issue discount income may come from the cash invested by investors, the 1940 Act does not require that investors be given notice of this fact; |
| The deferral of paid-in-kind, or PIK, interest may have a negative impact on liquidity, as it represents non-cash income that may require cash distributions to stockholders in order to maintain our RIC election; and |
| Original issue discount may create a risk of non-refundable cash payments to FB Advisor based on non-cash accruals that may never be realized. |
Risks Related to Our Business and Structure
Our board of directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
Our board of directors has the authority to modify or waive our current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and the value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay stockholders distributions and cause them to lose all or part of their investment. Moreover, we have significant investment flexibility and may invest our assets in ways with which investors may not agree.
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Our ability to achieve our investment objectives depends on FB Advisors and GDFMs ability to manage and support our investment process. If either FB Advisor or GDFM were to lose any members of their respective senior management teams, our ability to achieve our investment objectives could be significantly harmed.
Since we have no employees, we depend on the investment expertise, skill and network of business contacts of FB Advisor and GDFM. FB Advisor, with the assistance of GDFM, evaluates, negotiates, structures, executes, monitors and services our investments. Our future success depends to a significant extent on the continued service and coordination of FB Advisor and its senior management team. The departure of any members of FB Advisors senior management team could have a material adverse effect on our ability to achieve our investment objectives. Likewise, the departure of any key employees of GDFM may impact its ability to render services to us under the terms of its sub-advisory agreement with FB Advisor.
Our ability to achieve our investment objectives depends on FB Advisors ability, with the assistance of GDFM, to identify, analyze, invest in, finance and monitor companies that meet our investment criteria. FB Advisors capabilities in structuring the investment process, providing competent, attentive and efficient services to us, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve our investment objectives, FB Advisor may need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. FB Advisor may not be able to find investment professionals in a timely manner or at all. Failure to support our investment process could have a material adverse effect on our business, financial condition and results of operations.
In addition, each of the investment advisory agreement and the administrative services agreement that FB Advisor has entered into with us, as well as the sub-advisory agreement that FB Advisor has entered into with GDFM, have termination provisions that allow the parties to terminate the agreements without penalty. The investment advisory agreement and administrative services agreement may each be terminated at any time, without penalty, by FB Advisor, upon 60 days notice to us. The sub-advisory agreement may be terminated at any time, without the payment of any penalty, upon 60 days written notice by GDFM or, if our board of directors or the holders of a majority of our outstanding voting securities determine that the sub-advisory agreement with GDFM should be terminated, by FB Advisor. If either agreement is terminated, it may adversely affect the quality of our investment opportunities. In addition, in the event such agreements are terminated, it may be difficult for us to replace FB Advisor or for FB Advisor to replace GDFM. Furthermore, the termination of either of these agreements may adversely impact the terms of any financing facility into which we may enter, which could have a material adverse effect on our business and financial condition.
Because our business model depends to a significant extent upon relationships with private equity sponsors, investment banks and commercial banks, the inability of FB Advisor and GDFM to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
If FB Advisor or GDFM fails to maintain its existing relationships with private equity sponsors, investment banks and commercial banks on which they rely to provide us with potential investment opportunities, or develop new relationships with other sponsors or sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom FB Advisor and GDFM have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.
We may face increasing competition for investment opportunities, which could delay deployment of our capital, reduce returns and result in losses.
We compete for investments with other BDCs and investment funds (including private equity funds, mezzanine funds and CLO funds), as well as traditional financial services companies such as commercial banks
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and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, have begun to invest in areas in which they have not traditionally invested, including making investments in middle-market private U.S. companies. As a result of these new entrants, competition for investment opportunities in middle-market private U.S. companies may intensify. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors pricing, terms and structure. If we are forced to match our competitors pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the fact that the market for investments in middle-market private U.S. companies is underserved by traditional commercial banks and other financial sources. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on us as a BDC.
A significant portion of our investment portfolio is and will be recorded at fair value as determined in good faith by our board of directors and, as a result, there is and will be uncertainty as to the value of our portfolio investments.
Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value, as determined by our board of directors. There is not a public market for the securities of the privately-held companies in which we invest. Many of our investments are not publicly-traded or actively-traded on a secondary market but are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors or are not traded at all. As a result, we value these securities quarterly at fair value as determined in good faith by our board of directors.
Certain factors that may be considered in determining the fair value of our investments include dealer quotes for securities traded on the secondary market for institutional investors, the nature and realizable value of any collateral, the portfolio companys earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these non-traded securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale of one or more of our investments.
There is a risk that investors in our equity securities may not receive distributions or that our distributions may not grow over time.
We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. All distributions will be paid at the discretion of our board of directors and will depend on our earnings, our net investment income, our financial condition, maintenance of our RIC status, compliance with applicable BDC regulations and such other factors as our board of directors may deem relevant from time to time. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. See RegulationSenior Securities.
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Our distribution proceeds may exceed our earnings. Therefore, portions of the distributions that we make may represent a return of capital to stockholders, which will lower their tax basis in their shares.
We may pay all or a substantial portion of our distributions from the proceeds of the sale of shares of our common stock or from borrowings in anticipation of future cash flow, which may constitute a return of your capital and will lower your tax basis in shares of our common stock. A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities.
Changes in laws or regulations governing our operations or the operations of our business partners may adversely affect our business or cause us to alter our business strategy.
We and our portfolio companies are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. Changes in laws or regulations governing the operations of those with whom we do business could also have a material adverse effect on our business, financial condition and results of operations.
In addition, any changes to the laws and regulations governing our operations, including with respect to permitted investments, may cause us to alter our investment strategy to avail ourselves of new or different opportunities or make other changes to our business. Such changes could result in material differences to our strategies and plans as set forth in this prospectus and may result in our investment focus shifting from the areas of expertise of FB Advisor and GDFM to other types of investments in which FB Advisor and GDFM may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of a stockholders investment.
As a public company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations will involve significant expenditures, and non-compliance with such regulations may adversely affect us.
As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC and the listing standards of the NYSE.
Our management is required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial reporting. As a result, we expect to incur significant additional expenses, which may negatively impact our financial performance and our ability to make distributions. This process will also result in a diversion of managements time and attention. We cannot be certain as to the timing of the completion of our evaluation, testing and remediation actions or the impact of the same on our operations, and we may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be effective in a timely manner. In the event that we are unable to maintain an effective system of internal control and maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.
Price declines in the large corporate leveraged loan market may adversely affect the fair value of our syndicated loan portfolio, reducing our net asset value through increased net unrealized depreciation.
Prior to the onset of the financial crisis, collateralized loan obligations, or CLOs, a type of leveraged investment vehicle holding corporate loans, hedge funds and other highly leveraged investment vehicles,
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comprised a substantial portion of the market for purchasing and holding first and second lien secured loans. As the secondary market pricing of the loans underlying these portfolios deteriorated during the fourth quarter of 2008, it is our understanding that many investors, as a result of their generally high degrees of leverage, were forced to raise cash by selling their interests in performing loans in order to satisfy margin requirements or the equivalent of margin requirements imposed by their lenders. This resulted in a forced deleveraging cycle of price declines, compulsory sales, and further price declines, with widespread redemption requests and other constraints resulting from the credit crisis generating further selling pressure. This pervasive forced selling and the resultant price declines eliminated or significantly impaired many of our leveraged competitors for investment opportunities, especially those having built their investment portfolios prior to the financial crisis.
Where prices appreciated measurably in recent years, conditions in the large corporate leveraged loan market may experience similar disruptions or deterioration, which may cause pricing levels to similarly decline or be volatile. As a result, we may suffer unrealized depreciation and could incur realized losses in connection with the sale of our syndicated loans, which could have a material adverse impact on our business, financial condition and results of operations.
Economic activity in the United States was adversely impacted by the global financial crisis of 2008 and future recessions, downturns, disruptions or instability could have a material adverse effect on our business.
From time to time, the global capital markets may experience periods of disruption and instability, which could cause disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of U.S. and foreign governments, these events could contribute to worsening general economic conditions that materially and adversely impact the broader financial and credit markets and reduce the availability of debt and equity capital for the market as a whole and financial services firms in particular.
Beginning in the third quarter of 2007, global credit and other financial markets suffered substantial stress, volatility, illiquidity and disruption. These forces reached extraordinary levels in late 2008, resulting in the bankruptcy of, the acquisition of, or government intervention in the affairs of several major domestic and international financial institutions. In particular, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. We believe that such value declines were exacerbated by widespread forced liquidations as leveraged holders of financial assets, faced with declining prices, were compelled to sell to meet margin requirements and maintain compliance with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment vehicles, leading to a decline in the supply of capital for investment and depressed pricing levels for many assets. These events significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of certain assets, and caused extreme economic uncertainty.
Deterioration of economic and market conditions in the future could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets.
Future downgrades of the U.S. credit rating and global economic uncertainty could negatively impact our business, financial condition and results of operations.
In August 2011, S&Ps Ratings Services lowered its long-term sovereign credit rating on the U.S. from AAA to AA+, which was affirmed by S&P in June 2013. In January 2012, S&Ps Ratings Services lowered its long-term sovereign credit rating for France, Italy, Spain and six other European countries, which has negatively impacted global markets and economic conditions. In addition, in April 2012, S&Ps Ratings Services further lowered its long-term sovereign credit rating for Spain. Recent U.S. budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. The impact of any further downgrade to the U.S. governments
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sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. In addition, the economic downturn and the significant government interventions into the financial markets and fiscal stimulus spending over the last several years have contributed to significantly increased U.S. budget deficits. There can be no assurance that future fiscal or monetary measures to aid economic recovery will be effective. These developments and reactions of the credit markets toward these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to obtain debt financing on favorable terms. In addition, any adverse economic conditions resulting from any further downgrade of the U.S. governments sovereign credit rating or the economic crisis in Europe could have a material adverse effect on our business, financial condition and results of operations.
The impact of recent financial reform legislation on us is uncertain.
In light of recent conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration and regulators have increased their focus on the regulation of the financial services industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, or the Dodd-Frank Act, institutes a wide range of reforms that will have an impact on all financial institutions. Many of the requirements called for in the Dodd-Frank Act will be implemented over time, most of which will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The changes resulting from the Dodd-Frank Act may require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact our business, results of operations and financial condition. While we cannot predict what effect any changes in the laws or regulations or their interpretations would have on us as a result of the Dodd-Frank Act, these changes could be materially adverse to us and our stockholders.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our 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.
We are exposed to risks resulting from the current low interest rate environment.
Since we will borrow money to make investments, our net investment income depends, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. The current, historically low interest rate environment can, depending on our cost of capital, depress our net investment income, even though the terms of our investments generally will include a minimum interest rate. In addition, any reduction in the level of interest rates on new investments relative to interest rates on our current investments could adversely impact our net investment income, reducing our ability to service the interest obligations on, and to repay the principal of, our indebtedness, as well as our capacity to pay distributions. Any such developments would result in a decline in our net asset value and in the trading prices of our common stock.
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Risks Related to FB Advisor and Its Affiliates
FB Advisor and its affiliates, including our officers and some of our directors, face conflicts of interest caused by compensation arrangements with us and our affiliates, which could result in actions that are not in the best interests of our investors.
FB Advisor and its affiliates receive substantial fees from us in return for their services, and these fees could influence the advice provided to us. Among other matters, the decision to utilize leverage has increased our assets and, as a result, has increased the amount of base management fees payable to FB Advisor.
We may be obligated to pay FB Advisor incentive compensation on income that we have not received.
Any incentive fee payable by us that relates to our net investment income may be computed and paid on income that may include interest that has been accrued but not yet received. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously included in the calculation of the incentive fee will become uncollectible. FB Advisor is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on the obligation that resulted in the accrual of such income, and such circumstances would result in our paying an incentive fee on income we never received. See Investment Advisory Agreement.
For federal income tax purposes, we are required to recognize taxable income (such as deferred interest that is accrued as original issue discount) in some circumstances in which we do not receive a corresponding payment in cash and to make distributions with respect to such income to maintain our status as a RIC. Under such circumstances, we may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified to the extent that we are required to pay an incentive fee with respect to such accrued income. As a result, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital, or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
There may be conflicts of interest related to obligations FB Advisors and GDFMs senior management and investment teams have to our affiliates and to other clients.
The members of the senior management and investment teams of both FB Advisor and GDFM serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds managed by the same personnel. For example, the officers, managers and other personnel of FB Advisor also serve in similar capacities for the investment advisers to Franklin Square Holdings three other affiliated BDCs, FS Energy and Power Fund, FS Investment Corporation II, and FS Investment Corporation III and Franklin Square Holdings affiliated closed-end management investment company, FS Global Credit Opportunities Fund. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests or in the best interest of our stockholders. Our investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For example, we rely on FB Advisor to manage our day-to-day activities and to implement our investment strategy. FB Advisor and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities which are unrelated to us. As a result of these activities, FB Advisor, its employees and certain of its affiliates will have conflicts of interest in allocating their time between us and other activities in which they are or may become involved, including the management of other entities affiliated with Franklin Square Holdings. FB Advisor and its employees will devote only as much of its or their time to our business as FB Advisor and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time.
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Furthermore, GDFM, on which FB Advisor relies to assist it in identifying investment opportunities and making investment recommendations, has similar conflicts of interest. GDFM or its affiliate, GSO, serves as investment sub-adviser to Franklin Square Holdings three other affiliated BDCs and Franklin Square Holdings affiliated closed-end management investment company. GDFM, its affiliates and their respective members, partners, officers and employees will devote as much of their time to our activities as they deem necessary and appropriate. GDFM and its affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may be in competition with us and/or may involve substantial time and resources of GDFM. Also, in connection with such business activities, GDFM and its affiliates may have existing business relationships or access to material, non-public information that may prevent it from recommending investment opportunities that would otherwise fit within our investment objectives. All of these factors could be viewed as creating a conflict of interest in that the time, effort and ability of the members of GDFM, its affiliates and their officers and employees will not be devoted exclusively to our business but will be allocated between us and the management of the monies of other advisees of GDFM and its affiliates. See Prospectus SummaryConflicts of Interest and Managements Discussion and Analysis of Financial Condition and Results of OperationsRelated Party TransactionsPotential Conflicts of Interest for a more detailed discussion of these actual and potential conflicts of interest.
The time and resources that individuals employed by FB Advisor and GDFM devote to us may be diverted and we may face additional competition due to the fact that individuals employed by FB Advisor and GDFM are not prohibited from raising money for or managing another entity that makes the same types of investments that we target.
Neither FB Advisor nor GDFM, or individuals employed by FB Advisor or GDFM, are prohibited from raising money for and managing another investment entity that makes the same types of investments as those we target. As a result, the time and resources that these individuals may devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance. Affiliates of GDFM, whose primary businesses include the origination of investments, engage in investment advisory business with accounts that compete with us. Affiliates of GDFM have no obligation to make their originated investment opportunities available to GDFM or to us.
Our incentive fee may induce FB Advisor to make, and GDFM to recommend, speculative investments.
The incentive fee payable by us to FB Advisor may create an incentive for it to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to FB Advisor is determined may encourage it to use leverage to increase the return on our investments. In addition, the fact that our base management fee is payable based upon our gross assets, which would include any borrowings for investment purposes, may encourage FB Advisor to use leverage to make additional investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor holders of our common stock. Such a practice could result in our investing in more speculative securities than would otherwise be in our best interests, which could result in higher investment losses, particularly during cyclical economic downturns. In addition, since GDFM receives a portion of the advisory fees paid to FB Advisor, GDFM may have an incentive to recommend investments that are riskier or more speculative.
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FB Advisors liability is limited under the investment advisory agreement and the administration agreement, and we are required to indemnify it against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.
Pursuant to the investment advisory agreement and administration agreement, FB Advisor and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FB Advisor will not be liable to us for their acts under the investment advisory agreement or the administration agreement, as applicable, absent willful misfeasance, bad faith or gross negligence in the performance of their duties. We have agreed to indemnify, defend and protect FB Advisor and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FB Advisor with respect to all damages, liabilities, costs and expenses resulting from acts of FB Advisor not arising out of willful misfeasance, bad faith or gross negligence in the performance of their duties under the investment advisory agreement or the administration agreement, as applicable. These protections may lead FB Advisor to act in a riskier manner when acting on our behalf than it would when acting for its own account. See Investment Advisory Agreement and Administrative Services.
Risks Related to Business Development Companies
The requirement that we invest a sufficient portion of our assets in qualifying assets could preclude us from investing in accordance with our current business strategy; conversely, the failure to invest a sufficient portion of our assets in qualifying assets could result in our failure to maintain our status as a BDC.
As a BDC, we may not acquire any assets other than qualifying assets unless, at the time of such acquisition, at least 70% of our total assets are qualifying assets. Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets. Conversely, if we fail to invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments.
Failure to maintain our status as a BDC would reduce our operating flexibility.
If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.
Regulations governing our operation as a BDC and a RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.
As a result of the annual distribution requirement to qualify as a RIC, we may need to periodically access the capital markets to raise cash to fund new investments. We may issue senior securities, as defined in the 1940 Act, including issuing preferred stock and/or borrowing money from banks or other financial institutions only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. Our ability to issue different types of securities is also limited. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a BDC, therefore, we may issue equity continuously at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution.
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We expect to borrow for investment purposes. If the value of our assets declines, we may be unable to satisfy the asset coverage test, which would prohibit us from paying distributions and could prevent us from qualifying as a RIC. If we cannot satisfy the asset coverage test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales may be disadvantageous.
Under the 1940 Act, we generally are prohibited from issuing or selling our common stock at a price per share, after deducting selling underwriting commissions or discounts, that is below our net asset value per share, which may be a disadvantage as compared with other public companies. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of the common stock if our board of directors and independent directors determine that such sale is in our best interests and the best interests of our stockholders, and our stockholders as well, as those stockholders that are not affiliated with us, approve such sale. At our 2013 annual stockholders meeting, our stockholders approved the sale of shares of our common stock at a price below the then-current net asset value per share, subject to certain conditions, during the period beginning on July 17, 2013 and expiring on July 17, 2014.
Our ability to enter into transactions with our affiliates is restricted.
We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of a majority of the independent members of our board of directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we will generally be prohibited from buying or selling any securities from or to such affiliate, absent the prior approval of our board of directors. The 1940 Act also prohibits certain joint transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our board of directors and, in some cases, the SEC. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person or certain of that persons affiliates, or entering into prohibited joint transactions with such persons to the extent not covered by our exemptive relief, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security from or to any portfolio company of a private equity fund managed by FB Advisor without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.
We are uncertain of our sources for funding our future capital needs; if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected.
Any working capital reserves we maintain may not be sufficient for investment purposes, and we may require debt or equity financing to operate. Accordingly, in the event that we develop a need for additional capital in the future for investments or for any other reason, these sources of funding may not be available to us. Consequently, if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected. As a result, we would be less able to allocate our portfolio among various issuers and industries and achieve our investment objectives, which may negatively impact our results of operations and reduce our ability to make distributions to our stockholders.
Risks Related to Debt Financing
We currently use borrowed funds to make investments and are exposed to the typical risks associated with leverage.
Borrowings and other types of financing, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Our and our special
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purpose financing subsidiaries lenders and debt holders have fixed dollar claims on our and their assets that are superior to the claims of our common stockholders or any preferred stockholders. If the value of our assets increases, then leverage would cause the net asset value to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leverage would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make distributions to holders of our common stock. Leverage is generally considered a speculative investment technique.
The agreements governing certain of our and our special purpose financing subsidiaries debt instruments require us and our subsidiaries to comply with certain financial and operational covenants. These covenants require us and our subsidiaries to, among other things, maintain certain financial ratios, including asset coverage and minimum stockholders equity. As of March 31, 2014, we and our subsidiaries were in compliance with these covenants. However, our and their continued compliance with these covenants depends on many factors, some of which are beyond our and their control. In the event of deterioration in the capital markets and pricing levels subsequent to this period, net unrealized depreciation in our and our subsidiaries portfolio may increase in the future. Absent an amendment to our financing facilities, continued unrealized depreciation in our and our subsidiaries investment portfolio could result in non-compliance with certain covenants.
Accordingly, there can be no assurance that we and our subsidiaries will continue to comply with these covenants. Failure to comply with these covenants would result in a default which, if we and our subsidiaries were unable to obtain a waiver from the debt holders, could accelerate repayment under any or all of our and their debt instruments and thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay dividends.
Our and our subsidiaries current and future debt securities are and may be governed by indentures or other instrument containing covenants restricting our and their operating flexibility. We, and indirectly our stockholders, bear the cost of issuing and servicing such securities. Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock.
The agreements governing Broad Streets revolving credit facility contain various covenants which, if not complied with, could accelerate repayment under the credit facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and our ability to pay distributions to our stockholders.
Broad Street Funding LLC, or Broad Street, our wholly-owned, special-purpose financing subsidiary, Deutsche Bank AG, New York Branch, or Deutsche Bank, and the other lenders party thereto entered into a revolving credit facility, or the Broad Street credit facility. The agreements governing the Broad Street credit facility contain default provisions such as: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the facility exceeding the applicable advance rates; (c) the purchase by Broad Street of certain ineligible assets; (d) the insolvency or bankruptcy of Broad Street or us; (e) our ceasing to act as investment manager of Broad Streets assets; (f) the decline of our net asset value below $50.0 million; and (g) fraud or other illicit acts by us, FB Advisor or GDFM in our or their investment advisory capacities. An event of default under the Broad Street credit facility would result, among other things, in the termination of the availability of further funds under the Broad Street credit facility and an accelerated maturity date for all amounts outstanding under the Broad Street credit facility. This could disrupt our business, reduce our revenues and, by delaying any dividends allowed to us under the Broad Street credit facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business, make distribution payments to our stockholders and maintain our status as a RIC.
The agreements governing the Broad Street credit facility also require Broad Street to comply with certain operational covenants. These covenants require Broad Street to, among other things, maintain eligible assets with
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an aggregate value equal to or exceeding a specified multiple of the borrowings under the Broad Street credit facility. The occurrence of certain Super-Collateralization Events results in an increase of the minimum aggregate value of eligible assets that Broad Street is required to maintain. Super-Collateralization Events include, without limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of GDFM; (ii) the bankruptcy or insolvency of GDFM or FB Advisor; (iii) GDFM ceasing to act as our sub-adviser or FB Advisor ceasing to act as our investment adviser; (iv) our ceasing to act as Broad Streets investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value at least equal to $50.0 million; and (v) us, GDFM or FB Advisor committing fraud or other illicit acts in our or their investment advisory capacities. A decline in the value of assets owned by Broad Street or the occurrence of a Super-Collateralization Event under the Broad Street credit facility could result in our being required to contribute additional assets to Broad Street, which would likely disrupt our business and impact our ability to meet our investment objectives and pay distributions to our stockholders.
The failure to meet collateral requirements under the Broad Street credit facility or the occurrence of any other event of default which results in the termination of the Broad Street credit facility may force Broad Street or us to liquidate positions at a time and/or at a price which is disadvantageous to us and could result in losses. In addition, upon the occurrence of an event of default under the Broad Street credit facility, Deutsche Bank would have the right to the assets pledged as collateral supporting the amounts outstanding under the Broad Street credit facility and could sell such assets in order to satisfy amounts due under the Broad Street credit facility.
Each borrowing under the Broad Street credit facility is subject to the satisfaction of certain conditions. We cannot assure stockholders that Broad Street will be able to borrow funds under the Broad Street credit facility at any particular time or at all. See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesBroad Street Credit Facility for a more detailed discussion of the terms of the Broad Street credit facility.
We are subject to risks associated with our debt securitization facility.
On April 23, 2013, through our two wholly-owned, special-purpose financing subsidiaries, Locust Street Funding LLC, or Locust Street, and Race Street Funding LLC, or Race Street, we entered into an amendment to our debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, pursuant to which $950.0 million will be made available to us to fund investments and for other general corporate purposes. The financing transaction with JPM is structured as a debt securitization. We use the term debt securitization to describe a form of secured borrowing under which an operating company, sometimes referred to as an originator, acquires or originates loans or other assets that earn income, whether on a one-time or recurring basis, or collectively referred to herein as income producing assets, and borrows money on a non-recourse basis against a legally separate pool of income producing assets. In a typical debt securitization, the originator transfers the income producing assets to a special-purpose, bankruptcy-remote subsidiary, also referred to as a special purpose entity, which is established solely for the purpose of holding income producing assets and issuing debt secured by these income producing assets. The special purpose entity completes the borrowing through the issuance of notes secured by the income producing assets.
Pursuant to the financing arrangement, the assets held by Locust Street secure the obligations of Locust Street under the Class A Notes to be issued from time to time by Locust Street to Race Street pursuant to the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Locust Street from time to time is $1.14 billion. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of April 15, 2024. Race Street will purchase the Class A Notes to be issued by Locust Street from time to time at a purchase price equal to their par value.
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Race Street, in turn, has entered into a repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of April 23, 2013, and subsequently amended as of October 24, 2013, or collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $1.14 billion. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility will not exceed $950.0 million.
See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesJPM Financing for a more detailed discussion of the terms of this debt securitization facility.
As a result of this debt securitization facility, we are subject to certain risks, including those set forth below.
Our equity investment in Locust Street is subordinated to the debt obligations of Locust Street.
Any dividends or other payments in respect of our equity interest in Locust Street are subordinated in priority of payment to the Class A Notes. In addition, Locust Street is subject to certain payment restrictions set forth in the Amended and Restated Indenture in respect of our equity interest.
We will receive cash distributions based on our investment in Locust Street only if Locust Street has made all required cash interest payments on the Class A Notes. We cannot assure stockholders that distributions on the assets held by Locust Street will be sufficient to make any distributions to us or that the yield on our investment in Locust Street will meet our expectations.
Our equity investment in Locust Street is unsecured and ranks behind all of the creditors, known or unknown, of Locust Street, including the holders of the Class A Notes. Consequently, if the value of Locust Streets assets decreases as a result of conditions in the credit markets, defaulted loans, capital gains and losses on the underlying assets or prepayment or changes in interest rates generally, the value of our equity investment in Locust Street could be reduced. Accordingly, our investment in Locust Street may not produce a profit and may be subject to a loss in an amount up to the entire amount of such equity investment.
In addition, if the value of Locust Streets assets decreases and Locust Street is unable to make any required payments to Race Street pursuant to the terms of the Class A Notes, Race Street may, in turn, be unable to make any required payments to JPM pursuant to the terms of the JPM Facility. In such event, if the value of Race Streets assets is not sufficient to meet Race Streets payment obligations to JPM, we may be required to loan or otherwise provide additional funds to Race Street to cover Race Streets payment obligations to JPM, or otherwise be subject to a loss in an amount up to the entire amount of our equity investment in Race Street.
Our equity investment in Race Street is subordinated to the debt obligations of Race Street.
Any dividends or other payments in respect of our equity interest in Race Street are subordinated in priority of payment to Race Streets payment obligations under the JPM Facility. In addition, Race Street is subject to certain payment restrictions set forth in the JPM Facility in respect of our equity interest.
We will receive cash distributions based on our investment in Race Street only if Race Street has made all required payments under the JPM Facility. We cannot assure stockholders that distributions on the assets held by Race Street, including the Class A Notes, will be sufficient to make any distributions to us or that the yield on our investment in Race Street will meet our expectations.
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Our equity investment in Race Street is unsecured and ranks behind all of the creditors, known or unknown, of Race Street, including JPM. Consequently, if the value of Race Streets assets decreases as a result of conditions in the credit markets, defaulted loans, capital gains and losses on the underlying assets or prepayment or changes in interest rates generally, the value of our equity investment in Race Street could be reduced. Accordingly, our investment in Race Street may not produce a profit and may be subject to a loss in an amount up to the entire amount of such equity investment.
In addition, if the value of Race Streets assets decreases or Locust Street fails to make any required payments to Race Street pursuant to the terms of the Class A Notes, Race Street may be unable to make any required payments to JPM pursuant to the terms of the JPM Facility. In such event, if the value of Race Streets assets is not sufficient to meet Race Streets payment obligations to JPM, we may be required to loan or otherwise provide additional funds to Race Street to cover Race Streets payment obligations to JPM, or otherwise be subject to a loss in an amount up to the entire amount of our equity investment in Race Street.
Our equity investments in Locust Street and Race Street have a high degree of leverage.
As of March 31, 2014, Locust Street had issued Class A Notes in an aggregate amount of $1.14 billion (the maximum amount of Class A Notes permitted to be issued by Locust Street under the Amended and Restated Indenture). The fair value of assets held by Locust Street as of March 31, 2014 was approximately $1.88 billion, which included assets purchased by Locust Street with proceeds from the issuance of Class A Notes. The repurchase amount payable by Race Street to JPM under the JPM Facility in respect of the issued Class A Notes is $950.0 million, plus applicable interest, and as of March 31, 2014, the fair value of assets held by Race Street was approximately $776.1 million. The market value of our equity assets in Locust Street and Race Street may be significantly affected by a variety of factors, including changes in the market value of the assets held by Locust Street and Race Street, changes in distributions on the assets held by Locust Street and Race Street, defaults and recoveries on those assets, capital gains and losses on those assets, prepayments on those assets and other risks associated with those assets. Our investments in Locust Street and Race Street may not produce a profit and may be subject to a loss in an amount up to the entire amount of such equity investment. The leveraged nature of our equity investment may magnify the adverse impact of any loss on our equity investment.
The interests of JPM, as the holder of the Class A Notes, may not be aligned with our interests, and we will not have control over remedies in respect of the Class A Notes.
The Class A Notes rank senior in right of payment to any equity securities issued by Locust Street. As a result, there are circumstances in which the interests of JPM, as the holder of the Class A Notes, may not be aligned with our interests. For example, under the terms of the Class A Notes, JPM has the right to receive payments of principal and interest prior to Locust Street making any distributions or dividends to holders of its equity securities.
For as long as the Class A Notes remain outstanding, JPM has the right to act in certain circumstances with respect to the portfolio of assets that secure the obligations of Locust Street under the Class A Notes in ways that may benefit their interests but not ours, including by exercising remedies or directing the Amended and Restated Indenture trustee to declare events of default under or accelerate the Class A Notes in accordance with the terms of the Amended and Restated Indenture. JPM has no obligation to consider any possible adverse effect that actions taken may have on our equity interests. For example, upon the occurrence of an event of default with respect to the Class A Notes, the trustee, which is currently Citibank, may declare the outstanding principal amount of all of the Class A Notes, together with any accrued interest thereon, to be immediately due and payable. This would have the effect of accelerating the outstanding principal amount of the Class A Notes and triggering a repayment obligation on the part of Locust Street. Locust Street may not have proceeds sufficient to make required payments on the Class A Notes and make any distributions to us. Any failure of Locust Street to make distributions on the equity interests we hold could have a material adverse effect on our business, financial condition, results of operations and cash flows, and may result in our inability to make distributions to our stockholders in amounts sufficient to maintain our qualification as a RIC, or at all.
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Locust Street may fail to meet certain asset coverage and quality tests, which would have an adverse effect on us.
Under the Amended and Restated Indenture, there are coverage tests and quality tests applicable to the collateral securing the Class A Notes. The first coverage test, or the Class A Interest Coverage Test, compares the amount of interest received on the portfolio of assets held by Locust Street to the amount of interest payable in respect of the Class A Notes. To meet the Class A Interest Coverage Test, the aggregate amount of interest received on the portfolio of assets held by Locust Street must equal at least 150% of the interest payable in respect of the Class A Notes. The second coverage test, or the Class A Par Value Test, compares the aggregate par value of the portfolio of assets (other than any asset acquired for a purchase price of less than 80% of its par value, which asset will be assigned a value equal to its purchase price) plus cash held by Locust Street to the aggregate outstanding par value of the Class A Notes. To meet the Class A Par Value Test, the aggregate par value of the portfolio of assets (other than any assets acquired for a purchase price of less than 80% of its par value, which assets will be assigned a value equal to its purchase price) plus cash held by Locust Street must equal at least 145.36% of the aggregate outstanding principal amount of the Class A Notes. The third coverage test, or the Additional Class A Par Value Test, compares the aggregate principal amount of the portfolio of assets (other than any defaulted assets, which assets will be assigned a value equal to their market value) held by Locust Street to the aggregate outstanding par value of the Class A Notes. To meet the Additional Class A Par Value Test, the aggregate par value of the portfolio of assets (other than any defaulted assets, which assets will be assigned a value equal to its market value) held by Locust Street must equal at least 130% of the aggregate outstanding principal amount of the Class A Notes. The quality tests compare the minimum weighted average fixed coupon rates, the minimum weighted average floating coupon rates, the weighted average life, the anticipated recovery rates and the anticipated default rates of the portfolio of assets held by Locust Street to certain benchmarks as described more fully in the Amended and Restated Indenture.
If the Class A Interest Coverage Test or the Class A Par Value Test is not satisfied on any date on which compliance is measured, Locust Street is required to apply available amounts to the repayment of the outstanding principal of the Class A Notes to satisfy the applicable tests. Failure to satisfy the Additional Class A Par Value Test on any measurement date constitutes an event of default under the Amended and Restated Indenture. Obligations that may be added to the portfolio of assets held by Locust Street and constituting collateral from time to time under the Amended and Restated Indenture are subject to certain restrictions in respect of the quality tests referenced above and more fully described in the Amended and Restated Indenture.
The market value of the underlying assets held by Locust Street and Race Street may decline causing Race Street to borrow funds from us in order to meet certain margin posting and minimum market value requirements, which would have an adverse effect on the timing of payments to us.
If at any time during the term of the JPM Facility the market value of the underlying assets held by Locust Street securing the Class A Notes declines by an amount greater than 27% of their initial aggregate purchase price, or the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such assets at such time is less than the Margin Threshold. Similarly, pursuant to the JPM Facility, the market value of the underlying assets held by Race Street must be at least $648.0 million, or the Market Value Requirement. In either such event, in order to satisfy these requirements, Race Street intends to borrow funds from us pursuant to a revolving credit agreement, dated as of July 21, 2011 and as amended as of September 26, 2012 and April 23, 2013, between Race Street, as borrower, and us, as lender, or the Revolving Credit Agreement. We may, in our sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum. To the extent we loan additional funds to Race Street to satisfy the Margin Threshold or the Market Value Requirement, such event could have a material adverse effect on our business, financial condition, results of operations and cash flows, and may result in our inability to make distributions to our stockholders in amounts sufficient to maintain our qualification as a RIC, or at all. There is no assurance that loans made pursuant to the Revolving Credit Agreement will be repaid.
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Restructurings of investments held by Locust Street or Race Street, if any, may decrease their value and reduce the value of our equity interests in these entities.
As collateral manager, we have broad authority to direct and supervise the investment and reinvestment of the assets held by Locust Street and Race Street, which may require from time to time the execution of amendments, waivers, modifications and other changes to the investment documentation in accordance with the related collateral management agreements we have entered into with Locust Street and Race Street. During periods of economic uncertainty and recession, the necessity for amendments, waivers, modifications and restructurings of investments may increase. Such amendments, waivers, modifications and other restructurings may change the terms of the investments and, in some cases, may result in Locust Street or Race Street holding assets that do not meet certain specified criteria for the investments made by it. This could adversely impact the coverage and quality tests under the Amended and Restated Indenture applicable to Locust Street. This could also adversely impact the ability of Locust Street to meet the Margin Threshold and Race Street to meet the Market Value Requirement. Any amendment, waiver, modification or other restructuring that reduces Locust Streets compliance with the coverage and quality tests under the Amended and Restated Indenture will make it more likely that Locust Street will need to pay cash to reduce the unpaid principal amount of the Class A Notes so as to cure any breach of such tests. Similarly, any amendment, waiver, modification or other restructuring that reduces Locust Streets ability to meet the Margin Threshold or Race Streets ability to meet the Market Value Requirement will make it more likely that Race Street will need to retain assets, including cash, to increase the market value of the assets held by Race Street and to post cash collateral with JPM in an amount at least equal to the amount by which the market value of the underlying assets held by Locust Street is less than the Margin Threshold. Any such use of cash by Locust Street or Race Street would reduce distributions available to us or delay the timing of distributions to us.
We may not receive cash from Locust Street or Race Street.
We receive cash from Locust Street and Race Street only to the extent that Locust Street or Race Street, respectively, makes distributions to us. Locust Street may make distributions to us, in turn, only to the extent permitted by the Amended and Restated Indenture. The Amended and Restated Indenture generally provides that distributions by Locust Street may not be made unless all amounts owing with respect to the Class A Notes have been paid in full. Race Street may make distributions to us only to the extent permitted by the JPM Facility. The JPM Facility generally provides that distributions by Race Street may not be made if the Margin Threshold has not been met or if the market value of the underlying loans held by Race Street is less than the Market Value Requirement. If we do not receive cash from Locust Street or Race Street, we may be unable to make distributions to our stockholders in amounts sufficient to maintain our qualification as a RIC, or at all. We also could be forced to sell investments in our portfolio at less than their fair value in order to continue making such distributions.
We are subject to the credit risk of JPM.
If JPM fails to sell the Class A Notes back to Race Street at the end of the applicable period, Race Streets recourse will be limited to an unsecured claim against JPM for the difference between the value of such Class A Notes at such time and the amount that would be owing by Race Street to JPM had JPM performed under the JPM Facility. The ability of JPM to satisfy such a claim will be subject to JPMs creditworthiness at that time.
If we borrow additional money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us.
The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. If we use leverage to partially finance our investments, through borrowing from banks and other lenders, stockholders will experience increased risks of investing in our common stock. If the value of our assets increases, leverage would cause the net asset value attributable to our
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common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leverage would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock distribution payments. Leverage is generally considered a speculative investment technique. In addition, the decision to utilize leverage will increase our assets and, as a result, will increase the amount of base management fees payable to FB Advisor.
As of March 31, 2014, we had $60.2 million in borrowings available under our financing facilities. Below is a summary of our outstanding financing facilities as of March 31, 2014:
Facility |
Type of Facility | Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
Arch Street Credit Facility |
Revolving | L + 2.05% | $ | 373,682,000 | (1) | $ | | August 29, 2016 | ||||||
Broad Street Credit Facility |
Revolving | L + 1.50% | $ | 125,000,000 | $ | | December 20, 2014 | |||||||
JPM Facility |
Repurchase | 3.25% | $ | 950,000,000 | $ | | April 15, 2017 | |||||||
Walnut Street Credit Facility |
Revolving | L + 1.50% to 2.50% | $ | 239,800,000 | $ | 60,200,000 | May 17, 2017 |
(1) | On March 31, 2014, Arch Street and Citibank amended the Arch Street credit facility to, among other things, reduce the maximum commitments thereunder to $350.0 million. On April 2, 2014, Arch Street repaid $23.7 million on the Arch Street credit facility in accordance with the amendment. |
Illustration. The following table illustrates the effect of leverage on returns from an investment in shares of our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $4.5 billion in total assets, (ii) a weighted average cost of funds of 2.9%, (iii) $1.75 billion in debt outstanding (i.e., assumes that the full $1.75 billion available to us as of March 31, 2014 under the financing facilities with Citibank, Deutsche Bank, JPM and Wells Fargo Bank, National Association, is outstanding) and (iv) $2.69 billion in stockholders equity. In order to compute the Corresponding return to shareholders, the Assumed Return on Our Portfolio (net of expenses) is multiplied by the assumed total assets to obtain an assumed return to us. From this amount, the interest expense is calculated by multiplying the assumed weighted average cost of funds times the assumed debt outstanding, and the product is subtracted from the assumed return to us in order to determine the return available to stockholders. The return available to stockholders is then divided by our stockholders equity to determine the Corresponding return to stockholders. Actual interest payments may be different.
Assumed Return on Our Portfolio (net of expenses) | -10% | -5% | 0% | 5% | 10% | |||||||||||||||
Corresponding return to stockholders |
(18.64 | )% | (10.28 | )% | (1.91 | )% | 6.45 | % | 14.82 | % |
Similarly, assuming (i) $4.5 billion in total assets, (ii) a weighted average cost of funds of 2.9% and (iii) $1.75 billion in debt outstanding (i.e., assuming that the full $1.75 billion available to us as of March 31, 2014 under the financing facilities with Citibank, Deutsche Bank, JPM and Wells Fargo Bank, National Association, is outstanding), our assets would need to yield an annual return (net of expenses) of approximately 1.14% in order to cover the annual interest payments on our outstanding debt.
Changes in interest rates may affect our cost of capital and net investment income.
Since we intend to use debt to finance investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on
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our net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our net investment income. We expect that our long-term fixed-rate investments will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have limited experience in entering into hedging transactions, and we will initially have to develop such expertise or arrange for such expertise to be provided.
A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase of the amount of incentive fees payable to FB Advisor with respect to pre-incentive fee net investment income.
Risks Related to Federal Income Tax
We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements.
To qualify for and maintain RIC tax treatment under Subchapter M of the Code, we must meet the following annual distribution, income source and asset diversification requirements. See Material U.S. Federal Income Tax ConsiderationsTaxation as a RIC.
| The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our investment company taxable income, which is generally the sum of our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. Because we may use debt financing, we are subject to an asset coverage ratio requirement under the 1940 Act and may in the future become subject to certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. |
| The income source requirement will be satisfied if we obtain at least 90% of our gross income for each year from dividends, interest, gains from the sale of securities or similar sources. |
| The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our tax year. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain qualified publicly-traded partnerships. Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses. |
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If we fail to qualify for or maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt instruments that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same tax year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash. Further, we may elect to amortize market discount and include such amounts in our taxable income in the current year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expenses for tax purposes.
Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under Subchapter M of the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for or maintain RIC tax treatment and thus become subject to corporate-level income tax.
Our portfolio investments may present special tax issues.
Investments in below-investment grade debt instruments and certain equity securities may present special tax issues for us. U.S. federal income tax rules are not entirely clear about issues such as when we may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless debt in equity securities, how payments received on obligations in default should be allocated between principal and interest income, as well as whether exchanges of debt instruments in a bankruptcy or workout context are taxable. Such matters could cause us to recognize taxable income for U.S. federal income tax purposes, even in the absence of cash or economic gain, and require us to make taxable distributions to our stockholders to maintain our RIC status or preclude the imposition of either U.S. federal corporate income or excise taxation. Additionally, because such taxable income may not be matched by corresponding cash received by us, we may be required to borrow money or dispose of other investments to be able to make distributions to our stockholders. These and other issues will be considered by us, to the extent determined necessary, in order that we minimize the level of any U.S. federal income or excise tax that we would otherwise incur. See Material U.S. Federal Income Tax ConsiderationsElection to be Taxed as a RIC.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this prospectus may include statements as to:
| our future operating results; |
| our business prospects and the prospects of the companies in which we may invest; |
| the impact of the investments that we expect to make; |
| the ability of our portfolio companies to achieve their objectives; |
| our current and expected financings and investments; |
| receiving and maintaining corporate credit ratings and changes in the general interest rate environment; |
| the adequacy of our cash resources, financing sources and working capital; |
| the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies; |
| our contractual arrangements and relationships with third parties; |
| actual and potential conflicts of interest with FB Advisor, FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC II Advisor, LLC, FS Investment Corporation II, FSIC III Advisor, LLC, FS Investment Corporation III, FS Global Advisor, LLC, FS Global Credit Opportunities Fund, GDFM or any of their affiliates; |
| the dependence of our future success on the general economy and its effect on the industries in which we may invest; |
| our use of financial leverage; |
| the ability of FB Advisor to locate suitable investments for us and to monitor and administer our investments; |
| the ability of FB Advisor or its affiliates to attract and retain highly talented professionals; |
| our ability to maintain our qualification as a RIC and as a BDC; |
| the impact on our business of the Dodd-Frank Act and the rules and regulations issued thereunder; |
| the effect of changes to tax legislation and our tax position; and |
| the tax status of the enterprises in which we invest. |
In addition, words such as anticipate, believe, expect and intend indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this prospectus involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in Risk Factors and elsewhere in this prospectus. Other factors that could cause actual results to differ materially include:
| changes in the economy; |
| risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; |
| future changes in laws or regulations and conditions in our operating areas; and |
| the price at which shares of our common stock may trade on the NYSE. |
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We have based the forward-looking statements included in this prospectus on information available to us on the date of this prospectus. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
You are advised to consult any additional disclosures that we may make directly to you or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward looking statements and projections contained in this prospectus, any prospectus supplement or in periodic reports we file under the Exchange Act are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act.
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Unless otherwise specified in a prospectus supplement, we intend to use substantially all of the proceeds from a sale of our securities, net of expenses, for general corporate purposes, which may include, among other things, making investments in private U.S. companies in accordance with our investment objectives and using the strategies described in this prospectus or repaying indebtedness. We anticipate that we will use substantially all of the net proceeds of an offering for the above purposes within approximately six months after the completion of such offering. However, depending on market conditions and other factors, including the availability of investments that meet our investment objectives, we may be unable to invest such proceeds within the time period we anticipate.
As of March 31, 2014, we had $60.2 million in borrowings available under our financing facilities. Below is a summary of our outstanding financing facilities as of March 31, 2014:
Facility |
Type of Facility | Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
Arch Street Credit Facility |
Revolving | L + 2.05% | $ | 373,682,000 | (1) | $ | | August 29, 2016 | ||||||
Broad Street Credit Facility |
Revolving | L + 1.50% | $ | 125,000,000 | $ | | December 20, 2014 | |||||||
JPM Facility |
Repurchase | 3.25% | $ | 950,000,000 | $ | | April 15, 2017 | |||||||
Walnut Street Credit Facility |
Revolving | L + 1.50% to 2.50% | $ | 239,800,000 | $ | 60,200,000 | May 17, 2017 |
(1) | On March 31, 2014, Arch Street and Citibank amended the Arch Street credit facility to, among other things, reduce the maximum commitments thereunder to $350.0 million. On April 2, 2014, Arch Street repaid $23.7 million on the Arch Street credit facility in accordance with the amendment. |
See Managements Discussion and Analysis of Financial Condition and Results of Operations for more information regarding our financing facilities.
Pending such use, we intend to invest the net proceeds of any offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election for taxation as a RIC. These temporary investments may have lower yields than our other investments and, accordingly, may result in lower distributions, if any, during such period. Our ability to achieve our investment objective may be limited to the extent that the net proceeds from an offering, pending full investment, are held in lower yielding interest-bearing deposits or other short-term instruments. See RegulationTemporary Investments for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.
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Subject to our board of directors discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis. From time to time, we may also pay special interim distributions in the form of cash or shares of common stock at the discretion of our board of directors.
We may fund our cash distributions to stockholders from any sources of funds available to us, including proceeds from the sale of shares of our 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, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.
During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make will represent a return of capital. A return of capital generally is a return of an investors investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 or 2011 represented a return of capital.
Pursuant to an expense support and conditional reimbursement agreement, dated as of March 13, 2012, and amended and restated as of May 16, 2013, or, as amended and restated, the expense reimbursement agreement, Franklin Square Holdings agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from our offering proceeds or borrowings. During the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011, no such reimbursements were required from Franklin Square Holdings. See Managements Discussion and Analysis of Financial Condition and Results of OperationsOverviewExpense Reimbursement for a detailed discussion of the expense reimbursement agreement.
From time to time and not less than on a quarterly basis, FB Advisor must review our accounts to determine whether cash distributions are appropriate. We intend to distribute pro rata to our stockholders funds received by us which FB Advisor deems unnecessary for us to retain.
In order to qualify as a RIC, we must, among other things, distribute at least 90% of our investment company taxable income, which is generally the sum of our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax. Any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been received by our U.S. stockholders on December 31 of the calendar year in which the dividend was declared. We can offer no assurance that we will achieve results that will permit us to pay any cash distributions. If we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See Regulation and Material U.S. Federal Income Tax Considerations.
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We declared our first distribution on January 29, 2009. The following table reflects the cash distributions per share that we have declared and paid on our common stock during the years ended December 31, 2014 (through May 31, 2014), 2013, 2012 and 2011. Dollar amounts are presented in thousands, except per share data:
Distribution | ||||||||
For the Year Ended December 31, |
Per Share | Amount | ||||||
2011(1)(2) |
$ | 0.9098 | $ | 86,657 | ||||
2012(3)(4) |
0.8586 | 197,906 | ||||||
2013(5) |
0.8303 | 212,153 | ||||||
2014 (through May 31, 2014)(6) |
0.3645 | 95,186 |
(1) | In addition to regular semi-monthly cash distributions during such period, cash distributions declared and paid on our common stock during the year ended December 31, 2011 include approximately $10,284, or approximately $0.115 per share, in special cash distributions. |
(2) | On April 13, 2011, our board of directors determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.032156 per share to $0.033594 per share, effective May 1, 2011. |
(3) | In addition to regular cash distributions during such period, cash distributions declared and paid on our common stock during the year ended December 31, 2012 include approximately $12,417, or approximately $0.05 per share, in special cash distributions. |
(4) | On May 15, 2012, our board of directors determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.033594 per share to $0.03375 per share, effective May 16, 2012. Beginning in June 2012, we declared and paid regular cash distributions on a monthly basis in an amount equal to $0.0675 per share. |
(5) | On June 25, 2013, our board of directors determined to increase the amount of the regular monthly cash distributions payable to stockholders of record from $0.0675 per share to $0.06975 per share, effective as of June 28, 2013. On October 16, 2013, our board of directors determined to increase the amount of regular monthly cash distributions payable to stockholders of record from $0.06975 per share to $0.0720 per share, effective as of November 29, 2013. |
(6) | On March 31, 2014, our board of directors determined to increase the amount of the regular monthly cash distribution payable to stockholders of record from $0.0720 per share to $0.07425 per share in order to increase our annual distribution rate from 8.41% to 8.68% (based on our publicly reported net asset value per share of $10.27 as of February 28, 2014). The increase in the regular monthly cash distribution to $0.07425 per share commenced with the regular monthly cash distribution paid on April 30, 2014 to stockholders of record as of April 29, 2014. |
On June 3, 2014, our board of directors declared a regular monthly cash distribution of $0.07425 per share, which will be paid on July 2, 2014 to stockholders of record on June 24, 2014. In addition, our board of directors intends to declare two special cash distributions, each in the amount of $0.10 per share, that will be paid on August 15, 2014 and November 14, 2014 to stockholders of record as of July 31, 2014 and October 31, 2014, respectively. The timing and amount of any future distributions (including the aforementioned special cash distributions) to stockholders are subject to restrictions under applicable law and the sole discretion of our board of directors.
We have adopted our new distribution reinvestment plan, which became effective as of June 2, 2014, that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors declares a cash distribution, then our stockholders who have not elected to opt out of our new distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock rather than receiving the cash distribution. Registered stockholders must notify our transfer agent in writing if they wish to opt out of our new distribution reinvestment plan. If a stockholder holds shares of our common stock in the name of a broker or financial
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intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock. See Distribution Reinvestment Plan for more information.
The following table reflects the sources of the cash distributions that we have paid on our common stock during the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011. Dollar amounts in the table below are presented in thousands, except per share data:
Three Months Ended March 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||||||||
Source of |
Distribution Amount |
Percentage |
Distribution Amount |
Percentage |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||||||||||||||||||||
Offering proceeds |
$ | | | $ | | | $ | | | $ | | | $ | | | |||||||||||||||||||||||||
Borrowings |
| | | | | | | | | | ||||||||||||||||||||||||||||||
Net investment income(1) |
56,237 | 100 | % | 39,543 | 77 | % | 212,153 | 100 | % | 144,364 | 73 | % | 74,663 | 86 | % | |||||||||||||||||||||||||
Capital gains proceeds from the sale of assets |
| | 11,641 | 23 | % | | | 53,542 | 27 | % | 11,994 | 14 | % | |||||||||||||||||||||||||||
Non-capital gains proceeds from the sale of assets |
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Distributions on account of preferred and common equity |
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Expense reimbursement from sponsor |
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Total |
$ | 56,237 | 100 | % | $ | 51,184 | 100 | % | $ | 212,153 | 100 | % | $ | 197,906 | 100 | % | $ | 86,657 | 100 | % | ||||||||||||||||||||
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(1) | During the three months ended March 31, 2014 and 2013, 90.9% and 89.5%, respectively, of our gross investment income was attributable to cash interest earned, 7.0% and 9.2%, respectively, was attributable to non-cash accretion of discount and 2.1% and 1.3%, respectively, was attributable to PIK interest. During the years ended December 31, 2013, 2012 and 2011, 89.3%, 92.1% and 89.6%, respectively, of our gross investment income was attributable to cash interest earned, 9.1%, 6.8% and 9.2%, respectively, was attributable to non-cash accretion of discount and 1.6%, 1.1% and 1.2%, respectively, was attributable to PIK interest. |
Our net investment income on a tax basis for the three months ended March 31, 2014 and 2013 was $51,851 and $57,068, respectively. As of March 31, 2014, we had $151,267 of undistributed net investment income and realized gains on a tax basis. Our net investment income on a tax basis for the years ended December 31, 2013, 2012 and 2011, was $236,936, $185,513 and $91,254, respectively. As of December 31, 2013, 2012 and 2011, we had $137,867, $57,740 and $16,591, respectively, of undistributed net investment income and realized gains on a tax basis. Our undistributed net investment income on a tax basis as of December 31, 2012 was adjusted following the filing of our 2012 tax return in September 2013. The adjustment was primarily due to tax-basis income received by us during the year ended December 31, 2012 exceeding GAAP basis income with respect to collateralized securities and interests in partnerships held in our investment portfolio during such period. The tax notices for such collateralized securities and interests in partnerships were received by us subsequent to the filing of our annual report on Form 10-K for the year ended December 31, 2012.
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The difference between our GAAP-basis net investment income and our tax-basis net investment income is primarily due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by us, the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes, the reversal of non-deductible excise taxes and, with respect to the years ended December 31, 2012 and 2011, the inclusion of a portion of the periodic net settlement payments due on the total return swap in tax-basis net investment income and the amount by which tax-basis income received by us with respect to collateralized securities and interests in partnerships exceeded our GAAP-basis income.
The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011 (dollar amounts in the table below and the paragraph that follows such table are presented in thousands):
Three Months Ended March 31, |
Year Ended December 31, | |||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
GAAP-basis net investment income |
$ | 55,877 | $ | 50,729 | $ | 244,976 | $ | 133,907 | $ | 71,364 | ||||||||||
Tax accretion of discount on investments |
| | | | 4,035 | |||||||||||||||
Reversal of incentive fee accrual on unrealized gains |
(199 | ) | 6,350 | 2,583 | 27,960 | (4,063 | ) | |||||||||||||
Taxable income adjustment on collateralized securities and partnerships |
| | | 9,355 | 14,446 | |||||||||||||||
Excise taxes |
| | 5,742 | 500 | | |||||||||||||||
Tax-basis net investment income portion of total return swap payments |
| | | 12,356 | 5,169 | |||||||||||||||
Reclassification of unamortized original issue discount |
(3,964 | ) | | (15,904 | ) | | | |||||||||||||
Other miscellaneous differences |
137 | (11 | ) | (461 | ) | 1,435 | 303 | |||||||||||||
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Tax-basis net investment income |
$ | 51,851 | $ | 57,068 | $ | 236,936 | $ | 185,513 | $ | 91,254 |
We may make certain adjustments to the classification of stockholders equity as a result of permanent book-to-tax differences. During the year ended December 31, 2013, we increased accumulated undistributed net realized gains on investments and gain/loss on foreign currency by $8,441 and decreased capital in excess of par value and accumulated undistributed (distributions in excess of) net investment income by $6,633 and $1,808, respectively. During the years ended December 31, 2012 and 2011, we reduced accumulated undistributed net realized gains on investments and gain/loss on foreign currency by $13,480 and $9,385, respectively, and increased accumulated undistributed (distributions in excess of) net investment income by $13,480 and $9,385, respectively, to reflect the reclassification of a portion of realized gains on the total return swap, or the TRS, that Arch Street Funding LLC, or Arch Street, our wholly-owned, special-purpose financing subsidiary had entered into with Citibank into tax-basis net investment income.
The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.
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The following table reflects the stock distributions per share that we have declared on our common stock to date:
Date Declared |
Record Date | Payment Date | Distribution Percentage |
Shares Issued |
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Fiscal 2009 |
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March 31, 2009 |
March 31, 2009 | March 31, 2009 | 1.4 | % | 13,818 | |||||||||||
April 30, 2009 |
April 30, 2009 | April 30, 2009 | 3.0 | % | 42,661 | |||||||||||
May 29, 2009 |
May 29, 2009 | May 29, 2009 | 3.7 | % | 79,125 | |||||||||||
June 30, 2009 |
June 30, 2009 | June 30, 2009 | 3.5 | % | 96,976 | |||||||||||
July 30, 2009 |
July 31, 2009 | July 31, 2009 | 3.1 | % | 117,219 | |||||||||||
August 31, 2009 |
August 31, 2009 | August 31, 2009 | 3.0 | % | 148,072 | |||||||||||
December 31, 2009 |
December 31, 2009 | December 31, 2009 | 0.5 | % | 49,710 | |||||||||||
Fiscal 2010 |
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January 28, 2010 |
January 31, 2010 | January 31, 2010 | 2.5 | % | 283,068 |
The purpose of these special distributions was to maintain a net asset value per share that was below the then-current net offering price, as required by the 1940 Act, subject to certain limited exceptions. Our board of directors determined that our portfolio performance sufficiently warranted taking these actions.
The stock distributions increased the number of shares outstanding, thereby reducing our net asset value per share. However, because the stock distributions were issued to all stockholders in proportion to their current holdings, the reduction in net asset value per share as a result of the stock distributions was offset exactly by the increase in the number of shares owned by each investor. As overall value to an investor was not reduced as a result of the special stock distributions, our board of directors determined that these issuances would not be dilutive to existing stockholders. As the stock distributions did not change any stockholders proportionate interest in us, they did not represent taxable distributions. Specific tax characteristics of all distributions are reported to stockholders annually on Form 1099-DIV.
As of March 31, 2014 and December 31, 2013, the components of accumulated earnings on a tax basis were as follows (dollar amounts in the table below, the related note and the paragraph that follows such note are presented in thousands):
March 31, 2014 |
Year Ended December 31, 2013 |
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(Unaudited) | ||||||||
Distributable ordinary income |
$ | 78,137 | $ | 82,523 | ||||
Distributable realized gains |
73,130 | 55,344 | ||||||
Incentive fee accrual on unrealized gains |
(30,344 | ) | (30,543 | ) | ||||
Unamortized organization costs |
(418 | ) | (429 | ) | ||||
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(1) |
77,465 | 67,085 | ||||||
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$ | 197,970 | $ | 173,980 | |||||
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(1) | As of March 31, 2014 and December 31, 2013, the gross unrealized appreciation on our investments and gain on foreign currency was $135,516 and $136,679, respectively. As of March 31, 2014 and December 31, 2013, the gross unrealized depreciation on our investments and loss on foreign currency was $58,051 and $69,594, respectively. |
The aggregate cost of our investments for federal income tax purposes totaled $4,000,025 and $4,070,314 as of March 31, 2014 and December 31, 2013, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis, was $77,465 and $67,085 as of March 31, 2014 and December 31, 2013, respectively.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this section contains forward-looking statements that involve risks and uncertainties. Please see Risk Factors and Special Note Regarding Forward-Looking Statements for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this prospectus. Many of the amounts and percentages presented in Managements Discussion and Analysis of Financial Condition and Results of Operations have been rounded for convenience of presentation and all amounts are presented in thousands (unless otherwise indicated), except share and per share amounts.
Overview
We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007, and commenced operations on January 2, 2009. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. On April 16, 2014, our shares of common stock began trading on the NYSE under the ticker symbol FSIC. This listing accomplished our goal of providing our stockholders with greatly enhanced liquidity.
Our investment activities are managed by FB Advisor and supervised by our board of directors, a majority of whom are independent. Under the investment advisory agreement, we have agreed to pay FB Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and makes investment recommendations for approval by FB Advisor according to guidelines set by FB Advisor.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We have identified and intend to focus on the following investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.
Direct Originations: We intend to leverage our relationship with GDFM and its global sourcing and origination platform to directly source investment opportunities. Such investments are originated or structured specifically for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not expect to make equity investments independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.
Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may include event driven investments, anchor orders and CLOs.
In the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the markets apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a companys financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event
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rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.
We may also invest in certain opportunities that are originated and then syndicated by a commercial or investment bank, but where we provide a capital commitment significantly above the average syndicate participant, i.e., an anchor order. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of FB Advisor and GDFM.
In addition, our relationship with GSO, one of the largest CLO managers in the world, allows us to opportunistically invest in CLOs. CLOs are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities.
Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle-market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities.
The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The loans in which we invest may be rated by an NRSRO and, in such case, generally will carry a rating below investment grade (rated lower than Baa3 by Moodys or lower than BBB- by S&P).We also invest in non-rated debt securities.
Revenues
The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our
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investment portfolio. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.
We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.
Expenses
Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory agreement and the administration agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fee compensates FB Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FB Advisor is responsible for compensating our investment sub-adviser.
We reimburse FB Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FB Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, FB Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. FB Advisor will allocate the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics.
We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:
| corporate and organization expenses relating to offerings of our securities; |
| the cost of calculating our net asset value, including the cost of any third-party pricing or valuation services; |
| the cost of effecting sales and repurchases of shares of our common stock and other securities; |
| investment advisory fees; |
| fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments; |
| interest payments on our debt or related obligations; |
| transfer agent and custodial fees; |
| research and market data (including news and quotation equipment and services, and any computer hardware and connectivity hardware (e.g., telephone and fiber optic lines) incorporated into the cost of obtaining such research and market data); |
| fees and expenses associated with marketing efforts; |
| federal and state registration fees; |
| federal, state and local taxes; |
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| fees and expenses of directors not also serving in an executive officer capacity for us or FB Advisor; |
| costs of proxy statements, stockholders reports, notices and other filings; |
| fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums; |
| direct costs such as printing, mailing, long distance telephone and staff; |
| fees and expenses associated with accounting, corporate governance, independent audits and outside legal costs; |
| costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws, including compliance with the Sarbanes-Oxley Act; |
| brokerage commissions for our investments; |
| costs associated with our chief compliance officer; and |
| all other expenses incurred by FB Advisor, GDFM or us in connection with administering our business, including expenses incurred by FB Advisor or GDFM in performing administrative services for us and administrative personnel paid by FB Advisor, to the extent they are not controlling persons of FB Advisor or any of its affiliates. |
Expense Reimbursement
Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from proceeds of the sale of shares of our common stock or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to our stockholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense support payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to
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shares of our common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means our total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
Franklin Square Holdings is controlled by our chairman and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters. During the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011, no such reimbursements were required from Franklin Square Holdings. Accordingly, as of March 31, 2014, there were no unreimbursed expense support payments subject to future reimbursement by us.
Portfolio Investment Activity for the Three Months Ended March 31, 2014 and for the Year Ended December 31, 2013
During the three months ended March 31, 2014, we made investments in portfolio companies totaling $471,491. During the same period, we sold investments for proceeds of $306,983 and received principal repayments of $259,132. As of March 31, 2014, our investment portfolio, with a total fair value of $4,077,627, consisted of interests in 148 portfolio companies (50% in first lien senior secured loans, 22% in second lien senior secured loans, 10% in senior secured bonds, 10% in subordinated debt, 3% in collateralized securities and 5% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $174.2 million. As of March 31, 2014, the investments in our portfolio were purchased at a weighted average price of 97.1% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 32.5% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 10.2% based upon the amortized cost of our investments.
During the year ended December 31, 2013, we made investments in portfolio companies totaling $2,641,733. During the same period, we sold investments for proceeds of $1,137,264 and received principal repayments of $1,373,623. As of December 31, 2013, our investment portfolio, with a total fair value of $4,137,581, consisted of interests in 165 portfolio companies (51% in first lien senior secured loans, 22% in second lien senior secured loans, 9% in senior secured bonds, 10% in subordinated debt, 4% in collateralized securities and 4% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $190.7 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 97.3% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 40.7% of our
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portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 10.1% based upon the amortized cost of our investments.
Total Portfolio Activity
The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2014 and year ended December 31, 2013:
Net Investment Activity |
For the ThreeMonths Ended March 31, 2014 |
For the Year Ended December 31, 2013 |
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Purchases |
$ | 471,491 | $ | 2,641,733 | ||||
Sales and Redemptions |
(566,115 | ) | (2,510,887 | ) | ||||
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Net Portfolio Activity |
$ | (94,624 | ) | $ | 130,846 | |||
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For the Three
Months Ended March 31, 2014 |
For the Year Ended December 31, 2013 |
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New Investment Activity by Asset Class |
Purchases | Percentage | Purchases | Percentage | ||||||||||||
Senior Secured LoansFirst Lien |
$ | 168,040 | 36 | % | $ | 1,646,725 | 62 | % | ||||||||
Senior Secured LoansSecond Lien |
176,818 | 37 | % | 446,626 | 17 | % | ||||||||||
Senior Secured Bonds |
53,180 | 11 | % | 231,539 | 9 | % | ||||||||||
Subordinated Debt |
46,101 | 10 | % | 239,201 | 9 | % | ||||||||||
Collateralized Securities |
| | 47,340 | 2 | % | |||||||||||
Equity/Other |
27,352 | 6 | % | 30,302 | 1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 471,491 | 100 | % | $ | 2,641,733 | 100 | % | ||||||||
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|
|
|
|
|
|
The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2014 and December 31, 2013:
March 31,
2014 (Unaudited) |
December 31, 2013 | |||||||||||||||||||||||
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||||||||
Senior Secured LoansFirst Lien |
$ | 2,011,486 | $ | 2,050,394 | 50 | % | $ | 2,080,228 | $ | 2,123,608 | 51 | % | ||||||||||||
Senior Secured LoansSecond Lien |
888,604 | 911,083 | 22 | % | 875,276 | 897,845 | 22 | % | ||||||||||||||||
Senior Secured Bonds |
424,566 | 402,432 | 10 | % | 414,297 | 385,548 | 9 | % | ||||||||||||||||
Subordinated Debt |
373,292 | 382,394 | 10 | % | 421,964 | 426,728 | 10 | % | ||||||||||||||||
Collateralized Securities |
115,695 | 135,132 | 3 | % | 120,206 | 140,508 | 4 | % | ||||||||||||||||
Equity/Other |
170,153 | 196,192 | 5 | % | 142,114 | 163,344 | 4 | % | ||||||||||||||||
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|
|
|
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|
|
|
|
|||||||||||||
$ | 3,983,796 | $ | 4,077,627 | 100 | % | $ | 4,054,085 | $ | 4,137,581 | 100 | % | |||||||||||||
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|
(1) | Amortized costs represent the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
65
March 31, 2014 | December 31, 2013 | |||||||
Number of Portfolio Companies |
148 | 165 | ||||||
% Variable Rate (based on fair value) |
71.3 | % | 72.2 | % | ||||
% Fixed Rate (based on fair value) |
22.9 | % | 23.5 | % | ||||
% Income Producing Equity or Other Investments (based on fair value) |
2.5 | % | 2.4 | % | ||||
% Non-Income Producing Equity or Other Investments (based on fair value) |
3.3 | % | 1.9 | % | ||||
Average Annual EBITDA of Portfolio Companies |
$ | 174,200 | $ | 190,700 | ||||
Weighted Average Purchase Price of Investments (as a % of par or stated value) |
97.1 | % | 97.3 | % | ||||
Weighted Average Credit Rating of Investments that were Rated |
B3 | B3 | ||||||
% of Investments on Non-Accrual |
| | ||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) |
10.2 | % | 10.1 | % | ||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost)Excluding Non-Income Producing Assets |
10.3 | % | 10.2 | % |
Direct Originations
The following tables present certain selected information regarding our direct originations for the three months ended March 31, 2014 and year ended December 31, 2013:
New Direct Originations |
For the Three Months Ended March 31, 2014 |
For the Year Ended December 31, 2013 |
||||||
Total Commitments (including Unfunded Commitments) |
$ | 369,033 | $ | 1,559,115 | ||||
Exited Investments (including partial paydowns) |
(126,964 | ) | (519,894 | ) | ||||
|
|
|
|
|||||
Net Direct Originations |
$ | 242,069 | $ | 1,039,221 | ||||
|
|
|
|
For the Three
Months Ended March 31, 2014 |
For the Year Ended December 31, 2013 |
|||||||||||||||
New Direct Originations by Asset Class |
Commitment Amount |
Percentage | Commitment Amount |
Percentage | ||||||||||||
Senior Secured LoansFirst Lien |
$ | 88,173 | 24 | % | $ | 1,105,046 | 71 | % | ||||||||
Senior Secured LoansSecond Lien |
240,332 | 65 | % | 232,000 | 15 | % | ||||||||||
Senior Secured Bonds |
15,750 | 4 | % | | | |||||||||||
Subordinated Debt |
7,500 | 2 | % | 175,000 | 11 | % | ||||||||||
Collateralized Securities |
| | 16,740 | 1 | % | |||||||||||
Equity/Other |
17,278 | 5 | % | 30,329 | 2 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 369,033 | 100 | % | $ | 1,559,115 | 100 | % | ||||||||
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|
|
|
|
|
|
|
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For the Three Months Ended March 31, 2014 |
For the Year
Ended December 31, 2013 |
|||||||
Average New Direct Origination Commitment Amount |
$ | 28,387 | $ | 55,683 | ||||
Weighted Average Maturity for New Direct Originations |
10/12/20 | 1/1/19 | ||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period |
9.1 | % | 10.5 | % | ||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during PeriodExcluding Non-Income Producing Assets |
9.6 | % | 10.6 | % | ||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Investments Exited during Period |
9.4 | % | 14.0 | % |
Characteristics of All Direct Originations held in Portfolio |
March 31, 2014 | December 31, 2013 | ||||||
Number of Portfolio Companies |
40 | 35 | ||||||
Average Annual EBITDA of Portfolio Companies |
$ | 38,700 | $ | 34,900 | ||||
Average Leverage Through Tranche of Portfolio CompaniesExcluding Equity/Other and Collateralized Securities |
4.0x | 4.0x | ||||||
% of Investments on Non-Accrual |
| | ||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations |
9.8 | % | 9.9 | % | ||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct OriginationsExcluding Non-Income Producing Assets |
10.0 | % | 10.0 | % |
Portfolio Composition by Strategy and Industry
The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of March 31, 2014 and December 31, 2013:
March 31, 2014 | December 31, 2013 | |||||||||||||||
Portfolio Composition by Strategy |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
Direct Originations |
$ | 2,306,225 | 57 | % | $ | 2,096,806 | 51 | % | ||||||||
Opportunistic |
1,077,547 | 26 | % | 1,155,322 | 28 | % | ||||||||||
Broadly Syndicated/Other |
693,855 | 17 | % | 885,453 | 21 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,077,627 | 100 | % | $ | 4,137,581 | 100 | % | ||||||||
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|
|
|
|
|
|
|
67
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2014 and December 31, 2013:
March 31, 2014 (Unaudited) |
December 31, 2013 | |||||||||||||||
Industry Classification |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
Automobiles & Components |
$ | 19,047 | 0 | % | $ | 51,551 | 1 | % | ||||||||
Capital Goods |
928,706 | 23 | % | 858,352 | 21 | % | ||||||||||
Commercial & Professional Services |
232,388 | 6 | % | 318,196 | 8 | % | ||||||||||
Consumer Durables & Apparel |
328,895 | 8 | % | 306,917 | 7 | % | ||||||||||
Consumer Services |
507,543 | 12 | % | 436,650 | 11 | % | ||||||||||
Diversified Financials |
140,347 | 3 | % | 160,678 | 4 | % | ||||||||||
Energy |
410,728 | 10 | % | 468,036 | 11 | % | ||||||||||
Food & Staples Retailing |
23,221 | 1 | % | 29,484 | 1 | % | ||||||||||
Food, Beverage & Tobacco |
4,057 | 0 | % | 4,042 | 0 | % | ||||||||||
Health Care Equipment & Services |
169,223 | 4 | % | 176,010 | 4 | % | ||||||||||
Household & Personal Products |
66,300 | 2 | % | 66,300 | 2 | % | ||||||||||
Insurance |
3,305 | 0 | % | 17,814 | 0 | % | ||||||||||
Materials |
256,461 | 6 | % | 233,719 | 6 | % | ||||||||||
Media |
193,641 | 5 | % | 193,283 | 5 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences |
47,605 | 1 | % | 57,794 | 1 | % | ||||||||||
Retailing |
69,317 | 2 | % | 69,171 | 2 | % | ||||||||||
Software & Services |
347,658 | 9 | % | 366,976 | 9 | % | ||||||||||
Technology Hardware & Equipment |
152,930 | 4 | % | 134,121 | 3 | % | ||||||||||
Telecommunication Services |
166,716 | 4 | % | 178,977 | 4 | % | ||||||||||
Transportation |
9,539 | 0 | % | 9,510 | 0 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,077,627 | 100 | % | $ | 4,137,581 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
As of March 31, 2014, we did not control and were not an affiliate of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to control a portfolio company if we owned 25% or more of its voting securities and would be an affiliate of a portfolio company if we owned 5% or more of its voting securities.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2014, we had six such investments with aggregate unfunded commitments of $90,641 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $2,313. As of December 31, 2013, we had five such investments with aggregate unfunded commitments of $48,439 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $4,629. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.
68
Portfolio Asset Quality
In addition to various risk management and monitoring tools, FB Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FB Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
Investment |
Summary Description | |
1 | Investment exceeding expectations and/or capital gain expected. | |
2 | Performing investment generally executing in accordance with the portfolio companys business planfull return of principal and interest expected. | |
3 | Performing investment requiring closer monitoring. | |
4 | Underperforming investmentsome loss of interest or dividend possible, but still expecting a positive return on investment. | |
5 | Underperforming investment with expected loss of interest and some principal. |
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2014 and December 31, 2013:
March 31, 2014 | December 31, 2013 | |||||||||||||||
Investment Rating |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
1 |
$ | 423,296 | 11 | % | $ | 510,687 | 12 | % | ||||||||
2 |
3,276,702 | 80 | % | 3,244,518 | 79 | % | ||||||||||
3 |
329,600 | 8 | % | 340,238 | 8 | % | ||||||||||
4 |
41,093 | 1 | % | 40,034 | 1 | % | ||||||||||
5 |
6,936 | 0 | % | 2,104 | 0 | % | ||||||||||
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|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,077,627 | 100 | % | $ | 4,137,581 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
Comparison of the Three Months Ended March 31, 2014 and March 31, 2013
Revenues
We generated investment income of $114,796 and $110,044 for the three months ended March 31, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $104,283 and $98,525 of cash income earned as well as $10,513 and $11,519 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the increase in the number of directly originated transactions over the last year as part of the transition of the portfolio to higher yielding non-broadly syndicated assets.
69
Expenses
Our total operating expenses were $58,919 and $59,315 for the three months ended March 31, 2014 and 2013, respectively. Our operating expenses include base management fees attributed to FB Advisor of $22,371 and $22,206 for the three months ended March 31, 2014 and 2013, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $1,200 and $1,436 for the three months ended March 31, 2014 and 2013, respectively.
FB Advisor is eligible to receive incentive fees based on performance. During the three months ended March 31, 2014 and 2013, we accrued subordinated incentive fees on income of $15,178 and $14,228, respectively, based upon the performance of our portfolio. During the three months ended March 31, 2014 and 2013, we accrued capital gains incentive fees of $4,836 and $6,350, respectively, based on the performance of our portfolio, of which $5,035 and $0, respectively, was based on realized gains and $(199) and $6,350, respectively, was based on unrealized gains. No such fee is actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee.
We recorded interest expense of $12,700 and $12,136 for the three months ended March 31, 2014 and 2013, respectively, in connection with our credit facilities and the JPM Facility. Fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $332 and $365 for the three months ended March 31, 2014 and 2013, respectively. We incurred fees and expenses with our stock transfer agent of $451 and $890 for the three months ended March 31, 2014 and 2013, respectively. Fees for our board of directors were $265 and $225 for the three months ended March 31, 2014 and 2013, respectively.
Our other general and administrative expenses totaled $1,586 and $1,479 for the three months ended March 31, 2014 and 2013, respectively, and consisted of the following:
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Expenses associated with our independent audit and related fees |
$ | 132 | $ | 185 | ||||
Compensation of our chief compliance officer |
25 | 20 | ||||||
Legal fees |
445 | 250 | ||||||
Printing fees |
295 | 300 | ||||||
Other |
689 | 724 | ||||||
|
|
|
|
|||||
Total |
$ | 1,586 | $ | 1,479 | ||||
|
|
|
|
During the three months ended March 31, 2014 and 2013, the ratio of our operating expenses to our average net assets was 2.20% and 2.34%, respectively. Our ratio of operating expenses to our average net assets during the three months ended March 31, 2014 and 2013 includes $12,700 and $12,136, respectively, related to interest expense and $20,014, and $20,578, respectively, related to accruals for incentive fees. Without such expenses, our ratio of operating expenses to average net assets would have been 0.97% and 1.05% for the three months ended March 31, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. The lower ratio of operating expenses to average net assets during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 can primarily be attributed to a reduction in administrative services expenses and stock transfer agent fees charged to us.
Net Investment Income
Our net investment income totaled $55,877 ($0.22 per share) and $50,729 ($0.20 per share) for the three months ended March 31, 2014 and 2013, respectively. The increase in net investment income on a per share basis can be attributed to, among other things, the transition of our portfolio to higher yielding non-broadly syndicated assets.
70
Net Realized Gains or Losses
We sold investments and received principal repayments of $306,983 and $259,132, respectively, during the three months ended March 31, 2014, from which we realized a net gain of $13,822. We also realized a net loss of $19 from settlements on foreign currency during the three months ended March 31, 2014. We sold investments and received principal repayments of $147,944 and $395,873, respectively, during the three months ended March 31, 2013, from which we realized a net gain of $14,171. We also realized a net loss of $63 from settlements on foreign currency during the three months ended March 31, 2013.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Unrealized Gain (Loss) on Foreign Currency
For the three months ended March 31, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $10,335 and the net change in unrealized gain (loss) on foreign currency totaled $45. For the three months ended March 31, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $17,518 and the net change in unrealized gain (loss) on foreign currency totaled $121. The net change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2014 was primarily driven by strong performance of certain of our senior secured bonds and subordinated debt investments. The net change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2013 was primarily driven by a general strengthening in the credit markets during the prior period and continued tightening of credit spreads in the first quarter of 2013.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended March 31, 2014, the net increase in net assets resulting from operations was $80,060 ($0.32 per share) compared to a net increase in net assets resulting from operations of $82,476 ($0.33 per share) during the three months ended March 31, 2013.
Comparison of the Years Ended December 31, 2013 and 2012
Revenues
We generated investment income of $474,566 and $303,222 for the years ended December 31, 2013 and 2012, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $423,585 and $279,152 of cash income earned as well as $50,981 and $24,070 in non-cash portions relating to accretion of discount and PIK interest for the years ended December 31, 2013 and 2012, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth in the average balance of our portfolio over the last year and the increase in the number of directly originated transactions during the year.
Expenses
Our total expenses were $229,590 and $169,315 for the years ended December 31, 2013 and 2012, respectively. Our expenses include base management fees attributed to FB Advisor of $90,247 and $68,059 for the years ended December 31, 2013 and 2012, respectively. Our expenses also include administrative services expenses attributed to FB Advisor of $5,165 and $5,297 for the years ended December 31, 2013 and 2012, respectively.
FB Advisor is eligible to receive incentive fees based on performance. During the year ended December 31, 2013, we accrued a subordinated incentive fee on income of $62,253 based upon the performance of our portfolio and paid FB Advisor $61,343 in respect of such fee. As of December 31, 2013, a subordinated incentive fee on
71
income of $14,303 was payable to FB Advisor. During the year ended December 31, 2012, we accrued a subordinated incentive fee on income of $13,393 based upon the performance of our portfolio and paid FB Advisor $0 in respect of such fee. During the year ended December 31, 2013, we accrued capital gains incentive fees of $4,173 based on the performance of our portfolio, of which $2,583 was based on unrealized gains and $1,590 was based on realized gains. During the year ended December 31, 2012, we accrued capital gains incentive fees of $39,751 based on the performance of our portfolio, of which $27,960 was based on unrealized gains and $11,791 was based on realized gains. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee.
We recorded interest expense of $50,763 and $30,227 for the years ended December 31, 2013 and 2012, respectively, in connection with our credit facilities and the JPM Facility. Fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $1,390 and $1,495 for the years ended December 31, 2013 and 2012, respectively. We incurred fees and expenses with our stock transfer agent of $2,820 and $3,641 for the years ended December 31, 2013 and 2012, respectively. Fees for our board of directors were $943 and $933 for the years ended December 31, 2013 and 2012, respectively.
Our other general and administrative expenses totaled $6,094 and $6,019 for the years ended December 31, 2013 and 2012, respectively, and consisted of the following:
Year Ended December 31, |
||||||||
2013 | 2012 | |||||||
Expenses associated with our independent audit and related fees |
$ | 572 | $ | 769 | ||||
Compensation of our chief compliance officer |
100 | 88 | ||||||
Legal fees |
1,510 | 1,443 | ||||||
Printing fees |
1,500 | 888 | ||||||
Other |
2,412 | 2,831 | ||||||
|
|
|
|
|||||
Total |
$ | 6,094 | $ | 6,019 | ||||
|
|
|
|
During the years ended December 31, 2013 and 2012, we accrued $5,742 and $500, respectively, for excise taxes.
During the years ended December 31, 2013 and 2012, the ratio of our expenses to our average net assets was 8.90% and 7.67%, respectively. Our ratio of expenses to our average net assets during the years ended December 31, 2013 and 2012 included $50,763 and $30,227, respectively, related to interest expense, $66,426 and $53,144, respectively, related to accruals for incentive fees and an accrual of $5,742 and $500, respectively, for excise taxes. Without such expenses, our ratio of expenses to average net assets would have been 4.14% and 3.87% for the years ended December 31, 2013 and 2012, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. The higher ratio of expenses to average net assets during the year ended December 31, 2013 compared to the year ended December 31, 2012 can primarily be attributed to higher base management fees as a percentage of average net assets as a result of the termination of the TRS, and the replacement of such financing arrangement with a revolving credit facility.
Net Investment Income
Our net investment income totaled $244,976 ($0.96 per share) and $133,907 ($0.59 per share) for the years ended December 31, 2013 and 2012, respectively. The increase in net investment income on a per share basis can be attributed to, among other things, our ability to efficiently deploy capital following the closing of our public offering and the increase in the number of directly originated transactions during the year.
72
Net Realized Gains or Losses
We sold investments and received principal repayments of $1,137,264 and $1,373,623, respectively, during the year ended December 31, 2013, from which we realized a net gain of $47,014. We also realized a net loss of $111 from settlements on foreign currency during the year ended December 31, 2013. We sold investments and received principal repayments of $926,136 and $1,045,311, respectively, during the year ended December 31, 2012, from which we realized a net gain of $47,008. We also earned $19,607 from periodic net settlement payments on our TRS and realized a net gain of $407 from settlements on foreign currency during the year ended December 31, 2012.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency
For the year ended December 31, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(25,982) and the net change in unrealized gain (loss) on foreign currency totaled $(57). For the year ended December 31, 2012, the net change in unrealized appreciation (depreciation) on investments totaled $127,399, the net change in unrealized appreciation (depreciation) on our TRS was $1,996 and the net change in unrealized gain (loss) on foreign currency totaled $(125). The net change in unrealized appreciation (depreciation) on our investments during the year ended December 31, 2013 was primarily driven by the conversion of unrealized gains in 2012 to realized gains in 2013.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the year ended December 31, 2013, the net increase in net assets resulting from operations was $265,840 ($1.04 per share) compared to a net increase in net assets resulting from operations of $330,199 ($1.45 per share) during the year ended December 31, 2012.
Comparison of the Years Ended December 31, 2012 and December 31, 2011
Revenues
We generated investment income of $303,222 and $115,484 for the years ended December 31, 2012 and 2011, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $279,152 and $103,477 of cash income earned as well as $24,070 and $12,007 in non-cash portions relating to accretion of discount and PIK interest for the years ended December 31, 2012 and 2011, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income was primarily due to the growth of our portfolio during the year ended December 31, 2012.
Expenses
Our total expenses were $169,315 and $44,120 for the years ended December 31, 2012 and 2011, respectively. Our expenses include base management fees attributed to FB Advisor of $68,059 and $27,791 and administrative services expenses attributed to FB Advisor of $5,297 and $2,625 for the years ended December 31, 2012 and 2011, respectively.
FB Advisor is eligible to receive incentive fees based on performance. During the three months ended December 31, 2012, we accrued a subordinated incentive fee on income of $13,393 based upon the performance of our portfolio and paid FB Advisor $0 in respect of such fee. As of December 31, 2012, a subordinated incentive fee on income of $13,393 was payable to FB Advisor. We did not accrue any subordinated incentive fee on income during the year ended December 31, 2011. During the year ended December 31, 2012, we accrued capital gains incentive fees of $39,751 based on the performance of our portfolio, of which $27,960 was based on unrealized gains and $11,791 was based on realized gains. During the year ended December 31, 2011, we paid $1,396 in
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capital gains incentive fees to FB Advisor and reversed $4,063 in capital gains incentive fees accrued by us as of December 31, 2010 as a result of unrealized losses in our portfolio during the year ended December 31, 2011. As of December 31, 2012, $11,791 of capital gains incentive fees were payable to FB Advisor.
We recorded interest expense of $30,227 and $11,334 for the years ended December 31, 2012 and 2011, respectively, relating to our credit facilities and the JPM Facility. Fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $1,495 and $878 for the years ended December 31, 2012 and 2011, respectively. We incurred fees and expenses with our stock transfer agent of $3,641 and $2,028 for the years ended December 31, 2012 and 2011, respectively. Fees for our board of directors were $933 and $694 for the years ended December 31, 2012 and 2011, respectively.
Our other general and administrative expenses totaled $6,019 and $2,833 for the years ended December 31, 2012 and 2011, respectively, and consisted of the following:
Year Ended December 31, |
||||||||
2012 | 2011 | |||||||
Expenses associated with our independent audit and related fees |
$ | 769 | $ | 540 | ||||
Compensation of our chief financial officer and our chief compliance officer(1) |
88 | 105 | ||||||
Legal fees |
1,443 | 477 | ||||||
Printing fees |
888 | 600 | ||||||
Other |
2,831 | 1,111 | ||||||
|
|
|
|
|||||
Total |
$ | 6,019 | $ | 2,833 | ||||
|
|
|
|
(1) | On March 14, 2011, William Goebel was appointed as our chief financial officer. Prior to that date, we had contracted with Pine Hill Group, LLC to provide the services of Charles Jacobson as our chief financial officer. Mr. Goebel is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity. As a result, for periods after March 31, 2011, this line item does not include compensation paid to our chief financial officer and only represents compensation paid to our chief compliance officer. |
During the year ended December 31, 2012, we accrued $500 for excise taxes.
During the years ended December 31, 2012 and 2011, the ratio of our expenses to our average net assets was 7.67% and 5.01%, respectively. Our ratio of expenses to our average net assets during the years ended December 31, 2012 and 2011 included $30,227 and $11,334, respectively, related to interest expense, $53,144 and $(4,063), respectively, related to accruals for incentive fees and an accrual in 2012 of $500 for excise taxes. Without such expenses, our ratio of expenses to average net assets would have been 3.87% and 4.18% for the years ended December 31, 2012 and 2011, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. The lower ratio of expenses, exclusive of interest expense and incentive fees, to average net assets during the year ended December 31, 2012 compared to the year ended December 31, 2011 can primarily be attributed to economies of scale resulting from a larger asset base relative to our operating expenses.
As the size of our asset base and number of investors grew prior to the closing of our continuous public offering of common stock, our general and administrative expenses increased accordingly. Legal fees increased as the number of filings increased and printing costs increased with the increase in the number of filings and the number of stockholders.
Net Investment Income
Our net investment income totaled $133,907 ($0.59 per share) and $71,364 ($0.76 per share) for the years ended December 31, 2012 and 2011, respectively. The decrease in net investment income on a per share basis
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can be attributed primarily to the accrual during the year ended December 31, 2012 of $27,960 of capital gains incentive fees based on unrealized gains and the reversal during the year ended December 31, 2011 of $4,063 in capital gains incentive fees that had been accrued as of December 31, 2010. Without the effect of such accruals, net investment income per share would have been $0.71 and $0.72 per share for the years ended December 31, 2012 and 2011, respectively.
Net Realized Gains or Losses
We sold investments and received principal repayments of $926,136 and $1,045,311, respectively, during the year ended December 31, 2012, from which we realized net gains of $47,008. During the year ended December 31, 2012, we also earned $19,607 from periodic net settlement payments on our TRS and realized a net gain of $407 from settlements on foreign currency. We sold investments and received principal repayments of $476,087 and $382,574, respectively, during the year ended December 31, 2011, from which we realized net gains of $14,920. During the year ended December 31, 2011, we also earned $5,169 from periodic net settlement payments on our TRS.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency
For the year ended December 31, 2012, the net change in unrealized appreciation (depreciation) on investments totaled $127,399, the net change in unrealized appreciation (depreciation) on our TRS was $1,996 and the net change in unrealized gain (loss) on foreign currency totaled $(125). For the year ended December 31, 2011, the net change in unrealized appreciation (depreciation) on investments totaled $(35,987), the net change in unrealized appreciation (depreciation) on our TRS was $(1,996), and the net change in unrealized gain (loss) on foreign currency was $0. The net change in unrealized appreciation (depreciation) on our investments and our TRS during the year ended December 31, 2012 was primarily driven by tightening of credit spreads as demand for senior loans and subordinated debt increased during the period. The net change in unrealized appreciation (depreciation) on our investments and our TRS during the year ended December 31, 2011 was primarily driven by a general widening of credit spreads during the third quarter of 2011 resulting from, among other things, uncertainty surrounding European sovereign debt.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the year ended December 31, 2012, the net increase in net assets resulting from operations was $330,199 ($1.45 per share) compared to a net increase in net assets resulting from operations of $53,470 ($0.57 per share) during the year ended December 31, 2011.
Financial Condition, Liquidity and Capital Resources
In May 2012, we closed our continuous public offering of common stock to new investors. Following the closing of our continuous public offering, we continued to issue shares pursuant to our distribution reinvestment plan, or our former distribution reinvestment plan.
On April 16, 2014, shares of our common stock began trading on the NYSE under the ticker symbol FSIC. This listing accomplished our goal of providing our stockholders with greatly enhanced liquidity. In connection with the listing of our shares of common stock on the NYSE on April 16, 2014, we terminated our former distribution reinvestment plan. Our new distribution reinvestment plan became effective as of June 2, 2014.
During the three months ended March 31, 2014, we issued 2,854,659 shares of common stock pursuant to our former distribution reinvestment plan for gross proceeds of $29,257 at an average price per share of $10.25.
During the year ended December 31, 2013, we issued 10,771,271 shares of our common stock pursuant to our distribution reinvestment plan for gross proceeds of $109,373 at an average price per share of $10.15.
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During the year ended December 31, 2012, we sold 93,380,264 shares of our common stock for gross proceeds of $985,195. The gross proceeds received include reinvested stockholder distributions of $98,763, for which we issued 10,140,536 shares of common stock. During the year ended December 31, 2012, we also incurred offering costs of $3,234 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value on our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common stock were $83,084 for the year ended December 31, 2012. These sales commissions and fees include $15,842 retained by our former dealer manager, FS2 Capital Partners, LLC, or FS2, which is one of our affiliates.
During the year ended December 31, 2011, we sold 119,516,108 shares of our common stock for gross proceeds of $1,269,375. The gross proceeds received include reinvested stockholder distributions of $37,241, for which we issued 3,662,625 shares of common stock. During the year ended December 31, 2011, we also incurred offering costs of $6,669 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value on our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common stock were $115,443 for the year ended December 31, 2011. These sales commissions and fees include $22,109 retained by FS2.
We generate cash primarily from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments.
Prior to investing in securities of portfolio companies, we invested the net proceeds from the issuance of shares of our common stock under our former distribution reinvestment plan and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.
On April 16, 2014, we commenced the listing tender offer to purchase for cash up to $250,000 in value of our shares of common stock from our stockholders. In accordance with the terms of the listing tender offer, we selected the lowest price, not greater than $11.00 per share or less than $10.35 per share, net to the tendering stockholder in cash, less any applicable withholding taxes and without interest, that enabled us to purchase the maximum number of shares of common stock properly tendered in the listing tender offer and not properly withdrawn having an aggregate purchase price of up to $250,000.
The listing tender offer expired at 5:00 p.m., New York City time, on May 28, 2014. Pursuant to the listing tender offer, we accepted for purchase 23,255,813 shares of common stock at a purchase price of $10.75 per share, for an aggregate cost of approximately $250,000, excluding fees and expenses relating to the listing tender offer. The 23,255,813 shares of common stock accepted for purchase in the listing tender offer represented approximately 8.9% of our issued and outstanding shares of common stock as of May 28, 2014.
Based on the final count by Computershare Trust Company, N.A., the depositary and paying agent for the listing tender offer, a total of 24,075,768 shares of common stock were properly tendered and not properly withdrawn at or below the purchase price of $10.75 per share.
Due to the oversubscription of the listing tender offer, based on the final count described above, we accepted for purchase on a pro rata basis approximately 96.6% of the shares tendered in the listing tender offer. Following settlement of the listing tender offer, we had approximately 239,026,360 shares of common stock outstanding. We used available cash and/or borrowings under the ING credit facility to fund purchase of shares of common stock in the listing tender offer and to pay for all related fees and expenses.
Historically, we conducted quarterly tender offers pursuant to our share repurchase program to provide our stockholders with limited liquidity. In anticipation of the listing of our common stock on the NYSE, our board of directors terminated our share repurchase program effective March 21, 2014.
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The following table provides information concerning our repurchases pursuant to our share repurchase program during the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011:
For the Three Months Ended |
Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares |
|||||||||||||
Fiscal 2011 |
||||||||||||||||||
December 31, 2010 |
January 3, 2011 | 99,633 | 100 | % | $ | 9.585 | $ | 955 | ||||||||||
March 31, 2011 |
April 1, 2011 | 158,258 | 100 | % | $ | 9.675 | $ | 1,531 | ||||||||||
June 30, 2011 |
July 1, 2011 | 79,250 | 100 | % | $ | 9.675 | $ | 767 | ||||||||||
September 30, 2011 |
October 3, 2011 | 121,088 | 100 | % | $ | 9.585 | $ | 1,161 | ||||||||||
Fiscal 2012 |
||||||||||||||||||
December 31, 2011 |
January 3, 2012 | 385,526 | 100 | % | $ | 9.585 | $ | 3,695 | ||||||||||
March 31, 2012 |
April 2, 2012 | 411,815 | 100 | % | $ | 9.675 | $ | 3,984 | ||||||||||
June 30, 2012 |
July 2, 2012 | 410,578 | 100 | % | $ | 9.720 | $ | 3,991 | ||||||||||
September 30, 2012 |
October 1, 2012 | 672,064 | 100 | % | $ | 9.900 | $ | 6,653 | ||||||||||
Fiscal 2013 |
||||||||||||||||||
December 31, 2012 |
January 2, 2013 | 883,047 | 100 | % | $ | 10.000 | $ | 8,830 | ||||||||||
March 31, 2013 |
April 1, 2013 | 1,053,119 | 100 | % | $ | 10.100 | $ | 10,637 | ||||||||||
June 30, 2013 |
July 1, 2013 | 749,224 | 100 | % | $ | 10.200 | $ | 7,642 | ||||||||||
September 30, 2013 |
October 1, 2013 | 656,541 | 100 | % | $ | 10.200 | $ | 6,697 | ||||||||||
Fiscal 2014 |
||||||||||||||||||
December 31, 2013 |
January 2, 2014 | 872,865 | 100 | % | $ | 10.20 | $ | 8,903 |
As of March 31, 2014, we had $297,685 in cash, which we held in a custodial account, and $60,200 in borrowings available under our financing facilities. On April 3, 2014, we entered into the ING credit facility which provides for borrowings of up to $300,000. See Managements Discussion and Analysis of Financial Condition and Results of OperationRecent DevelopmentsING Credit Facility for more information. Below is a summary of our outstanding financing facilities as of March 31, 2014:
Facility |
Type of Facility | Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
Arch Street Credit Facility |
Revolving | L + 2.05% | $ | 373,682 | (1) | $ | | August 29, 2016 | ||||||
Broad Street Credit Facility |
Revolving | L + 1.50% | $ | 125,000 | $ | | December 20, 2014 | |||||||
JPM Facility |
Repurchase | 3.25% | $ | 950,000 | $ | | April 15, 2017 | |||||||
Walnut Street Credit Facility |
Revolving | L + 1.50% to 2.50% | $ | 239,800 | $ | 60,200 | May 17, 2017 |
(1) | On March 31, 2014, Arch Street and Citibank amended the Arch Street credit facility to, among other things, reduce the maximum commitments thereunder to $350,000. On April 2, 2014, Arch Street repaid $23,682 on the Arch Street credit facility in accordance with the amendment. |
Arch Street Credit Facility
On August 29, 2012, Arch Street, our wholly-owned, special-purpose financing subsidiary, terminated the TRS, and entered into a revolving credit facility, or the Arch Street credit facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto.
On March 31, 2014, Arch Street and Citibank amended the Arch Street credit facility to, among other things, (a) increase the interest rate applicable to loans outstanding thereunder (i) during the drawdown period to three-month LIBOR plus 2.05%, and (ii) thereafter, to three-month LIBOR plus 2.30%, (b) extend the final
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maturity date to August 29, 2016, (c) reduce the maximum commitments thereunder to $350,000, (d) add a financial covenant requiring that we maintain its net asset value at more than $200,000 and (e) modify the calculation of advance rates and certain eligibility and valuation criteria, in each case, applicable to Arch Streets portfolio of debt securities that are pledged as collateral for the Arch Street credit facility. We paid certain fees to Citibank in connection with this amendment.
The Arch Street credit facility provides for borrowings in an aggregate principal amount up to $350,000 on a committed basis. We may contribute cash or debt securities to Arch Street from time to time, subject to certain restrictions set forth in the Arch Street credit facility, and will retain a residual interest in any assets contributed through our ownership of Arch Street or will receive fair market value for any debt securities sold to Arch Street. Arch Street may purchase additional debt securities from various sources. Arch Streets obligations to the lenders under the facility are secured by a first priority security interest in substantially all of the assets of Arch Street, including its portfolio of debt securities. The obligations of Arch Street under the facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Arch Street.
Borrowings under the Arch Street credit facility accrue interest at a rate equal to three-month LIBOR plus 2.05% per annum through August 29, 2014 and three-month LIBOR plus 2.30% per annum thereafter. Borrowings under the facility are subject to compliance with an equity coverage ratio with respect to the current value of Arch Streets portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Arch Streets portfolio. Beginning November 27, 2012, Arch Street became required to pay a non-usage fee to the extent the aggregate principal amount available under the Arch Street credit facility is not borrowed. Outstanding borrowings under the facility will be amortized beginning nine months prior to the scheduled maturity date. Any amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 29, 2016.
As of March 31, 2014 and December 31, 2013, $373,682 was outstanding under the Arch Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. We incurred costs of $4,446 in connection with obtaining the Arch Street credit facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the facility. As of March 31, 2014, $2,093 of such deferred financing costs had yet to be amortized to interest expense.
For the three months ended March 31, 2014 and the year ended December 31, 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Arch Street credit facility were as follows:
Three Months Ended March 31, 2014 |
Year Ended December 31, 2013 |
|||||||
(Unaudited) | ||||||||
Direct interest expense |
$ | 1,862 | $ | 10,093 | ||||
Non-usage fees |
220 | 311 | ||||||
Amortization of deferred financing costs |
365 | 1,481 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 2,447 | $ | 11,885 | ||||
|
|
|
|
|||||
Cash paid for interest expense |
$ | 2,394 | $ | 12,121 | ||||
Average borrowings under the facility |
$ | 373,682 | $ | 488,712 | ||||
Effective interest rate on borrowings |
1.99 | % | 1.99 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
2.23 | % | 2.10 | % |
In connection with the Arch Street credit facility, Arch Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within five business days of when due; (b) the insolvency or bankruptcy of Arch Street or us;
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(c) the failure of Arch Street to be beneficially owned and controlled by us; (d) the resignation or removal of us as Arch Streets investment manager; and (e) GDFM (or any affiliate thereof or any replacement thereof approved in writing by Citibank) no longer serving as our investment sub-adviser. Upon the occurrence of an event of default, the lenders may declare the outstanding principal and interest and all other amounts owing under the facility immediately due and payable. During the continuation of an event of default, Arch Street must pay interest at a default rate. Arch Street was in compliance with the terms of the facility as of March 31, 2014.
Borrowings of Arch Street are considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Broad Street Credit Facility
On January 28, 2011, Broad Street, Deutsche Bank and the other lenders party thereto entered into the Broad Street credit facility, which amended and restated the revolving credit facility that Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto. On March 23, 2012, Broad Street and Deutsche Bank entered into an amendment to the Broad Street credit facility which extended the maturity date of the facility to March 23, 2013, increased the aggregate amount which could be borrowed under the facility to $380,000 and reduced the interest rate for all borrowings under the facility to a rate of LIBOR for an interest period equal to the weighted average LIBOR interest period of debt securities owned by Broad Street, plus 1.50% per annum. On December 13, 2012, Broad Street repaid $140,000 of borrowings under the facility, thereby reducing the amount which could be borrowed under the facility to $240,000. On March 22, 2013, Broad Street and Deutsche Bank entered into an amendment to the facility to extend the maturity date of the facility to December 22, 2013. On December 20, 2013, Broad Street and Deutsche Bank entered into a further amendment to the facility which extended the maturity date to December 20, 2014 and reduced the maximum amount which could be borrowed under the facility to $125,000. The Broad Street credit facility provides for borrowings of up to $125,000 at a rate of LIBOR for an interest period equal to the weighted average LIBOR interest period of debt securities owned by Broad Street, plus 1.50% per annum. Deutsche Bank is a lender and serves as administrative agent under the facility.
Under the Broad Street credit facility, we transfer debt securities to Broad Street from time to time as a contribution to capital and retain a residual interest in the contributed debt securities through our ownership of Broad Street. The obligations of Broad Street under the facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Broad Street.
As of March 31, 2014 and December 31, 2013, $125,000 was outstanding under the Broad Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. We incurred costs of $2,566 in connection with obtaining and amending the facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the facility. As of December 31, 2013, all of such deferred financing costs have been amortized to interest expense.
For the three months ended March 31, 2014 and the year ended December 31, 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Broad Street credit facility were as follows:
Three Months Ended March 31, 2014 |
Year Ended December 31, 2013 |
|||||||
(Unaudited) | ||||||||
Direct interest expense |
$ | 541 | $ | 4,117 | ||||
Non-usage fees |
| 72 | ||||||
Amortization of deferred financing costs |
| 225 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 541 | $ | 4,414 | ||||
|
|
|
|
|||||
Cash paid for interest expense |
$ | 313 | $ | 4,735 | ||||
Average borrowings under the facility |
$ | 125,000 | $ | 230,466 | ||||
Effective interest rate on borrowings |
1.73 | % | 1.74 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
1.73 | % | 1.76 | % |
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Borrowings under the Broad Street credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Broad Street varies depending upon the types of assets in Broad Streets portfolio. The occurrence of certain events described as Super-Collateralization Events in the credit agreement that governs the facility, or a decline in our net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of GDFM; (ii) the bankruptcy or insolvency of GDFM or FB Advisor; (iii) GDFM ceasing to act as our sub-adviser or FB Advisor ceasing to act as our investment adviser; (iv) our ceasing to act as Broad Streets investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value at least equal to $50,000; and (v) us, GDFM or FB Advisor committing fraud or other illicit acts in our or their investment advisory capacities.
In connection with the facility, Broad Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the facility exceeding the applicable advance rates; (c) the purchase by Broad Street of certain ineligible assets; (d) the insolvency or bankruptcy of Broad Street or us; (e) our ceasing to act as investment manager of Broad Streets assets; (f) the decline of our net asset value below $50,000; and (g) fraud or other illicit acts by us, FB Advisor or GDFM in our or their investment advisory capacities. During the continuation of an event of default, Broad Street must pay interest at a default rate. Broad Street was in compliance with the terms of the facility as of March 31, 2014.
Borrowings of Broad Street are considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
JPM Financing
On April 23, 2013, through our two wholly-owned, special-purpose financing subsidiaries, Locust Street and Race Street, we entered into the April 2013 amendment to our debt financing arrangement with JPM, which was originally entered into on July 21, 2011 (and previously amended on September 26, 2012). The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $700,000 to $950,000; and (ii) extended the final repurchase date under the financing arrangement from October 15, 2016 to April 15, 2017. We elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.
Set forth below is a diagram of our debt financing arrangement with JPM:
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Pursuant to the financing arrangement, the assets held by Locust Street secure the obligations of Locust Street under the Class A Notes to be issued from time to time by Locust Street to Race Street pursuant to the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Locust Street from time to time is $1,140,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of April 15, 2024. Race Street will purchase the Class A Notes to be issued by Locust Street from time to time at a purchase price equal to their par value.
Pursuant to the Amended and Restated Indenture, Locust Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the Amended and Restated Indenture contains the following events of default: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date or to make interest payments on the Class A Notes within five business days of when due; (b) the failure of the aggregate outstanding principal balance (subject to certain reductions) of the assets securing the Class A Notes to be at least 130% of the outstanding principal amount of the Class A Notes; and (c) GDFM ceasing to be the sub-adviser to FB Advisor. Locust Street was in compliance with the terms of the Indenture as of March 31, 2014.
Race Street, in turn, has entered into the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $1,140,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility is $950,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than April 15, 2017. The repurchase price paid by Race Street to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Assets held by Race Street secure the obligations of Race Street under the JPM Facility. Commencing April 15, 2015, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.
If at any time during the term of the JPM Facility the market value of the assets held by Locust Street securing the Class A Notes declines below the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such assets at such time is less than the Margin Threshold. In such event, in order to satisfy any such margin-posting requirements, Race Street intends to borrow funds from us pursuant to the Revolving Credit Agreement. We may, in our sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.
Pursuant to the JPM Facility, Race Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the JPM Facility contains the following events of default: (a) the failure to pay the repurchase price upon the applicable payment dates; (b) the failure to post required cash collateral with JPM as discussed above; and (c) the occurrence of an event of default under the Amended and Restated Indenture. Race Street was in compliance with the terms of the JPM Facility as of March 31, 2014.
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In connection with the Class A Notes and the Amended and Restated Indenture, Locust Street also entered into: (i) an amended and restated collateral management agreement with us, as collateral manager, dated as of September 26, 2012, or the Locust Management Agreement, pursuant to which we will manage the assets of Locust Street; and (ii) an amended and restated collateral administration agreement with Virtus Group, LP, or Virtus, as collateral administrator, and us, as collateral manager, dated as of September 26, 2012, or the Locust Administration Agreement, pursuant to which Virtus will perform certain administrative services with respect to the assets of Locust Street. In connection with the JPM Facility, Race Street also entered into the Race Management Agreement, pursuant to which we will manage the assets of Race Street.
As of March 31, 2014 and December 31, 2013, Class A Notes in the aggregate principal amount of $1,140,000 had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $950,000. The carrying amount outstanding under the JPM Facility approximates its fair value. We funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of March 31, 2014 and December 31, 2013, Race Streets liability under the JPM Facility was $950,000, plus $6,518 and $6,690, respectively, of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on our financial statements.
As of March 31, 2014 and December 31, 2013, the fair value of assets held by Locust Street was $1,884,205 and $1,870,351, respectively, which included assets purchased by Locust Street with proceeds from the issuance of Class A Notes. As of March 31, 2014 and December 31, 2013, the fair value of assets held by Race Street was $776,130 and $747,330, respectively.
We incurred costs of $425 in connection with obtaining the JPM Facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the JPM Facility. As of March 31, 2014, $141 of such deferred financing costs had yet to be amortized to interest expense.
For the three months ended March 31, 2014 and the year ended December 31, 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM Facility were as follows:
Three Months Ended March 31, 2014 |
Year Ended December 31, 2013 |
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(Unaudited) | ||||||||
Direct interest expense |
$ | 7,719 | $ | 26,452 | ||||
Non-usage fees |
| | ||||||
Amortization of deferred financing costs |
32 | 106 | ||||||
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Total interest expense |
$ | 7,751 | $ | 26,558 | ||||
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Cash paid for interest expense |
$ | 7,891 | $ | 24,060 | ||||
Average borrowings under the facility |
$ | 950,000 | $ | 802,746 | ||||
Effective interest rate on borrowings |
3.25 | % | 3.25 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
3.25 | % | 3.25 | % |
Amounts outstanding under the JPM Facility will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Walnut Street Credit Facility
On March 11, 2014, Walnut Street Funding LLC, or Walnut Street, our wholly-owned, special-purpose financing subsidiary, and Wells Fargo Bank, National Association entered into an amendment, or the Walnut Street amendment, to the revolving credit facility originally entered into by such parties on May 17, 2012, or the Walnut Street credit facility. Wells Fargo Securities, LLC serves as the administrative agent and Wells Fargo
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Bank, National Association, or together with Wells Fargo Securities, LLC, Wells Fargo, is the sole lender, collateral agent, account bank and collateral custodian under the facility.
The Walnut Street amendment increased the maximum commitments available under the Walnut Street credit facility from $250,000 to $300,000 and decreased, from 2.75% to 2.50%, the applicable spread above three-month LIBOR that is payable on the portion of outstanding advances under the Walnut Street credit facility attributable to Traditional Middle Market Loans, Fixed Rate Loans and Second Lien Loans, in each case as defined in the Walnut Street credit facility. We paid certain fees to Wells Fargo in connection with the Walnut Street amendment.
Under the Walnut Street credit facility, we contribute cash or debt securities to Walnut Street from time to time and retain a residual interest in any assets contributed through our ownership of Walnut Street or receive fair market value for any debt securities sold to Walnut Street. The obligations of Walnut Street under the Walnut Street credit facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Walnut Street.
Borrowings under the Walnut Street credit facility accrue interest at a rate equal to three-month LIBOR, plus a spread ranging between 1.50% and 2.50% per annum, depending on the composition of the portfolio of debt securities for the relevant period. Beginning on September 17, 2012, Walnut Street became subject to a non-usage fee to the extent the aggregate principal amount available under the Walnut Street credit facility is not borrowed. Any amounts borrowed under the Walnut Street credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 17, 2017.
As of March 31, 2014 and December 31, 2013, $239,800 and $225,000, respectively, was outstanding under the Walnut Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. We incurred costs of $4,020 in connection with obtaining and amending the Walnut Street credit facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the facility. As of March 31, 2014, $2,611 of such deferred financing costs had yet to be amortized to interest expense.
For the three months ended March 31, 2014 and the year ended December 31, 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Walnut Street credit facility were as follows:
Three Months Ended March 31, 2014 |
Year Ended December 31, 2013 |
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(Unaudited) | ||||||||
Direct interest expense |
$ | 1,714 | $ | 7,118 | ||||
Non-usage fees |
62 | 33 | ||||||
Amortization of deferred financing costs |
185 | 775 | ||||||
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Total interest expense |
$ | 1,961 | $ | 7,906 | ||||
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Cash paid for interest expense |
$ | 1,781 | $ | 6,959 | ||||
Average borrowings under the facility |
$ | 236,471 | $ | 243,583 | ||||
Effective interest rate on borrowings |
2.88 | % | 2.89 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
2.99 | % | 2.90 | % |
Borrowings under the Walnut Street credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Walnut Street varies depending upon the types of debt securities in Walnut Streets portfolio.
The occurrence of certain collateral control events triggers (i) a requirement that Walnut Street obtain the consent of Wells Fargo prior to entering into any transaction with respect to portfolio assets and (ii) the right of Wells Fargo to direct Walnut Street to enter into transactions with respect to any portfolio assets, in each case in Wells Fargos sole discretion. Collateral control events include non-performance of any obligation under the
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transaction documents by Walnut Street, us, FB Advisor or GDFM, and other events with respect to such entities that are adverse to Wells Fargo and the secured parties under the Walnut Street credit facility.
In connection with the Walnut Street credit facility, Walnut Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the Walnut Street credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) a borrowing base deficiency that is not cured in accordance with the terms of the facility; (c) the insolvency or bankruptcy of Walnut Street or us; (d) our resignation or removal as collateral manager; (e) our failure to maintain an asset coverage ratio of greater than or equal to 2:1; (f) our failure to have a net asset value of at least $200,000; and (g) the failure of Walnut Street to qualify as a bankruptcy-remote entity. Upon the occurrence and during the continuation of an event of default, Wells Fargo may declare the outstanding advances and all other obligations under the Walnut Street credit facility immediately due and payable. During the continuation of an event of default, Walnut Street must pay interest at a default rate. Walnut Street was in compliance with the terms of the Walnut Street credit facility as of March 31, 2014.
Borrowings of Walnut Street are considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
RIC Status and Distributions
We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our investment company taxable income, as defined by the Code, each tax year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the tax year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC status each year. We are also generally subject to nondeductible federal excise taxes if we do not distribute during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax. Any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been received by our U.S. stockholders on December 31 of the calendar year in which the dividend was declared.
Following commencement of our operations, we declared our first distribution on January 29, 2009. Subject to our board of directors discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors.
During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of an investors investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 or 2011 represented a return of capital.
Unless stockholders elect to receive their distributions in cash, we intend to make such distributions in additional shares of our common stock under our new distribution reinvestment plan. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local
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taxes in the same manner as cash distributions, investors participating in our new distribution reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.
The following table reflects the cash distributions per share that we have declared and paid on our common stock during the years ended December 31, 2014 (through May 31, 2014), 2013, 2012 and 2011:
Distribution | ||||||||
For the Year Ended December 31, |
Per Share | Amount | ||||||
2011(1)(2) |
$ | 0.9098 | $ | 86,657 | ||||
2012(3)(4) |
0.8586 | 197,906 | ||||||
2013(5) |
0.8303 | 212,153 | ||||||
2014 (through May 31, 2014)(6) |
0.3645 | 95,186 |
(1) | In addition to regular semi-monthly cash distributions during such period, cash distributions declared and paid on our common stock during the year ended December 31, 2011 include approximately $10,284, or approximately $0.115 per share, in special cash distributions. |
(2) | On April 13, 2011, our board of directors determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.032156 per share to $0.033594 per share, effective May 1, 2011. |
(3) | In addition to regular cash distributions during such period, cash distributions declared and paid on our common stock during the year ended December 31, 2012 include approximately $12,417, or approximately $0.05 per share, in special cash distributions. |
(4) | On May 15, 2012, our board of directors determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.033594 per share to $0.03375 per share, effective May 16, 2012. Beginning in June 2012, we declared and paid regular cash distributions on a monthly basis in an amount equal to $0.0675 per share. |
(5) | On June 25, 2013, our board of directors determined to increase the amount of the regular monthly cash distributions payable to stockholders of record from $0.0675 per share to $0.06975 per share, effective as of June 28, 2013. On October 16, 2013, our board of directors determined to increase the amount of regular monthly cash distributions payable to stockholders of record from $0.06975 per share to $0.0720 per share, effective as of November 29, 2013. |
(6) | On March 31, 2014, our board of directors determined to increase the amount of the regular monthly cash distribution payable to stockholders of record from $0.0720 per share to $0.07425 per share in order to increase our annual distribution rate from 8.41% to 8.68% (based on our publicly reported net asset value per share of $10.27 as of February 28, 2014). The increase in the regular monthly cash distribution to $0.07425 per share commenced with the regular monthly cash distribution paid on April 30, 2014 to stockholders of record as of April 29, 2014. |
On June 3, 2014, our board of directors declared a regular monthly cash distribution of $0.07425 per share, which will be paid on July 2, 2014 to stockholders of record on June 24, 2014. In addition, our board of directors intends to declare two special cash distributions, each in the amount of $0.10 per share, that will be paid on August 15, 2014 and November 14, 2014 to stockholders of record as of July 31, 2014 and October 31, 2014, respectively. The timing and amount of any future distributions (including the aforementioned special cash distributions) to stockholders are subject to restrictions under applicable law and the sole discretion of our board of directors.
We have adopted our new distribution reinvestment plan, which became effective as of June 2, 2014, that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors declares a cash distribution, then our stockholders who have not elected to opt out of our new distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock rather than receiving the cash distribution. Registered stockholders must notify our transfer agent in writing if they wish to opt out of our new distribution
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reinvestment plan. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock. See Distribution Reinvestment Plan for more information.
We may fund our cash distributions to stockholders from any sources of funds available to us, including proceeds from the sale of shares of our 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, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.
The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011:
Three Months Ended March 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||||||||
Source of |
Distribution Amount |
Percentage |
Distribution Amount |
Percentage |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||||||||||||||||||||
Offering proceeds |
$ | | | $ | | | $ | | | $ | | | $ | | | |||||||||||||||||||||||||
Borrowings |
| | | | | | | | | | ||||||||||||||||||||||||||||||
Net investment |
56,237 | 100 | % | 39,543 | 77 | % | 212,153 | 100 | % | 144,364 | 73 | % | 74,663 | 86 | % | |||||||||||||||||||||||||
Capital gains proceeds from the sale of assets |
| | 11,641 | 23 | % | | | 53,542 | 27 | % | 11,994 | 14 | % | |||||||||||||||||||||||||||
Non-capital gains proceeds from the sale of assets |
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Distributions on account of preferred and common equity |
| | | | | | | | | | ||||||||||||||||||||||||||||||
Expense reimbursement from sponsor |
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Total |
$ | 56,237 | 100 | % | $ | 51,184 | 100 | % | $ | 212,153 | 100 | % | $ | 197,906 | 100 | % | $ | 86,657 | 100 | % | ||||||||||||||||||||
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(1) | During the three months ended March 31, 2014 and 2013, 90.9% and 89.5%, respectively, of our gross investment income was attributable to cash interest earned, 7.0% and 9.2%, respectively, was attributable to non-cash accretion of discount and 2.1% and 1.3%, respectively, was attributable to PIK interest. During the years ended December 31, 2013, 2012 and 2011, 89.3%, 92.1% and 89.6%, respectively, of our gross investment income was attributable to cash interest earned, 9.1%, 6.8% and 9.2%, respectively, was attributable to non-cash accretion of discount and 1.6%, 1.1% and 1.2%, respectively, was attributable to PIK interest. |
Our net investment income on a tax basis for the three months ended March 31, 2014 and 2013 was $51,851 and $57,068, respectively. As of March 31, 2014, we had $151,267 of undistributed net investment income and realized gains on a tax basis. Our net investment income on a tax basis for the years ended December 31, 2013, 2012 and 2011 was $236,936, $185,513 and $91,254, respectively. As of December 31, 2013, 2012 and 2011, we had $137,867, $57,740 and $16,591, respectively, of undistributed net investment income and realized gains on a
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tax basis. Our undistributed net investment income on a tax basis as of December 31, 2012 was adjusted following the filing of our 2012 tax return in September 2013. The adjustment was primarily due to tax-basis income received by us during the year ended December 31, 2012 exceeding GAAP-basis income with respect to collateralized securities and interests in partnerships held in our investment portfolio during such period. The tax notices for such collateralized securities and interests in partnerships were received by us subsequent to the filing of our annual report on Form 10-K for the year ended December 31, 2012.
The difference between our GAAP-basis net investment income and our tax-basis net investment income is primarily due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by us, the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes, the reversal of non-deductible excise taxes and, with respect to the years ended December 31, 2012 and 2011, the inclusion of a portion of the periodic net settlement payments due on the total return swap in tax-basis net investment income and the amount by which tax-basis income received by us with respect to collateralized securities and interests in partnerships exceeded our GAAP-basis income.
The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011:
|
Three Months Ended March 31, |
Year Ended December 31, | ||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
GAAP-basis net investment income |
$ | 55,877 | $ | 50,729 | $ | 244,976 | $ | 133,907 | $ | 71,364 | ||||||||||
Tax accretion of discount on investments |
| | | | 4,035 | |||||||||||||||
Reversal of incentive fee accrual on unrealized gains |
(199 | ) | 6,350 | 2,583 | 27,960 | (4,063 | ) | |||||||||||||
Taxable income adjustment on collateralized securities and partnerships |
| | | 9,355 | 14,446 | |||||||||||||||
Excise taxes |
| | 5,742 | 500 | | |||||||||||||||
Tax-basis net investment income portion of total return swap payments |
| | | 12,356 | 5,169 | |||||||||||||||
Reclassification of unamortized original issue discount |
(3,964 | ) | | (15,904 | ) | | | |||||||||||||
Other miscellaneous differences |
137 | (11 | ) | (461 | ) | 1,435 | 303 | |||||||||||||
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Tax-basis net investment income |
$ | 51,851 | $ | 57,068 | $ | 236,936 | $ | 185,513 | $ | 91,254 | ||||||||||
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We may make certain adjustments to the classification of stockholders equity as a result of permanent book-to-tax differences. During the year ended December 31, 2013, we increased accumulated undistributed net realized gains on investments and gain/loss on foreign currency by $8,441 and decreased capital in excess of par value and accumulated undistributed (distributions in excess of) net investment income by $6,633 and $1,808, respectively. During the years ended December 31, 2012 and 2011, we reduced accumulated undistributed net realized gains on investments and gain/loss on foreign currency by $13,480 and $9,385, respectively, and increased accumulated undistributed (distributions in excess of) net investment income by $13,480 and $9,385, respectively, to reflect the reclassification of a portion of realized gains on the TRS into tax-basis net investment income.
The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.
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As of March 31, 2014 and December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
March 31, 2014 | Year Ended December 31, 2013 |
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(Unaudited) | ||||||||
Distributable ordinary income |
$ | 78,137 | $ | 82,523 | ||||
Distributable realized gains |
73,130 | 55,344 | ||||||
Incentive fee accrual on unrealized gains |
(30,344 | ) | (30,543 | ) | ||||
Unamortized organization costs |
(418 | ) | (429 | ) | ||||
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(1) |
77,465 | 67,085 | ||||||
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$ | 197,970 | $ | 173,980 | |||||
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(1) | As of March 31, 2014 and December 31, 2013, the gross unrealized appreciation on our investments and gain on foreign currency was $135,516 and $136,679, respectively. As of March 31, 2014 and December 31, 2013 and 2012, the gross unrealized depreciation on our investments and loss on foreign currency was $58,051 and $69,594, respectively. |
The aggregate cost of our investments for federal income tax purposes totaled $4,000,025 and $4,070,314 as of March 31, 2014 and December 31, 2013, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $77,465 and $67,085 as of March 31, 2014 and December 31, 2013, respectively.
Critical Accounting Policies
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of managements most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Valuation of Portfolio Investments
We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FB Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and
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annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
| our quarterly valuation process begins with FB Advisors management team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from an independent valuation firm, if applicable; |
| preliminary valuation conclusions are then documented and discussed with our valuation committee; |
| our valuation committee reviews the preliminary valuation and FB Advisors management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and |
| our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FB Advisor, the valuation committee and any third-party valuation firm, if applicable. |
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. Below is a description of factors that our board of directors may consider when valuing our debt and equity investments.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors may consider include the borrowers ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.
For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
Our board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio
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companies or industry practices in determining fair value. Our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.
When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, our board of directors allocates the cost basis in the investment between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of directors subsequently values these warrants or other equity securities received at fair value.
The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.
Our investments as of March 31, 2014 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our 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. Thirty-one senior secured loan investments, one senior secured bond investment, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, 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 our equity/other investments were valued by the same independent valuation firm, 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. One senior secured loan investment and one equity investment, each of which was newly-issued and purchased near March 31, 2014, were valued at cost, as our board of directors determined that the cost of each such investment was the best indication of its fair value. Also, one equity investment which is traded on an active public market was valued at its closing price on March 31, 2014 and two equity/other investments were valued by an independent third-party pricing service in the manner described above.
Our investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our 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. Twenty-seven senior secured loan investments, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, 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 our equity/other investments were valued by the same independent valuation firm, 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. Also, one equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.
We periodically benchmark the bid and ask prices we receive from the third-party pricing services against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual
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transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. We periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.
Revenue Recognition
Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Upfront structuring fees are recorded as fee income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.
Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency
Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.
Capital Gains Incentive Fee
Pursuant to the terms of the investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our 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, we accrue 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 Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, we changed our methodology for accruing for this incentive fee to include 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 our entire portfolio were 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 investment advisory agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in
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arrears, equals 20.0% of 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 our net assets, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 2.0%. Once our 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 our pre-incentive fee net investment income for such quarter equals 2.5%, or 10.0% annually, of our net assets. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.
The subordinated incentive fee on income is subject to the total return requirement which provides that no incentive fee in respect of our 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 our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, 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 our pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation 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 quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.
In anticipation of the listing of our common stock on the NYSE, FB Advisor recommended that the investment advisory agreement be amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on our net assets, from 8.0% to 7.5% and (ii) assuming the reduction to the hurdle rate is approved, reduce the base management fee from 2.0% to 1.75% of the average value of our gross assets. Our board of directors has approved this amendment, and we have called a special meeting of our stockholders for June 23, 2014, at which our stockholders will be asked to vote on the proposal. Pending stockholder approval of this proposal, FB Advisor has agreed, effective April 1, 2014, to waive a portion of the base management fee to which it is entitled under the investment advisory agreement so that such fee equals 1.75% of the average value of our gross assets. There can be no assurance this waiver will continue in the future.
Uncertainty in Income Taxes
We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is more likely than not to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the three months ended March 31, 2014 and the year ended December 31, 2013, we did not incur any interest or penalties.
Contractual Obligations
We have entered into agreements with FB Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive
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fee based on our performance. FB Advisor, and to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on our behalf. In anticipation of the listing of our shares of common stock on the NYSE, FB Advisor recommended that the investment advisory agreement be further amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on our net assets, from 8.0% to 7.5% and (ii) assuming the reduction to the hurdle rate is approved, reduce the base management fee from 2.0% to 1.75% of the average value of our gross assets. Our board of directors has approved this amendment, and we have called a special meeting of our stockholders for June 23, 2014, at which our stockholders will be asked to vote on the proposal. Pending stockholder approval of this proposal, FB Advisor has agreed, effective April 1, 2014, to waive a portion of the base management fee to which it is entitled under the investment advisory agreement so that the fee received equals 1.75% of the average value of our gross assets. There can be no assurance that this waiver will continue in the future.
For the three months ended March 31, 2014 and 2013, we incurred $22,371 and $22,206, respectively, in base management fees and $1,200 and $1,436, respectively, in administrative services expenses. In addition, FB Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the three months ended March 31, 2014 and 2013, we accrued subordinated incentive fees on income of $15,178 and $14,228, respectively, based upon the performance of our portfolio. During the three months ended March 31, 2014, we paid FB Advisor $14,303 in subordinated incentive fees on income. As of March 31, 2014, a subordinated incentive fee on income of $15,178 was payable to FB Advisor. During the three months ended March 31, 2014 and 2013, we accrued capital gains incentive fees of $4,836 and $6,350, respectively, based on the performance of our portfolio. As of December 31, 2013, we had accrued capital gains incentive fees of $32,133 based on the performance of our portfolio, of which $30,543 was based on unrealized gains and $1,590 was based on realized gains. We paid FB Advisor $1,590 in capital gains incentive fees during the three months ended March 31, 2014. As of March 31, 2014, we had accrued $35,379 in capital gains incentive fees, of which only $5,035 was based on realized gains and was payable to FB Advisor.
For the years ended December 31, 2013, 2012 and 2011, we incurred $90,247, $68,059 and $27,791, respectively, in base management fees and $5,165, $5,297 and $2,625, respectively, in administrative services expenses. In addition, FB Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the years ended December 31, 2013, 2012 and 2011, we accrued subordinated incentive fees on income of $62,253, $13,393 and $0, respectively, based upon the performance of our portfolio. During the year ended December 31, 2013, we paid FB Advisor $61,343 in subordinated incentive fees on income. As of December 31, 2013, a subordinated incentive fee on income of $14,303 was payable to FB Advisor. During the years ended December 31, 2013 and 2012, we accrued $4,173 and $39,751, respectively, of capital gains incentive fees based on the performance of our portfolio, of which $2,583 and $27,960, respectively, was based on unrealized gains and $1,590 and $11,791, respectively, was based on realized gains. We paid FB Advisor $11,791 in capital gains incentive fees during the year ended December 31, 2013. During the year ended December 31, 2011, we reversed $4,063 in capital gains incentive fees accrued by us as of December 31, 2010 as a result of unrealized losses in our portfolio during the year ended December 31, 2011. As of December 31, 2013, we had accrued $32,133 in capital gains incentive fees, of which only $1,590 was based on realized gains and was payable to FB Advisor.
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A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the Arch Street credit facility, the Broad Street credit facility, the JPM Facility and the Walnut Street credit facility at March 31, 2014 is as follows:
Payments Due By Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years |
3-5 years |
More than 5 years | ||||||||||||||||
Borrowings of Arch Street(1) |
$ | 373,682 | | $ | 373,682 | | | |||||||||||||
Borrowings of Broad Street(2) |
$ | 125,000 | $ | 125,000 | | | | |||||||||||||
Borrowings of Race Street(3) |
$ | 950,000 | $ | 950,000 | | | | |||||||||||||
Borrowings of Walnut Street(4) |
$ | 239,800 | | | $ | 239,800 | |
(1) | At March 31, 2014, no amounts remained unused under the Arch Street credit facility. On March 31, 2014, Arch Street and Citibank amended the Arch Street credit facility to, among other things, reduce the maximum commitments thereunder to $350,000. On April 2, 2014, Arch Street repaid $23,682, on the Arch Street credit facility. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 29, 2016. |
(2) | At March 31, 2014, no amounts remained unused under the Broad Street credit facility. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on December 20, 2014. |
(3) | At March 31, 2014, no amounts remained unused under the JPM Facility. Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. As of March 31, 2014, the final repurchase transaction was scheduled to occur no later than April 15, 2017. |
(4) | At March 31, 2014, $60,200 remained unused under the Walnut Street credit facility. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 17, 2017. |
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Recently Issued Accounting Standards
None.
Related Party Transactions
Compensation of our Former Dealer Manager, Investment Adviser and Administrator
Pursuant to both the former investment advisory agreement and the investment advisory agreement, FB Advisor provides us with investment advisory services. FB Advisor is entitled to an annual base management fee of 2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the former investment advisory agreement on January 2, 2009, upon commencement of our operations. Base management fees are paid on a quarterly basis in arrears.
The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. Under the former investment advisory agreement, the hurdle rate used to compute the subordinated incentive fee on income was based on adjusted capital (as defined in the former investment advisory agreement). Under the investment advisory agreement, the hurdle rate used to compute the subordinated incentive fee on income is based on the net asset value of our assets rather than adjusted capital. In
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addition, under the investment advisory agreement, the subordinated incentive fee on income is subject to the total return requirement.
The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue 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. See Critical Accounting PoliciesCapital Gains Incentive Fee.
In anticipation of the listing of our common stock on the NYSE, FB Advisor recommended that the investment advisory agreement be amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on our net assets, from 8.0% to 7.5% and (ii) assuming the reduction to the hurdle rate is approved, reduce the base management fee from 2.0% to 1.75% of the average value of our gross assets. Our board of directors has approved this amendment, and we have called a special meeting of our stockholders for June 23, 2014, at which our stockholders will be asked to vote on the proposal. Pending stockholder approval of this proposal, FB Advisor has agreed, effective April 1, 2014, to waive a portion of the base management fee to which it is entitled under the investment advisory agreement so that such fee equals 1.75% of the average value of our gross assets. There can be no assurance this waiver will continue in the future.
Franklin Square Holdings has funded certain of our offering costs and organization costs. Under the terms of the former investment advisory agreement, when our registration statement was declared effective by the SEC and we were successful in satisfying the minimum offering requirement, FB Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering of common stock until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On January 2, 2009, we satisfied the minimum offering requirement. We paid total reimbursements of $0, $0, $0 and $641 to FB Advisor and its affiliates during the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011, respectively. The reimbursements are recorded as a reduction of capital. As of March 31, 2014, no amounts remain reimbursable to FB Advisor and its affiliates under this arrangement.
Pursuant to the former investment advisory agreement, we reimbursed FB Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement was set at the lesser of (1) FB Advisors actual costs incurred in providing such services and (2) the amount that we estimated we would be required to pay alternative service providers for comparable services in the same geographic location. FB Advisor was required to allocate the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors then assessed the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our board of directors considered whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compared the total amount paid to FB Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.
Pursuant to the administration agreement, FB Advisor provides administrative services necessary for our operation, including general ledger accounting, fund accounting, legal services, investor relations and other administrative services. There is no separate fee paid by us to FB Advisor in connection with the services provided under the administration agreement; provided, however, that we will reimburse FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities thereunder. FB Advisor will allocate the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics.
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The following table describes the fees and expenses accrued under the former investment advisory agreement and the previously effective dealer manager agreement during the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011:
Three Months Ended March 31, 2014 |
Year Ended December 31, | |||||||||||||||||||
Related Party |
Source Agreement |
Description |
2013 | 2012 | 2011 | |||||||||||||||
(Unaudited) | ||||||||||||||||||||
FB Advisor |
Former Investment Advisory Agreement | Base Management Fee(1) | $ | 22,371 | $ | 90,247 | $ | 68,059 | $ | 27,791 | ||||||||||
FB Advisor |
Former Investment Advisory Agreement | Capital Gains Incentive Fee(2) | $ | 4,836 | $ | 4,173 | $ | 39,751 | $ | (4,063 | ) | |||||||||
FB Advisor |
Former Investment Advisory Agreement | Subordinated Incentive Fee on Income(3) | $ | 15,178 | $ | 62,253 | $ | 13,393 | | |||||||||||
FB Advisor |
Former Investment Advisory Agreement | Administrative Services Expenses(4) | $ | 1,200 | $ | 5,165 | $ | 5,297 | $ | 2,625 | ||||||||||
FS2 |
Dealer Manager Agreement | Dealer Manager Fee(5) | | | $ | 15,842 | $ | 22,109 |
(1) | During the three months ended March 31, 2014, $22,696 in base management fees were paid to FB Advisor. As of March 31, 2014, $22,375 in base management fees were payable to FB Advisor. During the years ended December 31, 2013, 2012 and 2011, $89,054, $56,124 and $21,517, respectively, in base management fees were paid to FB Advisor. |
(2) | During the three months ended March 31, 2014, we accrued capital gains incentive fees of $4,836, based on the performance of our portfolio. As of March 31, 2014, we accrued $35,379 in capital gains incentive fees, of which $30,344 was based on unrealized gains and $5,035 was based on realized gains. We paid FB Advisor $1,590 in capital gains incentive fees during the three months ended March 31, 2014. During the year ended December 31, 2013, we accrued capital gains incentive fees of $4,173 based on the performance of our portfolio, of which $2,583 was based on unrealized gains and $1,590 was based on realized gains. During the year ended December 31, 2012, we accrued capital gains incentive fees of $39,751 based on the performance of our portfolio, of which $27,960 was based on unrealized gains and $11,791 was based on realized gains. During the year ended December 31, 2011, we reversed $4,063 in capital gains incentive fees accrued by us as of December 31, 2010 as a result of unrealized losses in our portfolio during the year ended December 31, 2011. No such fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. |
(3) | During the three months end March 31, 2014 and the year ended December 31, 2013, $14,303 and $61,343, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of March 31, 2014, a subordinated incentive fee on income of $15,178 was payable to FB Advisor. |
(4) | During the three months end March 31, 2014, $873 of administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FB Advisor and the remainder related to other reimbursable expenses. We paid $533 in administrative services expenses to FB Advisor during the three months end March 31, 2014. During the years ended December 31, 2013, 2012 and 2011, $4,463, $4,772 and $2,501, 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. We paid $4,959, $4,504 and $2,781, respectively, in administrative services expenses to FB Advisor during the years ended December 31, 2013, 2012 and 2011. |
(5) | Represents aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers. |
Our former dealer manager for our continuous public offering of common stock was FS2, which is one of our affiliates. Under the previously effective dealer manager agreement with FS2, FS2 was entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in our continuous public offering, all or a portion of which were re-allowed to selected broker dealers. Our continuous public offering closed to new investors in May 2012.
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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 FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings other affiliated BDCs and affiliated closed-end management investment company. As a result, such personnel provide investment advisory services to us and each of FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund. While none of FB Advisor, FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC or FS Global Advisor, LLC, is currently making private corporate debt investments for clients other than us, FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FB Advisor 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 our investment objectives and strategies, if necessary, so that we will not be disadvantaged in relation to any other client of FB Advisor or its management team. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and/or FS Global Credit Opportunities Fund rather than to us.
Exemptive Relief
In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. We believe this relief may not only enhance our ability to further our investment objectives and strategy, but may also increase favorable investment opportunities for us, in part by allowing us to participate in larger investments, together with our co-investment affiliates, than would be available to us if we had not obtained such relief. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Expense Reimbursement
Pursuant to the expense reimbursement agreement, Franklin Square Holdings agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from proceeds from the sale of shares of our common stock or borrowings. See OverviewExpense Reimbursement for a detailed description of the expense reimbursement agreement.
During the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011, no such reimbursements were required from Franklin Square Holdings.
Recent Developments
Listing on the NYSE
On April 16, 2014, our shares of common stock were listed on the NYSE, and began trading under the ticker symbol FSIC.
Listing Tender Offer
On April 16, 2014, we commenced the listing tender offer to purchase for cash up to $250,000 in value of our shares of common stock from our stockholders. In accordance with the terms of the listing tender offer, we selected the lowest price, not greater than $11.00 per share or less than $10.35 per share, net to the tendering stockholder in cash, less any applicable withholding taxes and without interest, that enabled us to purchase the maximum number of shares of common stock properly tendered in the listing tender offer and not properly withdrawn having an aggregate purchase price of up to $250,000.
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The listing tender offer expired at 5:00 p.m., New York City time, on May 28, 2014. Pursuant to the listing tender offer, we accepted for purchase 23,255,813 shares of common stock at a purchase price of $10.75 per share, for an aggregate cost of approximately $250,000, excluding fees and expenses relating to the listing tender offer. The 23,255,813 shares of common stock accepted for purchase in the listing tender offer represented approximately 8.9% of our issued and outstanding shares of common stock as of May 28, 2014.
Based on the final count by Computershare Trust Company, N.A., the depositary and paying agent for the listing tender offer, a total of 24,075,768 shares of common stock were properly tendered and not properly withdrawn at or below the purchase price of $10.75 per share.
Due to the oversubscription of the listing tender offer, based on the final count described above, we accepted for purchase on a pro rata basis approximately 96.6% of the shares tendered in the listing tender offer. Following settlement of the listing tender offer, we had approximately 239,026,360 shares of common stock outstanding. We used available cash and/or borrowings under the ING credit facility to fund purchases of common stock in the listing tender offer and to pay for all related fees and expenses.
Investment Advisory Agreement
On April 16, 2014, we entered into the investment advisory agreement with FB Advisor. The investment advisory agreement amended and restated the former investment advisory agreement. The investment advisory agreement became effective upon the listing of our common stock on the NYSE. In anticipation of the listing of our common stock on the NYSE, FB Advisor recommended that the investment advisory agreement be amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on our net assets, from 8.0% to 7.5% and (ii) assuming the reduction to the hurdle rate is approved, reduce the base management fee from 2.0% to 1.75% of the average value of our gross assets. Our board of directors has approved this amendment, and we have called a special meeting of our stockholders scheduled for June 23, 2014, at which stockholders will be asked to vote on the proposal. Pending stockholder approval of this proposal, FB Advisor has agreed, effective April 1, 2014, to waive a portion of the base management fee to which it is entitled under the investment advisory agreement so that such fee equals 1.75% of the average value of our gross assets. There can be no assurance this waiver will continue in the future. See Investment Advisory Agreement for more information.
Administration Agreement
On April 16, 2014, we entered into the administration agreement with FB Advisor relating to the administrative services previously provided by FB Advisor to us under the former investment advisory agreement. The administration agreement became effective upon the listing of our common stock on the NYSE. See Administrative Services for more information.
Distribution Reinvestment Plan
We have adopted our new distribution reinvestment plan, which became effective as of June 2, 2014, that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors declares a cash distribution, then our stockholders who have not elected to opt out of our new distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock rather than receiving the cash distribution. No action is required on the part of a registered stockholder to have their cash distribution reinvested in shares of our common stock. Registered stockholders must notify our transfer agent in writing if they wish to opt out of our new distribution reinvestment plan. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock. See Distribution Reinvestment Plan for more information.
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Distributions
Our board of directors intends to declare two special cash distributions, each in the amount of $0.10 per share of our common stock, that will be paid on August 15, 2014 and November 14, 2014 to stockholders of record as of July 31, 2014 and October 31, 2014, respectively. The timing and amount of any future distributions (including the aforementioned special cash distributions) to stockholders are subject to restrictions under applicable law and the sole discretion of our board of directors. If we purchase tendered shares of our common stock before the record date for any future regular or special cash distribution, tendering stockholders will not receive such distributions.
ING Credit Facility
On April 3, 2014, we entered into the ING credit facility with ING. The ING credit facility provides 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 us 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. Our obligations under the ING credit facility are guaranteed by all of our subsidiaries, other than its special-purpose financing subsidiaries. Our obligations under the ING credit facility are secured by a first priority security interest in substantially all of our assets and our subsidiary guarantors thereunder.
Borrowings under the ING credit facility are subject to compliance with a borrowing base. Interest under the ING credit facility for (i) loans for which we elect the base rate option is payable at a rate equal to 1.5% per annum plus the greatest of (x) the U.S. Prime Rate as published in The Wall Street Journal, (y) the federal funds effective rate plus 0.5% per annum and (z) three-month LIBOR plus 1.0% per annum and (ii) loans for which we elect the Eurocurrency option is payable at a rate equal to 2.5% per annum plus adjusted LIBOR for a period of one, three or six months, at our election. The ING credit facility will be subject to a non-usage fee of (a) 1% per annum on the unused portion of the commitment under the ING credit facility for each day such unused portion exceeds 65.0% of the commitments and (b) 0.375% per annum on the unused portion of the commitments for each day the unused portion is 35.0% or less. We will pay letter of credit participation fees and a fronting fee on the average daily amount of any lenders exposure with respect to any letters of credit issued under the ING credit facility.
In connection with the ING credit facility, we made certain representations and warranties and must comply with various covenants and reporting requirements customary for facilities of this type. In addition, we must comply with the following financial covenants: (a) our minimum stockholders equity, measured as of each fiscal quarter-end, must be greater than or equal to the greater of (i) 40% of our assets and subsidiaries as of the last day of such fiscal quarter and (ii) approximately $2,000,000 (less amounts paid to purchase common stock in the listing tender offer), plus 50% of the net proceeds of any post-closing equity offerings; (b) we must maintain at all times a 200% asset coverage ratio; (c) the sum of (x) our and the guarantors Net Worth (defined as stockholders equity minus the net asset value held by us in any special-purpose financing subsidiaries) plus (y) 30% of the equity value of any special-purpose financing subsidiaries, must at all times be at least equal to the sum of (A) any of our unsecured longer-term debt and (B) accrued but unpaid base management fees and incentive fees at the time of measurement; and (d) the aggregate value of eligible portfolio investments that can be converted to cash in fewer than 20 business days without more than a 5% change in price must not be less than 10% of the Covered Debt Amount (defined as the aggregate amount of outstanding loans and issued letters of credit under the facility, plus, to the extent incurred after closing of the ING credit facility, certain of our other permitted debt) for more than 30 business days during any period during which the Covered Debt Amount (less cash and cash equivalents included in the borrowing base) is greater than 90% of the borrowing base (less cash and cash equivalents included therein).
The ING credit facility contains events of default customary for facilities of this type. Upon the occurrence of an event of default, ING, at the instruction of the lenders, may terminate the commitments and declare the outstanding advances and all other obligations under the ING credit facility immediately due and payable. During
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the continuation of an event of default and subject, in certain cases, to the instructions of the lenders, we must pay interest at a default rate.
Trademark License Agreement
On April 16, 2014, in connection with the listing of our common stock on the NYSE, we entered into a trademark license agreement, or the Trademark License Agreement, with Franklin Square Holdings. See Certain Relationships and Related Party TransactionsTrademark License Agreement.
Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. As of March 31, 2014, 71.3% of our portfolio investments (based on fair value) paid variable interest rates, 22.9% paid fixed interest rates, 2.5% were income producing preferred equity investments, and the remaining 3.3% consisted of non-income producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to certain variable rate investments we hold and to declines in the value of any fixed rate investments we hold. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FB Advisor with respect to our increased pre-incentive fee net investment income.
Pursuant to the terms of the Arch Street credit facility, the Broad Street credit facility and the Walnut Street credit facility, Arch Street, Broad Street and Walnut Street, respectively, borrow at a floating rate based on LIBOR. Under the terms of the JPM Facility, Race Street pays interest to JPM at a fixed rate. To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.
The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our investment portfolio and borrowing arrangements in effect as of March 31, 2014:
LIBOR Basis Point Change |
Increase (Decrease) in Interest Income(1) |
Increase (Decrease) in Interest Expense |
Increase (Decrease) in Net Interest Income |
Percentage Change in Net Interest Income |
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Down 25 basis points |
$ | (781 | ) | $ | (1,576 | ) | $ | 795 | 0.2 | % | ||||||
Current LIBOR |
| | | | ||||||||||||
Up 100 basis points |
4,333 | 6,304 | (1,971 | ) | (0.5 | )% | ||||||||||
Up 300 basis points |
59,065 | 18,913 | 40,152 | 11.1 | % | |||||||||||
Up 500 basis points |
115,782 | 31,521 | 84,261 | 23.4 | % |
(1) | Assumes no defaults or prepayments by portfolio companies over the next twelve months. |
We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011, we did not engage in interest rate hedging activities.
In addition, we may have risk regarding portfolio valuation. See Critical Accounting PoliciesValuation of Portfolio Investments.
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Information about our senior securities (including debt securities and other indebtedness) is shown in the table below as of December 31, 2013, 2012, 2011, 2010 and 2009. The report of McGladrey LLP, our independent registered public accounting firm, on the senior securities table is attached as an exhibit to the registration statement of which this prospectus is a part. This information about our senior securities should be read in conjunction with our audited consolidated financial statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations. Dollar amounts in this section are presented in thousands, unless otherwise indicated.
Year Ended December 31, |
Total Amount Outstanding Exclusive of Treasury Securities(1) |
Asset Coverage per Unit(2) |
Involuntary Liquidation Preference per Unit(3) |
Average Market Value per Unit(4) (Exclude Bank Loans) |
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Financing Facilities(5) |
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2009 |
$ | | | | N/A | |||||||||||
2010 |
$ | 297,201 | 2.31 | | N/A | |||||||||||
2011 |
$ | 791,324 | 2.89 | | N/A | |||||||||||
2012 |
$ | 1,649,713 | 2.52 | | N/A | |||||||||||
2013 |
$ | 1,673,682 | 2.58 | | N/A |
(1) | Total amount (in thousands) of each class of senior securities outstanding at the end of the period presented. |
(2) | Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. |
(3) | The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it. The in this column indicates that the SEC expressly does not require this information to be disclosed for certain types of senior securities. |
(4) | Not applicable because senior securities are not registered for public trading. |
(5) | See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital Resources for a description of our financing facilities. Amounts for the year ended December 31, 2011 include the TRS, which Arch Street entered into on March 18, 2011 and terminated on August 29, 2012. For purposes of determining our compliance with the asset coverage ratio test applicable to BDCs, we agreed with the staff of the SEC to treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted under the TRS, as a senior security for the life of that instrument. |
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Our common stock began trading on the NYSE under the ticker symbol FSIC on April 16, 2014. The following table lists the high and low closing sale price for our common stock, the closing sale price as a percentage of net asset value and distributions per share since April 16, 2014.
Closing Sales Price |
Premium (Discount) of High Sales Price to Net Asset Value per Share(1) |
Premium (Discount) of Low Sales Price to Net Asset Value per Share(1) |
Distributions per Share | |||||||||||||||||||||||||||
Period |
Net Asset Value per Share(1) |
High(2) | Low(2) | |||||||||||||||||||||||||||
Fiscal Year Ending December 31, 2014 |
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Second Quarter |
N/A | $ | 10.67 | $ | 10.07 | N/A | N/A | $ | 0.1485 | (3) |
(1) | Net asset value for the period presented has not been determined. |
(2) | Closing sales price is the high or low closing sales price during the applicable period, without adjustment for distributions. |
(3) | Includes two distributions of $0.07425 each, the first paid May 30, 2014 to stockholders of record as of May 29, 2014 and the second paid April 30, 2014 to stockholders of record as of April 29, 2014. |
Shares of BDCs may trade at a market price that is less than the net asset value that is attributable to those shares. Our net asset value per share was $10.28 as of March 31, 2014. The possibility that our shares of common stock will trade at a discount from net asset value or at a premium that is unsustainable over the long term is separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether our shares will trade at, above or below net asset value in the future.
On June 13, 2014, the last reported closing price of our common stock was $10.34 per share. As of June 10, 2014, we had 5,186 stockholders of record.
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RATIOS OF EARNINGS TO FIXED CHARGES
The following table contains our ratios of earnings to fixed charges for the periods indicated, computed as set forth below. You should read these ratios of earnings to fixed charges in connection with our audited and unaudited consolidated financial statements, including the notes to those statements, included in this prospectus.
Dollar amounts in thousands |
For the Three 2014 |
For the Years Ended December 31, | ||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||
Earnings(1) |
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Net investment income (after taxes) |
$ | 55,877 | $ | 244,976 | $ | 133,907 | $ | 71,364 | $ | 9,392 | $ | 2,151 | ||||||||||||
Add: Net realized gain (losses) gains on investments |
13,803 | 46,903 | 67,022 | 20,089 | 9,081 | 1,030 | ||||||||||||||||||
Add: Net change in unrealized appreciation (depreciation) |
10,380 | (26,039 | ) | 129,270 | (37,983 | ) | 9,791 | 8,275 | ||||||||||||||||
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Total Earnings |
$ | 80,060 | $ | 265,840 | $ | 330,199 | $ | 53,470 | $ | 28,264 | $ | 11,456 | ||||||||||||
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Fixed Charges(2) |
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Interest and expenses on debt |
$ | 12,700 | $ | 50,763 | $ | 30,227 | $ | 11,334 | $ | 3,881 | $ | | ||||||||||||
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Ratio of Total Earnings to Fixed Charges |
6.30 | 5.24 | 10.92 | 4.72 | 7.28 | | ||||||||||||||||||
Ratio of Net Investment Income to Fixed Charges |
4.40 | 4.83 | 4.43 | 6.30 | 2.42 | |
(1) | Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period. |
(2) | Fixed charges include interest and related expenses on our financing facilities. |
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SALES OF COMMON STOCK BELOW NET ASSET VALUE
Our stockholders have in the past and may again approve our ability to sell shares of our common stock, not exceeding 25% of our then outstanding common stock, below our then current net asset value per share in one or more public offerings of our common stock. In making a determination that an offering below net asset value per share is in our and our stockholders best interests, our board of directors, a majority of our directors who have no financial interest in the sale and a majority of our independent directors, may also consider a variety of factors, including:
| The effect that an offering below net asset value per share would have on our stockholders, including the potential dilution they would experience as a result of the offering; |
| The amount per share by which the offering price per share and the net proceeds per share are less than the most recently determined net asset value per share; |
| The relationship of recent market prices of our common stock to net asset value per share and the potential impact of the offering on the market price per share of our common stock; |
| Whether the estimated offering price would closely approximate the market value of our shares, less distributing commissions or discounts, and would not be below current market price; |
| The potential market impact of being able to raise capital in the current financial market; |
| The nature of any new investors anticipated to acquire shares in the offering; |
| The anticipated rate of return on and quality, type and availability of investments; |
| The leverage available to us, both before and after the offering and other borrowing terms; and |
| The potential investment opportunities available relative to the potential dilutive effect of additional capital at the time of the offering. |
Our board of directors may also consider the fact that a sale of shares of common stock at a discount will benefit FB Advisor, as FB Advisor will earn additional investment base management fees on the proceeds of such offerings, as it would from the offering of any of our other securities or from the offering of common stock at premium to net asset value per share.
Sales by us of our common stock at a discount to net asset value pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering.
We will not sell shares of our common stock pursuant to stockholder approval (or any rights or warrants to purchase shares of our common stock) under this prospectus or an accompanying prospectus supplement without first filing a new post-effective amendment to the registration statement where such offering will result in (i) greater than 15% dilution in the aggregate to existing stockholder net asset value, (ii) us receiving an auditors going-concern opinion or (iii) a material adverse change making the financial statements materially misleading. The limitation in clause (i) above would be measured separately for each offering pursuant to the registration statement, as amended by this post-effective amendment, by calculating the percentage dilution or accretion to aggregate net asset value from that offering and then summing the percentage from each offering. For example, if our most recently determined net asset value per share at the time of the first offering is $10.00, and we have 100 million shares outstanding, the sale of an additional 25 million shares at net proceeds to us of $5.00 per share (a 50% discount) would produce dilution of 10.0%. If we subsequently determined that our net asset value per share increased to $11.00 on the then outstanding 125 million shares and contemplated an additional offering, we could, for example, propose to sell approximately 31.25 million additional shares at a price that would be expected to yield net proceeds to us of $8.25 per share, resulting in incremental dilution of 5.0%, before we would reach the aggregate 15% limit. If we file a new post-effective amendment, the threshold would reset.
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The following three headings and accompanying tables explain and provide hypothetical examples assuming proceeds are temporarily invested in cash equivalents on the impact of an offering at a price less than net asset value per share on three different sets of investors:
| existing stockholders who do not purchase any shares in the offering; |
| existing stockholders who purchase a relatively small amount of shares in the offering or a relatively large amount of shares in the offering; and |
| new investors who become stockholders by purchasing shares in the offering. |
Impact on Existing Stockholders who do not Participate in the Offering
Our existing stockholders who do not participate, or who are not given the opportunity to participate, in an offering below net asset value per share by us or who do not buy additional shares in the secondary market at the same or lower price obtained by us in the offering (after expenses and any underwriting discounts and commissions) face the greatest potential risks. All stockholders will experience an immediate decrease (often called dilution) in the net asset value per share of the shares they hold. Stockholders who do not participate in the offering will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than stockholders who do participate in the offering. All stockholders may also experience a decline in the market price of their shares, which often reflects, to some degree, announced or potential increases and decreases in net asset value per share. A decrease could be more pronounced as the size of the offering and level of discounts increase.
The following examples illustrate the level of net asset value dilution that would be experienced by a nonparticipating stockholder in four different hypothetical common stock offerings of different sizes and levels of discount to net asset value per share, although it is not possible to predict the level of market price decline that may also occur. Actual sales prices and discounts may differ from presentation below.
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The examples assume that Entity XYZ has 1,000,000 shares of common stock outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The current net asset value and net asset value per share are thus $10,000,000 and $10.00, respectively. The table below illustrates the dilutive effect on nonparticipating stockholder A of (1) an offering of 50,000 shares (5% of the outstanding shares) at $9.50 per share after offering expenses and any underwriting discounts and commissions (a 5% discount to net asset value per share); (2) an offering of 100,000 shares (10% of the outstanding shares) at $9.00 per share after offering expenses and any underwriting discounts and commissions (a 10% discount to net asset value per share); (3) an offering of 200,000 shares (20% of the outstanding shares) at $8.00 per share after offering expenses and any underwriting discounts and commissions (a 20% discount to net asset value per share); and (4) an offering of 250,000 shares (25% of the outstanding shares) at $0.01 per share after offering expenses and any underwriting discounts and commissions (a 100% discount to net asset value per share).
Example 1 5% offering at 5% Discount |
Example
2 10% offering at 10% Discount |
Example
3 20% offering at 20% Discount |
Example
4 25% offering at 100% Discount |
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Prior to Sale Below Net Asset Value per Share |
Following Sale |
% Change |
Following Sale |
% Change |
Following Sale |
% Change |
Following Sale |
% Change |
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Offering Price |
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Price per Share to Public |
| $ | 10.05 | | $ | 9.52 | | $ | 8.47 | | $ | 0.01 | | |||||||||||||||||||||||
Net Proceeds per Share to Issuer |
| $ | 9.50 | | $ | 9.00 | | $ | 8.00 | | $ | 0.01 | | |||||||||||||||||||||||
Decrease to Net Asset Value per Share |
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Total Shares Outstanding |
1,000,000 | 1,050,000 | 5.00 | % | 1,100,000 | 10.00 | % | 1,200,000 | 20.00 | % | 1,250,000 | 25.00 | % | |||||||||||||||||||||||
Net Asset Value per Share |
$ | 10.00 | $ | 9.98 | (0.20 | )% | $ | 9.91 | (0.90 | )% | $ | 9.67 | (3.30 | )% | $ | 8.00 | (20.00 | )% | ||||||||||||||||||
Dilution to Stockholder |
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Shares Held by Stockholder A |
10,000 | 10,000 | | 10,000 | | 10,000 | | 10,000 | ||||||||||||||||||||||||||||
Percentage Held by Stockholder A |
1.00 | % | 0.95 | % | (5.00 | )% | 0.91 | % | (9.00 | )% | 0.83 | % | (17.00 | )% | 0.80 | % | (20.00 | )% | ||||||||||||||||||
Total Asset Values |
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Total Net Asset Value Held by Stockholder A |
$ | 100,000 | $ | 99,800 | (0.20 | )% | $ | 99,100 | (0.90 | )% | $ | 96,700 | (3.30 | )% | $ | 80,000 | (20.00 | )% | ||||||||||||||||||
Total Investment by Stockholder A (Assumed to be $10.00 per Share) |
$ | 100,000 | $ | 100,000 | | $ | 100,000 | | $ | 100,000 | | $ | 100,000 | | ||||||||||||||||||||||
Total Dilution to Stockholder A (Total Net Asset Value Less Total Investment) |
| $ | (200 | ) | | $ | (900 | ) | | $ | (3,300 | ) | | $ | (20,000 | ) | | |||||||||||||||||||
Per Share Amounts |
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Net Asset Value per Share Held by Stockholder A |
| $ | 9.98 | | $ | 9.91 | | $ | 9.67 | | $ | 8.00 | | |||||||||||||||||||||||
Investment per Share Held by Stockholder A (Assumed to be $10.00 per Share on Shares Held Prior to Sale) |
$ | 10.00 | $ | 10.00 | | $ | 10.00 | | $ | 10.00 | | $ | 10.00 | | ||||||||||||||||||||||
Dilution per Share Held by Stockholder A (Net Asset Value per Share Less Investment per Share) |
| $ | (0.02 | ) | | $ | (0.09 | ) | | $ | (0.33 | ) | | $ | (2.00 | ) | | |||||||||||||||||||
Percentage Dilution to Stockholder A (Dilution per Share Divided by Investment per Share) |
| | (0.20 | )% | | (0.90 | )% | | (3.30 | )% | | (20.00 | )% |
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Impact on Existing Stockholders who Participate in the Offering
Our existing stockholders who participate in an offering by us of shares at a price below net asset value per share or who buy additional shares in the secondary market at the same or lower price as obtained by us in the offering (after expenses and any underwriting discounts and commissions) will experience the same types of net asset value per share dilution as the nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in the shares immediately prior to the offering. The level of net asset value per share dilution on an aggregate basis will decrease as the number of shares such stockholders purchase increases. Our existing stockholders who buy more than such percentage will experience net asset value per share dilution, but will, in contrast to our existing stockholders who purchase less than their proportionate share of the offering, experience an increase (often called accretion) in net asset value per share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to the offering. The level of accretion will increase as the excess number of shares such stockholder purchases increases. Even a stockholder who over-participates will, however, be subject to the risk that we may make additional discounted offerings in the future in which such stockholder does not participate, in which case such stockholder will experience net asset value per share dilution as described above in such subsequent offerings. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. Their decrease could be more pronounced as the size of our offering and level of discount to net asset value per share increases.
The following examples assume that Entity XYZ has 1,000,000 shares of common stock outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The current net asset value and net asset value per share are thus $10,000,000 and $10.00, respectively. The table below illustrates the dilutive and accretive effect in the hypothetical 20% discount offering from the prior chart for stockholder A that acquires shares equal to (1) 50% of their proportionate share of the offering (i.e., 1,000 shares, which is 0.50% of the offering of 200,000 shares rather than their 1.00% proportionate share) and (2) 150% of their proportionate share of the offering (i.e., 3,000 shares, which is 1.50% of the offering of 200,000 shares rather than their 1.00% proportionate share).
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The prospectus pursuant to which any offering at a price less than the then-current net asset value per share is made will include a chart for its example based on the actual number of shares in such offering and the actual discount to the most recently determined net asset value per share.
50% Participation | 150% Participation | |||||||||||||||||||
Prior to Sale Below Net Asset Value per Share |
Following Sale | % Change |
Following Sale | % Change |
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Offering Price |
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Price per share to public |
| $ | 8.47 | | $ | 8.47 | | |||||||||||||
Net proceeds per share to issuer |
| $ | 8.00 | | $ | 8.00 | | |||||||||||||
Increases in Shares and Decrease to Net Asset Value per Share |
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Total shares outstanding |
1,000,000 | 1,200,000 | 20.00 | % | 1,200,000 | 20.00 | % | |||||||||||||
Net Asset Value per share |
$ | 10.00 | $ | 9.67 | (3.30 | )% | $ | 9.67 | (3.30 | )% | ||||||||||
(Dilution)/Accretion to Participating Stockholder A |
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Shares held by stockholder A |
10,000 | 11,000 | 10.00 | % | 13,000 | 30.00 | % | |||||||||||||
Percentage held by stockholder A |
1.0 | % | 0.92 | % | (8.00 | )% | 1.08 | % | 8.00 | % | ||||||||||
Total Asset Values |
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Total Net Asset Value held by stockholder A |
$ | 100,000 | $ | 106,370 | 6.37 | % | $ | 125,710 | 25.71 | % | ||||||||||
Total investment by stockholder A (assumed to be $10.00 per share on shares held prior to sale) |
$ | 100,000 | $ | 108,470 | 8.47 | % | $ | 125,410 | 25.41 | % | ||||||||||
Total (dilution)/accretion to stockholder A (total net asset value per share less total investment) |
| (2,100 | ) | | $ | 300 | | |||||||||||||
Per Share Amounts |
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Net Asset Value per share held by stockholder A |
| $ | 9.67 | | $ | 9.67 | | |||||||||||||
Investment per share held by stockholder A (assumed to be $10.00 per share on shares held prior to sale) |
$ | 10.00 | $ | 9.86 | (1.40 | )% | $ | 9.65 | (3.50 | )% | ||||||||||
(Dilution)/accretion per share held by stockholder A (net asset value per share less investment per share) |
| $ | (0.19 | ) | | $ | 0.02 | | ||||||||||||
Percentage (dilution)/accretion to stockholder A (dilution/accretion per share divided by investment per share) |
| | (1.93 | )% | | 0.21 | % |
Impact on New Investors
The following examples illustrate the level of net asset value dilution or accretion that would be experienced by a new stockholder in three different hypothetical common stock offerings of different sizes and levels of discount to net asset value per share, although it is not possible to predict the level of market price decline that may also occur. Actual sales prices and discounts may differ from the presentation below.
Investors who are not currently stockholders, but who participate in an offering by us below net asset value per share and whose investment per share is greater than the resulting net asset value per share due to expenses and any underwriting discounts and commissions paid by us will experience an immediate decrease, albeit small, in the net asset value of their shares and their net asset value per share compared to the price they pay for their shares. Investors who are not currently stockholders and who participate in an offering by us of shares at a price below net asset value per share and whose investment per share is also less than the resulting net asset value per share due to expenses and any underwriting discounts and commissions paid by us being significantly less than the discount per share, will experience an immediate increase in the net asset value of their shares and their net asset value per share compared to the price they pay for their shares. All these investors will experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in
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assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings by us. These investors may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. Their decrease could be more pronounced as the size of the offering and level of discounts increases.
The following examples illustrate the level of net asset value per share dilution or accretion that would be experienced by a new stockholder of Entity XYZ who purchases the same percentage (1.00%) of shares in the three different hypothetical offerings of common stock of different sizes and levels of discount to net asset value per share. The examples assume that Entity XYZ has 1,000,000 shares outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The current net asset value and net asset value per share are thus $10,000,000 and $10.00, respectively. The table below illustrates the dilutive and accretive effects on stockholder A at (1) an offering of 50,000 shares (5% of the outstanding shares) at $9.50 per share after offering expenses and any underwriting discounts and commissions (a 5% discount to net asset value per share); (2) an offering of 100,000 shares (10% of the outstanding shares) at $9.00 per share after offering expenses and any underwriting discounts and commissions (a 10% discount to net asset value per share); and (3) an offering of 200,000 shares (20% of the outstanding shares) at $8.00 per share after offering expenses and any underwriting discounts and commissions (a 20% discount to net asset value per share).
Example
1 5% Offering at 5% Discount |
Example 2 10% Offering at 10% Discount |
Example 3 20% Offering at 20% Discount |
||||||||||||||||||||||||||
Prior to Sale Below Net Asset Value per Share |
Following Sale |
% Change |
Following Sale |
% Change |
Following Sale |
% Change |
||||||||||||||||||||||
Offering Price |
||||||||||||||||||||||||||||
Price per share to public |
| $ | 10.05 | | $ | 9.52 | | $ | 8.47 | | ||||||||||||||||||
Net offering proceeds per share to issuer |
| $ | 9.50 | | $ | 9.00 | | $ | 8.00 | | ||||||||||||||||||
Decrease to Net Asset Value per Share |
||||||||||||||||||||||||||||
Total shares outstanding |
| 1,050,000 | 5.00 | % | 1,100,000 | 10.00 | % | 1,200,000 | 20.00 | % | ||||||||||||||||||
Net Asset Value per Share |
| $ | 9.98 | (0.20 | )% | $ | 9.91 | (0.90 | )% | $ | 9.67 | (3.30 | )% | |||||||||||||||
Dilution to Stockholder A |
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Shares held by stockholder A |
| 500 | | 1,000 | | 2,000 | | |||||||||||||||||||||
Percentage held by stockholder A |
| 0.05 | % | | 0.09 | % | | 0.17 | % | | ||||||||||||||||||
Total Asset Values |
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Total Net Asset Value held by stockholder A |
| $ | 4,990 | | $ | 9,910 | | $ | 19,340 | | ||||||||||||||||||
Total investment by stockholder A |
| $ | 5,025 | | $ | 9,952 | | $ | 16,940 | | ||||||||||||||||||
Total dilution to stockholder A (total net asset value less total investment) |
| $ | (35 | ) | | $ | 390 | | $ | 2,400 | | |||||||||||||||||
Per Share Amounts |
||||||||||||||||||||||||||||
Net asset value per share held by stockholder A |
| $ | 9.98 | | $ | 9.91 | | $ | 9.67 | | ||||||||||||||||||
Investment per share held by stockholder A |
| $ | 10.05 | | $ | 9.52 | | $ | 8.47 | | ||||||||||||||||||
(Dilution)/accretion per share held by stockholder A (net asset value per share less investment per share) |
| $ | (0.07 | ) | | $ | 0.39 | | $ | 1.20 | | |||||||||||||||||
Percentage (dilution)/accretion to stockholder A (dilution/accretion per share divided by investment per share) |
| | (0.70 | )% | | 4.10 | % | | 14.17 | % |
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INVESTMENT OBJECTIVES AND STRATEGY
We were incorporated under the general corporation laws of the State of Maryland in December 2007 and commenced operations in January 2009. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. As such, we are required to comply with certain regulatory requirements. In addition, we have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code.
Our investment activities are managed by FB Advisor and supervised by our board of directors, a majority of whom are independent. Under the investment advisory agreement, we have agreed to pay FB Advisor an annual base management fee based on our average gross assets as well as incentive fees based on our performance. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and make investment recommendations for approval by FB Advisor according to guidelines set by FB Advisor. GDFM is a subsidiary of GSO, the credit platform of Blackstone, a leading global alternative asset manager and provider of financial advisory services. GSO is one of the worlds largest credit platforms in the alternative asset business with approximately $66.0 billion in assets under management as of March 31, 2014.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We seek to meet our investment objectives by:
| utilizing the experience and expertise of the management teams of FB Advisor and GDFM, along with the broader resources of GSO, which include its access to the relationships and human capital of its parent, Blackstone, in sourcing, evaluating and structuring transactions; |
| employing a defensive investment approach focused on long-term credit performance and principal protection; |
| focusing primarily on debt investments in a broad array of private U.S. companies, including middle-market companies, which we define as companies with annual revenues of $50 million to $2.5 billion at the time of investment. In many market environments, we believe such a focus offers an opportunity for superior risk adjusted returns; |
| investing primarily in established, stable enterprises with positive cash flows; and |
| maintaining rigorous portfolio monitoring, in an attempt to anticipate and pre-empt negative credit events within our portfolio. |
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle-market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities.
The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security we may hold in our portfolio. The loans in which we invest may be rated by a NRSRO and, in such case, generally will carry a rating below investment grade (rated lower than Baa3 by Moodys or lower than BBB- by S&P). We also invest in non-rated debt securities.
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As a BDC, we are subject to certain regulatory restrictions in making our 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, co-invest in transactions where price is the only negotiated point. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, 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 and any future BDCs that are advised by FB Advisor or its affiliated investment advisers, or collectively our co-investment affiliates. We believe this relief may not only enhance our ability to further our investment objectives and strategy, but may also increase favorable investment opportunities for us, in part by allowing us to participate in larger investments, together with our co-investment affiliates, than would be available to us if we had not obtained such relief. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
To seek to enhance our returns, we employ leverage as market conditions permit and at the discretion of FB Advisor, but in no event will leverage employed exceed 50% of the value of our assets, as required by the 1940 Act.
On April 16, 2014, our shares of common stock were listed on the NYSE and began trading under the ticker symbol FSIC.
Our Public Offering
In May 2012, we closed our continuous public offering of common stock to new investors. We sold 247,454,171 shares (as adjusted for stock distributions) of common stock for gross proceeds of $2.6 billion in our continuous public offering.
Portfolio Update
During the year ended December 31, 2013, we made investments in portfolio companies totaling approximately $2.6 billion. During the same period, we sold investments for proceeds of approximately $1.1 billion and received principal repayments of approximately $1.4 billion. As of December 31, 2013, our investment portfolio, with a total fair value of approximately $4.1 billion, consisted of interests in 165 portfolio companies (51% in first lien senior secured loans, 22% in second lien senior secured loans, 9% in senior secured bonds, 10% in subordinated debt, 4% in collateralized securities and 4% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $190.7 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 97.3% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 40.7% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 10.1%, based upon the amortized cost of our investments.
During the three months ended March 31, 2014, we made investments in portfolio companies totaling approximately $471.5 million. During the same period, we sold investments for proceeds of approximately $307.0 million and received principal repayments of approximately $259.1 million. As of March 31, 2014, our investment portfolio, with a total fair value of approximately $4.1 billion, consisted of interests in 148 portfolio companies (50% in first lien senior secured loans, 22% in second lien senior secured loans, 10% in senior secured bonds, 10% in subordinated debt, 3% in collateralized securities and 5% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $174.2 million. As of March 31, 2014, the investments in our portfolio were purchased at a weighted average price of
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97.1% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 32.5% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 10.2% based upon the amortized cost of our investments. See Portfolio Companies for a list of the investments in our portfolio as of March 31, 2014. The portfolio yield does not represent an actual investment return to stockholders and may be higher than what stockholders will realize on an investment in our common stock because it does not reflect our expenses or any sales load that may have been paid by such stockholder.
Based on our regular monthly cash distribution of $ 0.07425 per share as of March 31, 2014 and our net asset value per share of $10.28 as of such date, the annualized distribution rate to stockholders as of March 31, 2014 was 8.67%. The distribution rate to stockholders does not represent an actual investment return to stockholders and may include income, realized capital gains and a return of investors capital. Our gross annual portfolio yield and distribution rate to stockholders are subject to change and in the future may be greater or less than the rates set forth above. See Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these statements.
Distributions
We declared our first distribution on January 29, 2009. Subject to our board of directors discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis. From time to time, we may also pay special interim distributions in the form of cash or shares of common stock at the discretion of our board of directors
We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions. During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of an investors investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 or 2011 represented a return of capital. There can be no assurance that we will be able to pay distributions at a specific rate or at all. See Material U.S. Federal Income Tax Considerations.
We currently intend to continue to make our ordinary distributions in the form of cash out of assets available for distribution. We have adopted our new distribution reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors declares a cash distribution, then our stockholders who have not elected to opt out of our new distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock rather than receiving the cash distribution. No action is required on the part of a registered stockholder to have their cash distribution reinvested in shares of our common stock. Registered stockholders must notify our transfer agent in writing if they wish to opt out of our new distribution reinvestment plan. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock. See Distribution Reinvestment Plan for more information.
See Distributions for the cash and share distributions declared and paid during 2011, 2012, 2013 and 2014.
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About FB Advisor
FB Advisor is a subsidiary of our affiliate, Franklin Square Holdings, L.P., or Franklin Square Holdings, a national sponsor of alternative investment products designed for the individual investor. FB Advisor is registered as an investment adviser with the SEC under the Advisers Act and is led by substantially the same personnel that form the investment and operations team of FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC. FS Investment Advisor, LLC, FSIC II Advisor, LLC and FSIC III Advisor, LLC are registered investment advisers that manage Franklin Square Holdings other three affiliated BDCs, FS Energy and Power Fund, FS Investment Corporation II and FS Investment Corporation III, respectively. FS Global Advisor, LLC is a registered investment adviser that manages Franklin Square Holdings affiliated closed-end management investment company, FS Global Credit Opportunities Fund. See Risk FactorsRisks Related to FB Advisor and Its Affiliates and Certain Relationships and Related Party Transactions.
In addition to managing our investments, the directors, officers and other personnel of FB Advisor also currently manage the following entities:
Name |
Entity |
Investment Focus |
Gross Assets(1) |
|||||
FS Energy and Power Fund |
BDC | Primarily invests in debt and income-oriented equity securities of privately-held U.S. companies in the energy and power industry. | $ | 2,717,712,000 | ||||
FS Investment Corporation II |
BDC | Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. | $ | 3,734,428,000 | ||||
FS Investment Corporation III(2) |
BDC | Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. | | |||||
FS Global Credit Opportunities Fund(3) |
Closed-end management investment company | Primarily invests in secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments. | $ | 63,946,000 |
(1) | As of March 31, 2014, except as otherwise noted below. |
(2) | FS Investment Corporation III commenced operations on April 2, 2014 upon meeting its minimum offering requirement of raising gross proceeds of $2.5 million in its continuous public offering from persons who were not affiliated with FS Investment Corporation III or its investment adviser, FSIC III Advisor, LLC. |
(3) | FS Global Credit Opportunities Fund commenced operations on December 12, 2013. The FSGCOF Offered Funds, which have the same investment objectives and strategies as FS Global Credit Opportunities Fund, currently offer common shares of beneficial interest to the public and invest substantially all of the net proceeds of their respective offerings in FS Global Credit Opportunities Fund. Gross assets shown as of December 31, 2013. |
Our chairman and chief executive officer, Michael C. Forman, has led FB Advisor since its inception. In 2007, he co-founded Franklin Square Holdings with the goal of delivering alternative investment solutions, advised by what Franklin Square Holdings believes to be best-in-class institutional asset managers, to individual investors nationwide. In addition to leading FB Advisor, Mr. Forman currently serves as chairman, president and chief executive officer of FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC II Advisor, LLC,
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FS Investment Corporation II, FSIC III Advisor, LLC, FS Investment Corporation III, FS Global Advisor, LLC, FS Global Credit Opportunities Fund and the FSGCOF Offered Funds.
FB Advisors senior management team has significant experience in private lending and private equity investing, and has developed an expertise in using all levels of a firms capital structure to produce income-generating investments, while focusing on risk management. The team also has extensive knowledge of the managerial, operational and regulatory requirements of publicly registered alternative asset entities, such as BDCs. We believe that the active and ongoing participation by Franklin Square Holdings and its affiliates in the credit markets, and the depth of experience and disciplined investment approach of FB Advisors management team, will allow FB Advisor to successfully execute our investment strategy.
All investment decisions require the unanimous approval of FB Advisors investment committee, which is currently comprised of Mr. Forman, Gerald F. Stahlecker, our president, Zachary Klehr, our executive vice president, and Sean Coleman, our managing director. Our board of directors, including a majority of independent directors, oversees and monitors our investment performance and annually reviews the compensation we pay to FB Advisor and the compensation FB Advisor pays to GDFM to determine that the provisions of each of the investment advisory agreement and the investment sub-advisory agreement are carried out.
About GDFM
From time to time, FB Advisor may enter into sub-advisory relationships with registered investment advisers that possess skills that FB Advisor believes will aid it in achieving our investment objectives. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and makes investment recommendations for approval by FB Advisor, according to guidelines set by FB Advisor. GDFM also serves as the investment sub-adviser to FS Investment Corporation II and FS Investment Corporation III pursuant to the investment sub-advisory agreements between it and each of FSIC II Advisor, LLC and FSIC III Advisor, LLC, the investment advisers to FS Investment Corporation II and FS Investment Corporation III, respectively. Furthermore, GDFMs affiliate, GSO, serves as the investment sub-adviser to FS Energy and Power Fund and FS Global Credit Opportunities Fund pursuant to the investment sub-advisory agreements between it and each of FS Investment Advisor, LLC and FS Global Advisor, LLC, the investment advisers to FS Energy and Power Fund and FS Global Credit Opportunities Fund, respectively. GDFM is a Delaware limited liability company with principal offices located at 345 Park Avenue, New York, New York 10154.
GDFM is a wholly-owned subsidiary of GSO. GSO is the credit platform of Blackstone, a leading global alternative asset manager. As of March 31, 2014, GSO and its affiliates, excluding Blackstone, managed approximately $66.0 billion of assets across multiple strategies within the leveraged finance marketplace, including leveraged loans, high-yield bonds, distressed, mezzanine and private equity. As sub-adviser, GDFM makes recommendations to FB Advisor in a manner that is consistent with its existing investment and monitoring processes.
Blackstone is a leading global alternative asset manager and provider of financial advisory services. It is one of the largest independent managers of private capital in the world, with assets under management of approximately $271.8 billion as of March 31, 2014. Blackstones alternative asset management businesses include the management of private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation vehicles, separately managed accounts and publicly-traded closed-end mutual funds. Blackstone is a publicly traded limited partnership that has common units which trade on the NYSE under the ticker symbol BX. Information about Blackstone and its various affiliates, including certain ownership, governance and financial information, is disclosed in Blackstones periodic filings with the SEC, which can be obtained from Blackstones website at http://ir.blackstone.com or the SECs website at www.sec.gov. Information contained on Blackstones website and in Blackstones filings with the SEC are not incorporated by reference into this prospectus or any supplements to this prospectus, and you should not consider that information to be part of this prospectus or any supplements to this prospectus.
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About Franklin Square Holdings
Franklin Square Holdings is a leading manager of alternative investment funds designed to enhance investors portfolios by providing access to asset classes, strategies and asset managers that typically have been available to only the largest institutional investors. The firms funds offer endowment-style investment strategies that help construct diversified portfolios and manage risk. Franklin Square Holdings strives not only to maximize investment returns but also to set the industry standard for best practices by focusing on transparency, investor protection and education for investment professionals and their clients.
Franklin Square Holdings was founded in Philadelphia in 2007 and seeks to establish itself as a leader in the alternative investments industry by introducing innovative credit-based income funds. Franklin Square Holdings sponsors four other funds in addition to us, FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund. As of March 31, 2014, Franklin Square Holdings had over $11.0 billion in total assets under management.
Our investment objectives, policies and strategies are substantially similar to those of FS Investment Corporation II and FS Investment Corporation III, which are both focused on generating current income and, to a lesser extent, long-term capital appreciation for stockholders, primarily by making investments in senior loans of private U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. In addition, substantially the same personnel that form the investment and operations team of FB Advisor form the investment and operations teams of FSIC II Advisor, LLC and FSIC III Advisor, LLC, the investment advisers of FS Investment Corporation II and FS Investment Corporation III, respectively. Each of FB Advisor, FSIC II Advisor, LLC and FSIC III Advisor, LLC has engaged GDFM to act as sub-adviser for us, FS Investment Corporation II and FS Investment Corporation III, respectively.
Market Opportunity
We believe that there are and will continue to be significant investment opportunities in the senior secured and second lien secured loan asset class, as well as investments in debt securities of middle-market companies.
Attractive Opportunities in Senior Secured and Second Lien Secured Loans
We believe that opportunities in senior secured and second lien secured loans are significant because of the variable rate structure of most senior secured debt issues and because of the strong defensive characteristics of this investment class. Given current market conditions, we believe that debt issues with variable interest rates offer a superior return profile to fixed-rate securities, since variable interest rate structures are generally less susceptible to declines in value experienced by fixed-rate securities in a rising interest rate environment.
Senior secured debt issues also provide strong defensive characteristics. Because these loans have priority in payment among an issuers security holders (i.e., they are due to receive payment before bondholders and equityholders), they carry the least potential risk among investments in the issuers capital structure. Further, these investments are secured by the issuers assets, which may be seized in the event of a default, if necessary. They generally also carry restrictive covenants aimed at ensuring repayment before unsecured creditors, such as most types of public bondholders, and other security holders and preserving collateral to protect against credit deterioration.
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The chart below illustrates examples of the collateral used to secure senior secured and second lien secured debt.
Source: Moodys
Opportunity in Middle-Market Private Companies
In addition to investing in senior secured and second lien secured loans generally, we believe that the market for lending to private companies, particularly middle-market private companies within the United States, is underserved and presents a compelling investment opportunity. We believe that the following characteristics support our belief:
Large Target Market
According to The U.S. Census Bureau, in its most recently released economic census in 2007, there were approximately 40,000 middle-market companies in the U.S. with annual revenues between $50 million and $2.5 billion, compared with approximately 1,200 companies with revenues greater than $2.5 billion. These middle-market companies represent, we believe, a significant portion of the growth segment of the U.S. economy and often require substantial capital investment to grow their businesses. In the same economic census mentioned above, The U.S. Census Bureau found that firms in this target market collectively generated $8.3 trillion in revenues and employed 32.8 million people. Middle-market companies have generated a significant number of investment opportunities for investment programs managed by our affiliates and GDFM over the past several years, and we believe that this market segment will continue to produce significant investment opportunities for us.
Limited Investment Competition
Despite the size of the market, we believe that regulatory changes and other factors have diminished the role of traditional financial institutions and certain other capital providers in providing financing to middle-market companies. As tracked by S&P Capital IQ LCD, U.S. banks share of senior secured loans to middle-market companies contracted to 9% of overall middle-market loan volume in 2013, down from 12% in 2012 and nearly 20% in 2011. We believe this trend of reduced middle-market lending by financial institutions will continue and has the potential to accelerate as new regulations begin to take effect. We believe increased regulatory scrutiny as well as other regulatory changes have the potential to reduce banks lending activities and may serve to reduce further the role of banks in providing capital to middle-market companies.
Regulatory uncertainty regarding collateralized loans obligations, or CLOs, may also limit financing available to middle-market companies. Issues such as risk retention and the ability of banks to hold certain CLO
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securities as a result of regulatory changes may serve to inhibit future CLO creation and future lending to middle-market companies. CLOs represented 53.2% of the institutional investor base for broadly syndicated loans in 2013, as tracked by S&P Capital IQ LCD, and any decline in the formation of new CLOs will likely have broad implications for the senior secured loan marketplace and for middle-market borrowers.
We also believe that lending and originating new loans to middle-market companies, which are often private, generally requires a greater dedication of the lenders time and resources compared to lending to larger companies, due in part to the smaller size of each investment and the often fragmented nature of information available from these companies. Further, many investment firms lack the breadth and scale necessary to identify investment opportunities, particularly in regards to directly originated investments in middle-market companies, and that attractive investment opportunities are often overlooked. In addition, middle-market companies may require more active monitoring and participation on the lenders part. We believe that many large financial organizations, which often have relatively high cost structures, are not suited to deal with these factors and instead emphasize services and transactions to larger corporate clients with a consequent reduction in the availability of financing to middle-market companies.
Attractive Market Segment
We believe that the underserved nature of such a large segment of the market can at times create a significant opportunity for investment. In many environments, we believe that middle-market companies are more likely to offer attractive economics in terms of transaction pricing, up-front and ongoing fees, prepayment penalties and security features in the form of stricter covenants and quality collateral than loans to larger companies. Further, due to a lack of coverage at many investment firms, loans to middle-market firms tend to be priced less efficiently, potentially creating attractive opportunities for investment. In addition, as compared to larger companies, middle-market companies often have simpler capital structures and carry less leverage, thus aiding the structuring and negotiation process and allowing us greater flexibility in structuring favorable transactions. We believe that these factors will result in advantageous conditions in which to pursue our investment objectives of generating current income and, to a lesser extent, long-term capital appreciation.
Characteristics of and Risks Related to Investments in Private Companies
We invest primarily in the debt of private middle-market U.S. companies. Investments in private companies pose significantly greater risks than investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress. As a result, these companies, which may present greater credit risk than public companies, may be unable to meet the obligations under their debt securities that we hold. Second, the investments themselves may often be illiquid. The securities of many of the companies in which we invest are not publicly-traded or actively-traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. In addition, such securities may be subject to legal and other restrictions on resale. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. These investments also may be difficult to value because little public information generally exists about private companies, requiring an experienced due diligence team to analyze and value the potential portfolio company. Finally, these companies often may not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of FB Advisor and/or GDFM to obtain adequate information through their due diligence efforts to evaluate the creditworthiness of, and risks involved in, investing in these companies, and to determine the optimal time to exit an investment. These companies and their financial information will also generally not be subject to the Sarbanes-Oxley Act and other rules and regulations that govern public companies that are designed to protect investors. See Risk FactorsRisks Related to Our InvestmentsAn investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.
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Investment Strategy
Our principal focus is to invest in senior secured and second lien secured loans of private U.S. middle-market companies, and to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities.
When identifying prospective portfolio companies, we focus primarily on the attributes set forth below, which we believe will help us generate higher total returns with an acceptable level of risk. While these criteria provide general guidelines for our investment decisions, we caution investors that, if we believe the benefits of investing are sufficiently strong, not all of these criteria necessarily will be met by each prospective portfolio company in which we choose to invest. These attributes are:
| Leading, defensible market positions. We seek to invest in companies that have developed strong positions within their respective markets and exhibit the potential to maintain sufficient cash flows and profitability to service our debt in a range of economic environments. We seek companies that can protect their competitive advantages through scale, scope, customer loyalty, product pricing or product quality versus their competitors, thereby minimizing business risk and protecting profitability. |
| Investing in stable companies with positive cash flow. We seek to invest in established, stable companies with strong profitability and cash flows. Such companies, we believe, are well-positioned to maintain consistent cash flow to service and repay our loans and maintain growth in their businesses or market share. We do not intend to invest to any significant degree in start-up companies, turnaround situations or companies with speculative business plans. |
| Proven management teams. We focus on companies that have experienced management teams with an established track record of success. We typically prefer our portfolio companies to have proper incentives in place to align managements goals with ours. |
| Private equity sponsorship. Often, we seek to participate in transactions sponsored by what we believe to be sophisticated and seasoned private equity firms. FB Advisors management team believes that a private equity sponsors willingness to invest significant sums of equity capital into a company is an endorsement of the quality of the investment. Further, by co-investing with such experienced private equity firms which commit significant sums of equity capital ranking junior in priority of payment to our debt investments, we may benefit from the due diligence review performed by the private equity firm, in addition to our own due diligence review. Further, strong private equity sponsors with significant investments at risk have the ability and a strong incentive to contribute additional capital in difficult economic times should operational or financial issues arise which could provide additional protections for our investments. |
| Allocation among various issuers and industries. We seek to allocate our portfolio broadly among issuers and industries, thereby attempting to reduce the risk of a downturn in any one company or industry having a disproportionate adverse impact on the value of our portfolio. |
| Viable exit strategy. While we attempt to invest in securities that may be sold in a privately negotiated over-the-counter market, providing us a means by which we may exit our positions, we expect that a large portion of our portfolio may not be sold on this secondary market. For any investments that are not able to be sold within this market, we focus primarily on investing in |
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companies whose business models and growth prospects offer attractive exit possibilities, including repayment of our investments, an initial public offering of equity securities, a merger, a sale or a recapitalization, in each case with the potential for capital gains. |
In addition, in an order dated June 4, 2013, the SEC granted exemptive relief that, subject to the satisfaction of certain conditions, expands our ability to co-invest in certain privately negotiated investment transactions with our co-investment affiliates, which we believe will enhance our ability to further our investment objectives and strategy.
Potential Competitive Strengths
We believe that we offer our investors the following potential competitive strengths:
Global platform with seasoned investment professionals
We believe that the breadth and depth of the experience of FB Advisors senior management team, together with the wider resources of GSOs investment team, which is dedicated to sourcing, structuring, executing, monitoring and harvesting a broad range of private investments, as well as the specific expertise of GDFM, provide us with a significant competitive advantage in sourcing and analyzing attractive investment opportunities.
Long-term investment horizon
Our long-term investment horizon gives us great flexibility, which we believe allows us to maximize returns on our investments. Unlike most private equity and venture capital funds, as well as many private debt funds, we are not required to return capital to our stockholders once we exit a portfolio investment. We believe that freedom from such capital return requirements, which allows us to invest using a longer-term focus, provides us with the opportunity to increase total returns on invested capital, compared to other private company investment vehicles.
GDFM transaction sourcing capability
FB Advisor seeks to leverage GDFMs significant access to transaction flow. GDFM seeks to generate investment opportunities through syndicate and club deals (generally, investments made by a small group of investment firms) and, subject to regulatory constraints as discussed under Regulation, and the allocation policies of GDFM and its affiliates, as applicable, also through GSOs direct origination channels. These include significant contacts to participants in the credit and leveraged finance marketplace, which it can draw upon in sourcing investment opportunities for us. With respect to syndicate and club deals, GDFM has built a network of relationships with commercial and investment banks, finance companies and other investment funds as a result of the long track record of its investment professionals in the leveraged finance marketplace. With respect to GDFMs origination channel, FB Advisor seeks to leverage the global presence of GSO to generate access to a substantial amount of directly originated transactions with attractive investment characteristics. We believe that the broad network of GDFM provides a significant pipeline of investment opportunities for us. GDFM also has a significant trading platform, which, we believe, allows us access to the secondary market for investment opportunities.
Disciplined, income-oriented investment philosophy
FB Advisor and GDFM employ a defensive investment approach focused on long-term credit performance and principal protection. This investment approach involves a multi-stage selection process for each investment opportunity, as well as ongoing monitoring of each investment made, with particular emphasis on early detection of deteriorating credit conditions at portfolio companies which would result in adverse portfolio developments.
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This strategy is designed to maximize current income and minimize the risk of capital loss while maintaining the potential for long-term capital appreciation.
Investment expertise across all levels of the corporate capital structure
FB Advisor and GDFM believe that their broad expertise and experience investing at all levels of a companys capital structure enable us to manage risk while affording us the opportunity for significant returns on our investments. We attempt to capitalize on this expertise in an effort to produce and maintain an investment portfolio that will perform in a broad range of economic conditions.
Operating and Regulatory Structure
Our investment activities are managed by FB Advisor and supervised by our board of directors, a majority of whom are independent. Under the investment advisory agreement, we have agreed to pay FB Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. See Managements Discussion and Analysis of Financial Condition and Results of OperationsContractual Obligations for a description of the fees we pay to FB Advisor.
From time to time, FB Advisor may enter into sub-advisory relationships with registered investment advisers that possess skills or attributes that FB Advisor believes will aid it in achieving our investment objectives. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and makes investment recommendations for approval by FB Advisor according to guidelines set by FB Advisor.
Pursuant to the administration agreement, we reimburse FB Advisor for expenses necessary to perform services related to our administration and operations. We reimburse 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 us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics.
We have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FB Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance. We have also contracted with Vigilant Compliance, LLC to provide us with a chief compliance officer, Salvatore Faia, president of that firm.
As a BDC, we are required to comply with certain regulatory requirements. Also, while we are permitted to finance investments using debt, our ability to use debt will be limited in certain significant respects pursuant to the 1940 Act. Within the limits of existing regulation, we will adjust our use of debt, according to market conditions, to the level we believe will allow us to generate maximum risk-adjusted returns. See Regulation. We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code.
Investment Types
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private U.S middle-market companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. FB Advisor will seek to tailor our investment focus as market conditions evolve. Depending on market conditions, we may increase or decrease our exposure to less senior portions of the capital structure, where returns tend to be stronger in a more stable or growing economy,
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but less secure in weak economic environments. Below is a diagram illustrating where these investments lie in a typical portfolio companys capital structure. Senior secured debt is situated at the top of the capital structure and typically has the first claim on the assets and cash flows of the company, followed by second lien secured debt, subordinated debt, preferred equity and, finally, common equity. Due to this priority of cash flows, an investments risk increases as it moves further down the capital structure. Investors are usually compensated for this risk associated with junior status in the form of higher returns, either through higher interest payments or potentially higher capital appreciation. We rely on FB Advisors and GDFMs experience to structure investments, possibly using all levels of the capital structure, which we believe will perform in a broad range of economic environments.
Typical Leveraged Capital Structure Diagram
Senior Secured Loans
Senior secured loans are situated at the top of the capital structure. Because these loans generally have priority in payment, they carry the least risk among all investments in a firm. Generally, our senior secured loans are expected to have maturities of three to seven years, offer some form of amortization, and have first priority security interests in the assets of the borrower. Generally, we expect that the interest rate on our senior secured loans typically will have variable rates ranging between 6.0% and 10.0% over a standard benchmark, such as the London Interbank Offered Rate, or LIBOR.
Second Lien Secured Loans
Second lien secured loans are immediately junior to senior secured loans and have substantially the same maturities, collateral and covenant structures as senior secured loans. Second lien secured loans, however, are granted a second priority security interest in the assets of the borrower. In return for this junior ranking, second lien secured loans generally offer higher returns compared to senior secured debt. These higher returns come in the form of higher interest and in some cases the potential for equity participation through warrants, though to a lesser extent than with subordinated loans. Generally, we expect these loans to carry a fixed or a floating current yield of 9.0% to 12.0% over a standard benchmark. In addition, we may receive additional returns from any warrants we may receive in connection with these investments.
Subordinated Debt
In addition to senior secured and second lien secured loans, we also may invest a portion of our assets in subordinated debt. Subordinated debt investments usually rank junior in priority of payment to senior secured
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loans and second lien secured loans and are often unsecured, but are situated above preferred equity and common equity in the capital structure. In return for their junior status compared to senior secured loans and second lien secured loans, subordinated debt investments typically offer higher returns through both higher interest rates and possible equity ownership in the form of warrants, enabling the lender to participate in the capital appreciation of the borrower. These warrants typically require only a nominal cost to exercise. We intend to generally target subordinated debt with interest-only payments throughout the life of the security, with the principal due at maturity. Typically, subordinated debt investments have maturities of five to ten years. Generally, we expect these securities to carry a fixed or a floating current yield of 7.5% to 14.0% over a standard benchmark. In addition, we may receive additional returns from any warrants we may receive in connection with these investments. In some cases, a portion of the total interest may accrue or be PIK.
Equity and Equity-Related Securities
While we intend to maintain our focus on investments in debt securities, from time to time, when we see the potential for extraordinary gain, or in connection with securing particularly favorable terms in a debt investment, we may enter into non-control investments in preferred or common equity, typically in conjunction with a private equity sponsor we believe to be sophisticated and seasoned. In addition, we typically receive the right to make equity investments in a portfolio company whose debt securities we hold in connection with the next equity financing round for that company. This right will provide us with the opportunity to further enhance our returns over time through equity investments in our portfolio companies. In addition, we may hold equity-related securities consisting primarily of warrants or other equity interests generally obtained in connection with our subordinated debt or other investments. In the future, we may achieve liquidity through a merger or acquisition of a portfolio company, a public offering of a portfolio companys stock or by exercising our right, if any, to require a portfolio company to repurchase the equity-related securities we hold. With respect to any preferred or common equity investments, we expect to target an annual investment return of at least 15%.
Non-U.S. Securities
We may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies, to the extent permitted by the 1940 Act.
Cash and Cash Equivalents
We may maintain a certain level of cash or equivalent instruments to make follow-on investments if necessary in existing portfolio companies or to take advantage of new opportunities.
Comparison of Targeted Debt Investments to Corporate Bonds
Loans to private companies are debt instruments that can be compared to corporate bonds to aid an investors understanding. As with corporate bonds, loans to private companies can range in credit quality depending on security-specific factors, including total leverage, amount of leverage senior to the security in question, variability in the issuers cash flows, the quality of assets securing debt and the degree to which such assets cover the subject companys debt obligations. As is the case in the corporate bond market, we will require greater returns for securities that we perceive to carry increased risk. The companies in which we invest may be leveraged, often as a result of leveraged buyouts or other recapitalization transactions, and, in many cases, will not be rated by national rating agencies. When our targeted debt investments do carry ratings from an NRSRO, we believe that such ratings generally will be below investment grade (rated lower than Baa3 by Moodys or lower than BBB- by S&P). To the extent we make unrated investments, we believe that such investments would likely receive similar ratings if they were to be examined by an NRSRO. Compared to below-investment grade corporate bonds that are typically available to the public, our targeted senior secured and second lien secured loan investments are higher in the capital structure, have priority in receiving payment, are secured by the issuers assets, allow the lender to seize collateral if necessary, and generally exhibit higher rates of recovery in the event of default. Corporate bonds, on the other hand, are often unsecured obligations of the issuer.
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The market for loans to private companies possesses several key differences compared to the corporate bond market. For instance, due to a possible lack of debt ratings for certain middle-market firms, and also due to the reduced availability of information for private companies, investors must conduct extensive due diligence investigations before committing to an investment. This intensive due diligence process gives the investor significant access to management, which is often not possible in the case of corporate bondholders, who rely on underwriters, debt rating agencies and publicly available information for due diligence reviews and monitoring of corporate issuers. While holding these investments, private debt investors often receive monthly or quarterly updates on the portfolio companys financial performance, along with possible representation on the companys board of directors, which allows the investor to take remedial action quickly if conditions happen to deteriorate. Due to reduced liquidity, the relative scarcity of capital and extensive due diligence and expertise required on the part of the investor, we believe that private debt securities typically offer higher returns than corporate bonds of equivalent credit quality.
Sources of Income
The primary means through which our stockholders will receive a return of value is through interest income, dividends and capital gains generated by our investments. In addition to these sources of income, we may receive fees paid by our portfolio companies, including one-time closing fees paid at the time each investment is made and monitoring fees paid throughout the term of our investments. Closing fees typically range from 1.0% to 2.0% of the purchase price of an investment, while monitoring fees generally range from 0.25% to 1.0% of the purchase price of an investment annually. In addition, we may generate revenues in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance, consulting fees and performance-based fees.
Risk Management
We seek to limit the downside potential of our investment portfolio by:
| applying our investment strategy guidelines for portfolio investments; |
| requiring a total return on investments (including both interest and potential appreciation) that adequately compensates us for credit risk; |
| allocating our portfolio among various issuers and industries, size permitting, with an adequate number of companies, across different industries, with different types of collateral; and |
| negotiating or seeking debt investments with covenants or features that protect us while affording portfolio companies flexibility in managing their businesses consistent with preservation of capital. |
Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights. We may also enter into interest rate hedging transactions at the sole discretion of FB Advisor. Such transactions will enable us to selectively modify interest rate exposure as market conditions dictate.
Affirmative Covenants
Affirmative covenants require borrowers to take actions that are meant to ensure the solvency of the company, facilitate the lenders monitoring of the borrower, and ensure payment of interest and loan principal due to lenders. Examples of affirmative covenants include covenants requiring the borrower to maintain adequate insurance, accounting and tax records, and to produce frequent financial reports for the benefit of the lender.
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Negative Covenants
Negative covenants impose restrictions on the borrower and are meant to protect lenders from actions that the borrower may take that could harm the credit quality of the lenders investments. Examples of negative covenants include restrictions on the payment of dividends and restrictions on the issuance of additional debt without the lenders approval. In addition, certain covenants restrict a borrowers activities by requiring it to meet certain earnings interest coverage ratio and leverage ratio requirements. These covenants are also referred to as financial or maintenance covenants.
Investment Process
The investment professionals employed by FB Advisor and GDFM have spent their careers developing the resources necessary to invest in private companies. Our transaction process is highlighted below.
Our Transaction Process
Sourcing
In order to source transactions, FB Advisor seeks to leverage GDFMs significant access to transaction flow, along with GDFMs trading platform. GDFM seeks to generate investment opportunities through its trading platform, through syndicate and club deals and, subject to regulatory constraints, and the allocation policies of GDFM and its affiliates, as applicable, through GSOs direct origination channels. With respect to syndicate and club deals, GDFM has built a network of relationships with commercial and investment banks, finance companies and other investment funds as a result of the long track record of its investment professionals in the leveraged finance marketplace. With respect to GDFMs origination channel, FB Advisor seeks to leverage the global presence of GSO to generate access to a substantial amount of directly originated transactions with attractive investment characteristics. We believe that the broad network of GDFM provides a significant pipeline of investment opportunities for us.
Evaluation
Initial Review. In its initial review of an investment opportunity to present to FB Advisor, GDFMs transaction team examines information furnished by the target company and external sources, including rating agencies, if applicable, to determine whether the investment meets our basic investment criteria and other guidelines specified by FB Advisor, within the context of proper allocation of our portfolio among various issuers and industries, and offers an acceptable probability of attractive returns with identifiable downside risk. For the majority of securities available on the secondary market, a comprehensive analysis is conducted and continuously maintained by a dedicated GDFM research analyst, the results of which are available for the transaction team to review. In the case of a directly originated transaction, FB Advisor and GDFM conduct detailed due diligence investigations as necessary.
Credit Analysis/Due Diligence. Before undertaking an investment, the transaction team conducts a thorough due diligence review of the opportunity to ensure the company fits our investment strategy, which may include:
| a full operational analysis to identify the key risks and opportunities of the targets business, including a detailed review of historical and projected financial results; |
| a detailed analysis of industry dynamics, competitive position, regulatory, tax and legal matters; |
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| on-site visits, if deemed necessary; |
| background checks to further evaluate management and other key personnel; |
| a review by legal and accounting professionals, environmental or other industry consultants, if necessary; |
| financial sponsor due diligence, including portfolio company and lender reference checks, if necessary; and |
| a review of managements experience and track record. |
When possible, our advisory team seeks to structure transactions in such a way that our target companies are required to bear the costs of due diligence, including those costs related to any outside consulting work we may require.
Execution
Recommendation. FB Advisor has engaged GDFM to identify and recommend investment opportunities for its approval. GDFM seeks to maintain a defensive approach toward its investment recommendations by emphasizing risk control in its transaction process, which includes (i) the pre-review of each opportunity by one of its portfolio managers to assess the general quality, value and fit relative to our portfolio, (ii) where possible, transaction structuring with a focus on preservation of capital in varying economic environments and (iii) ultimate approval of investment recommendations by GDFMs investment committee.
Approval. After completing its internal transaction process, GDFM makes formal recommendations for review and approval by FB Advisor. In connection with its recommendation, it transmits any relevant underwriting material and other information pertinent to the decision-making process. In addition, GDFM makes its staff available to answer inquiries by FB Advisor in connection with its recommendations. The consummation of a transaction requires unanimous approval of the members of FB Advisors investment committee.
Monitoring
Portfolio Monitoring. FB Advisor, with the help of GDFM, monitors our portfolio with a focus toward anticipating negative credit events. To maintain portfolio company performance and help to ensure a successful exit, FB Advisor and GDFM work closely with, as applicable, the lead equity sponsor, loan syndicator, portfolio company management, consultants, advisers and other security holders to discuss financial position, compliance with covenants, financial requirements and execution of the companys business plan. In addition, depending on the size, nature and performance of the transaction, we may occupy a seat or serve as an observer on a portfolio companys board of directors or similar governing body.
Typically, FB Advisor and GDFM receive financial reports detailing operating performance, sales volumes, margins, cash flows, financial position and other key operating metrics on a quarterly basis from our portfolio companies. FB Advisor and GDFM use this data, combined with due diligence gained through contact with the companys customers, suppliers, competitors, market research and other methods, to conduct an ongoing, rigorous assessment of the companys operating performance and prospects.
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In addition to various risk management and monitoring tools, FB Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FB Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
Investment |
Summary Description | |
1 | Investment exceeding expectations and/or capital gain expected. | |
2 | Performing investment generally executing in accordance with the portfolio companys business planfull return of principal and interest expected. | |
3 | Performing investment requiring closer monitoring. | |
4 | Underperforming investmentsome loss of interest or dividend possible, but still expecting a positive return on investment. | |
5 | Underperforming investment with expected loss of interest and some principal. |
FB Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with valuing our assets, our board of directors reviews these investment ratings on a quarterly basis. In the event that our advisory team determines that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, we will attempt to sell the asset in the secondary market, if applicable, or to implement a plan to attempt to exit the investment or to correct the situation.
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2014 and December 31, 2013 (dollar amounts are presented in thousands):
March 31, 2014 | December 31, 2013 | |||||||||||||||
Investment Rating |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
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1 |
$ | 423,296 | 11 | % | $ | 510,687 | 12 | % | ||||||||
2 |
3,276,702 | 80 | % | 3,244,518 | 79 | % | ||||||||||
3 |
329,600 | 8 | % | 340,238 | 8 | % | ||||||||||
4 |
41,093 | 1 | % | 40,034 | 1 | % | ||||||||||
5 |
6,936 | 0 | % | 2,104 | 0 | % | ||||||||||
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Total |
$ | 4,077,627 | 100 | % | $ | 4,137,581 | 100 | % | ||||||||
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The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Valuation Process. Each quarter, we value investments in our portfolio, and such values are disclosed each quarter in reports filed with the SEC. Investments for which market quotations are readily available are recorded at such market quotations. With respect to investments for which market quotations are not readily available, our board of directors determines the fair value of such investments in good faith, utilizing the input of management, our valuation committee, FB Advisor and any other professionals or materials that our board of directors deems worthy and relevant, including GDFM, independent third-party pricing services and independent third-party valuation firms, if applicable. See Determination of Net Asset Value.
Managerial Assistance. As a BDC, we must offer, and provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising
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officers of portfolio companies and providing other organizational and financial guidance. Depending on the nature of the assistance required, FB Advisor or GDFM will provide such managerial assistance on our behalf to portfolio companies that request this assistance. To the extent fees are paid for these services, we, rather than FB Advisor or GDFM, will retain any fees paid for such assistance.
Exit
While we attempt to invest in securities that may be sold in a privately negotiated over-the-counter market, providing us a means by which we may exit our positions, we expect that a large portion of our portfolio may not be sold on this secondary market. For any investments that are not able to be sold within this market, we focus primarily on investing in companies whose business models and growth prospects offer attractive exit possibilities, including repayment of our investments, an initial public offering of equity securities, a merger, a sale or a recapitalization, in each case with the potential for capital gains.
Staffing
We do not currently have any employees. Each of our executive officers, aside from our chief compliance officer, Mr. Faia, is a principal, officer or employee of FB Advisor, which manages and oversees our investment operations. Mr. Faia is not affiliated with FB Advisor. See ManagementBoard of Directors and Executive OfficersExecutive Officers Who are Not Directors for a biography of Mr. Faia. In the future, FB Advisor may retain additional investment personnel based upon its needs. See Investment Advisory Agreement.
Facilities
Our administrative and principal executive offices are located at Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted.
Legal Proceedings
Neither we nor FB Advisor is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or against FB Advisor.
From time to time, we and individuals employed by FB Advisor may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material effect upon our financial condition or results of operations.
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DETERMINATION OF NET ASSET VALUE
We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FB Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.
ASC Topic 820, Fair Value Measurements and Disclosure, issued by the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
| our quarterly valuation process begins with FB Advisors management team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from an independent valuation firm, if applicable; |
| preliminary valuation conclusions are then documented and discussed with our valuation committee; |
| our valuation committee reviews the preliminary valuation and FB Advisors management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and |
| our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FB Advisor, the valuation committee and any third-party valuation firm, if applicable. |
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. Below is a description of factors that our board of directors may consider when valuing our debt and equity investments.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors may consider include the borrowers ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.
For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
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Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
Our board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.
When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, our board of directors allocates the cost basis in the investment between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of directors subsequently values these warrants or other equity securities received at fair value.
The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.
Our investments as of March 31, 2014 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our 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. Thirty-one senior secured loan investments, one senior secured bond investment, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, 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 our equity/other investments were valued by the same independent valuation firm, 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. One senior secured loan investment and one equity investment, each of which was newly-issued and purchased near March 31, 2014, were valued at cost, as our board of directors determined that the cost of each such investment was the best indication of its fair value. Also, one equity investment which is traded on an active public market was valued at its closing price on March 31, 2014 and two equity/other investments were valued by an independent third-party pricing service in the manner described above.
Our investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our 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. Twenty-seven senior secured loan investments, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, 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 our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors,
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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. Also, one equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.
We periodically benchmark the bid and ask prices we receive from the third-party pricing services against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe 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), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. We periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.
Determinations in Connection With Offerings
In connection with each offering of shares of our common stock, our board of directors or a committee thereof is required to make the determination that we are not selling shares of our common stock at a price below net asset value of our common stock at the time at which the sale is made unless we receive the consent of the majority of our common stockholders to do so, and the board of directors decides that such an offering is in the best interests of our common stockholders. Our board of directors will consider the following factors, among others, in making such determination:
| the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC; |
| our managements assessment of whether any change in the net asset value of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities) during the period beginning on the date of the most recent public filing with the SEC that discloses the net asset value of our common stock and ending two days prior to the date of the sale of our common stock; and |
| the magnitude of the difference between the offering price of the shares of our common stock in the proposed offering and managements assessment of any change in the net asset value of our common stock during the period discussed above. |
Importantly, this determination will not necessarily require that we calculate the net asset value of our common stock in connection with each offering of shares of our common stock, but instead it will involve the determination by our board of directors or a committee thereof that we are not selling shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made or otherwise in violation of the 1940 Act. However, if we receive the consent of a majority of our common stockholders to issue shares of our common stock at a price below our then current net asset value and our board of directors decides that such an offering is in the best interest of our common stockholders, then we may undertake such an offering. See Sales Of Common Stock Below Net Asset Value for more information.
To the extent that the above procedures result in a possibility that we may (i) in the absence of stockholder approval issue shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made or (ii) trigger our undertaking to suspend the offering of shares of our common stock pursuant to this prospectus if the net asset value fluctuates by certain amounts in certain circumstances until the prospectus is amended, the board of directors or a committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of
the occurrence of such event or to undertake to determine net asset value within two days prior to any such sale
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to ensure that such sale will not be below our then current net asset value, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine net asset value to ensure that such undertaking has not been triggered.
We may, however, subject to the requirements of the 1940 Act, issue rights to acquire our common stock at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our common stockholders. In any such case, the price at which our securities are to be issued and sold may not be less than a price, that in the determination of our board of directors, closely approximates the market value of such securities. We will not offer transferable subscription rights to our stockholders at a price equivalent to less than the then current net asset value per share of common stock, excluding underwriting commissions and discounts, unless we first file a post-effective amendment that is declared effective by the SEC with respect to such issuance and the common stock to be purchased in connection with the rights represents no more than one-third of our outstanding common stock at the time such rights are issued. In addition, we note that for us to file a post-effective amendment to this registration statement on Form N-2, we must then be qualified to register our securities on Form N-2. If we raise additional funds by issuing more common stock or warrants or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our common stockholders at that time would decrease, and our common stockholders may experience dilution.
These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations of the board of directors described in this section, and we will maintain these records with other records that we are required to maintain under the 1940 Act.
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Pursuant to our charter and bylaws, our business and affairs are managed under the direction of our board of directors. The responsibilities of our board of directors include, among other things, the oversight of our investment activities, the quarterly valuation of our assets, oversight of our financing arrangements and corporate governance activities. Our board of directors has an audit committee, a valuation committee, a nominating and corporate governance committee and a compensation committee, and may establish additional committees from time to time as necessary. Although the number of directors may be increased or decreased, a decrease will not have the effect of shortening the term of any incumbent director. Any director may resign at any time and may be removed with or without cause by the stockholders upon the affirmative vote of at least a majority of all the votes entitled to be cast at a meeting called for the purpose of the proposed removal. The notice of the meeting will indicate that the purpose, or one of the purposes, of the meeting is to determine if the director is to be removed.
A vacancy created by an increase in the number of directors or the death, resignation, adjudicated incompetence or other incapacity of a director may be filled only by a vote of a majority of the remaining directors. As provided in our charter, nominations of individuals to fill the vacancy of a board seat previously filled by an independent director will be made by the remaining independent directors.
Board of Directors and Executive Officers
Our board of directors consists of ten members, six of whom are not interested persons of us or FB Advisor as defined in Section 2(a)(19) of the 1940 Act and are independent directors under Rule 303A.00 of the NYSE. We refer to these individuals as our independent directors. Effective as of April 16, 2014, our directors are divided into three classes, designated Class A, Class B, and Class C, with the Class A directors to hold office initially for a term expiring at the 2014 annual meeting of stockholders, the Class B directors to hold office initially for a term expiring at the 2015 annual meeting of stockholders, and the Class C directors to hold office initially for a term expiring at the 2016 annual meeting of stockholders. After such initial terms, the directors shall hold office for three-year terms, with one classs term expiring each year. Each director will hold office for the term to which he or she is elected or until his successor is duly elected and qualified. We are prohibited from making loans or extending credit, directly or indirectly, to our directors or executive officers under Section 402 of the Sarbanes-Oxley Act.
Through its direct oversight role, and indirectly through its committees, our board of directors performs a risk oversight function for us consisting of, among other things, the following activities: (1) at regular and special board of directors meetings, and on an ad hoc basis as needed, receiving and reviewing reports related to our performance and operations; (2) reviewing and approving, as applicable, our compliance policies and procedures; (3) meeting with the portfolio management team to review investment strategies, techniques and the processes used to manage related risks; (4) meeting with, or reviewing reports prepared by, the representatives of key service providers, including our investment adviser, administrator, distributor, transfer agent, custodian and independent registered public accounting firm, to review and discuss our activities and to provide direction with respect thereto; and (5) engaging the services of our chief compliance officer to test our compliance procedures and our service providers.
Mr. Forman, who is not an independent director, serves as chief executive officer and chairman of our board of directors. Our board of directors feels that Mr. Forman, as our co-founder, chief executive officer and chairman of our board of directors, is the director with the most knowledge of our business strategy and is best situated to serve as chairman of our board of directors. Our charter, as well as regulations governing BDCs generally, requires that a majority of the board of directors be independent directors. While we currently do not have a policy mandating a lead independent director, our board of directors believes that, having an independent director fill the lead director role is appropriate. On August 7, 2013, our board of directors appointed Mr. Hagan as lead independent director. The lead independent director, among other things, works with the chairman of our board of directors in the preparation of the agenda for each board meeting and in determining the need for special
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meetings of our board of directors, chairs any meeting of the independent directors in executive session, facilitates communications between other members of our board of directors and the chairman of our board of directors and/or the chief executive officer and otherwise consults with the chairman of our board of directors and/or the chief executive officer on matters relating to corporate governance and board of director performance. Our board of directors, after considering various factors, has concluded that this structure is appropriate given our current size and complexity and the extensive regulation to which we are subject as a BDC and as a company listed on the NYSE.
Directors
Information regarding our board of directors is set forth below. We have divided the directors into two groupsinterested directors and independent directors. The address for each director is c/o FS Investment Corporation, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104.
NAME |
AGE | DIRECTOR SINCE | EXPIRATION OF TERM | |||||||||
Interested Directors |
||||||||||||
Michael C. Forman |
53 | 2007 | 2016 | |||||||||
David J. Adelman |
42 | 2008 | 2015 | |||||||||
Thomas J. Gravina |
52 | 2009 | 2015 | |||||||||
Michael J. Heller |
48 | 2008 | 2016 | |||||||||
Independent Directors |
||||||||||||
Gregory P. Chandler |
47 | 2008 | 2016 | |||||||||
Barry H. Frank |
75 | 2008 | 2016 | |||||||||
Michael J. Hagan |
51 | 2011 | 2014 | |||||||||
Jeffrey K. Harrow |
57 | 2010 | 2014 | |||||||||
Paul Mendelson |
67 | 2008 | 2015 | |||||||||
Pedro A. Ramos |
49 | 2013 | 2014 |
Interested Directors
Michael C. Forman served as our chairman, president and chief executive officer from its inception until April 2013 and currently serves as our chairman and chief executive officer. He has served as the chairman and chief executive officer of FB Advisor since its inception. Mr. Forman also currently serves as chairman, president and chief executive officer of FS Energy and Power Fund, FS Investment Advisor, LLC, FS Investment Corporation II, FSIC II Advisor, LLC, FS Investment Corporation III, FSIC III Advisor, LLC, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA, FS Global Credit Opportunities FundD and FS Global Advisor, LLC, and has presided in such roles since each entitys inception in September 2010, September 2010, July 2011, November 2011, June 2013, October 2013, January 2013, January 2013, January 2013 and January 2013, respectively. In 2005, Mr. Forman co-founded FB Capital Partners, L.P., an investment firm that previously invested in private equity, senior and mezzanine debt and real estate, and has served as managing general partner since inception. In May 2007, Mr. Forman co-founded Franklin Square Holdings, our affiliate and sponsor.
Prior to co-founding FB Capital Partners, L.P., Mr. Forman spent nearly 20 years as an attorney in the corporate and securities department at the Philadelphia based law firm of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, or Klehr Harrison, where he was a partner from 1991 until leaving the firm to focus exclusively on investments. In addition to his career as an attorney and investor, Mr. Forman has been an active entrepreneur and has founded several companies, including companies engaged in the gaming, specialty finance and asset management industries. Mr. Forman serves as a member of the board of directors of a number of private companies. He is also a member of a number of civic and charitable boards, including The Franklin Institute (executive committee member), the University of the Arts (executive committee member), the Vetri Foundation
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for Children (chairman), the executive committee of the Greater Philadelphia Alliance for Capital and Technologies (PACT), and Murex Investments, Inc., a Pennsylvania based economic development/venture capital firm, where he chairs the investment committee. Mr. Forman received his B.A., summa cum laude, from the University of Rhode Island, where he was elected Phi Beta Kappa, and received his J.D. from Rutgers University.
Mr. Forman has extensive experience in corporate and securities law and has founded and served in a leadership role of various companies, including FB Advisor. Our board of directors believes Mr. Formans experience and his positions as our and FB Advisors chief executive officer make him a significant asset to us.
David J. Adelman has served as our vice-chairman and the vice-chairman of FB Advisor since December 2007 and October 2007, respectively. He also currently serves as the vice-chairman of FS Energy and Power Fund, FS Investment Advisor, LLC, FS Investment Corporation II, FSIC II Advisor, LLC, FS Investment Corporation III, FSIC III Advisor, LLC, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA, FS Global Credit Opportunities FundD and FS Global Advisor, LLC, and has presided in such role since each entitys inception in September 2010, September 2010, July 2011, November 2011, June 2013, October 2013, January 2013, January 2013, January 2013 and January 2013, respectively. Mr. Adelman has significant managerial and investment experience and has served as the president and chief executive officer of Philadelphia-based Campus Apartments, Inc., or Campus Apartments, since 1997. Campus Apartments develops, manages, designs and privately finances more than 220 upscale housing facilities for colleges and universities across the United States. In 2006, Campus Apartments entered into a $1.1 billion venture with GIC Real Estate Pte Ltd., the real estate investment arm of the Government of Singapore Investment Corporation, in which Campus Apartments uses the ventures capital to acquire, develop, operate and manage student housing projects across the United States. In addition to his duties as president and chief executive officer of Campus Apartments, Mr. Adelman has been the chief executive officer of Campus Technologies, Inc. since 2001, the vice-chairman of University City District board of directors since 1997, board member of ICG Group, Inc. since June 2011, and member of the National Multi Family Council (NMHC) and the Young Presidents Organization. Mr. Adelman formerly served as a board member of Hyperion Bank and on the executive committee of the Urban Land Institutes Philadelphia Chapter. Mr. Adelman is also an active private investor and entrepreneur, having cofounded Franklin Square Holdings with Mr. Forman. Mr. Adelman received his B.A. in Political Science from The Ohio State University.
Mr. Adelman serves as vice-chairman of FB Advisor and, together with Mr. Forman, is responsible for implementing our investment strategy. Mr. Adelman has substantial management, operational and financial expertise generated through his leadership roles for public and private companies, including his service as president and chief executive officer of Campus Apartments. Mr. Adelman also serves on the board of directors and in other leadership roles for various charitable and civic organizations. These varied activities have provided him, in the opinion of our board of directors, with experience and insight which is beneficial to us.
Thomas J. Gravina currently serves as executive chairman of GPX Enterprises, L.P., a private investment firm, and its affiliates, including GPX Realty Partners, L.P., a private real estate and investment advisory firm, and has served in such capacities since cofounding GPX Enterprises, L.P. in 2006. He also currently serves on the board of trustees of FS Energy and Power Fund and has presided in that role since September 2010. He has served as a member of FS Energy and Power Funds nominating and corporate governance committee since April 2011 and has presided as its chairman since September 2013. He was also a member of our audit committee from January 2010 to September 2011 and served as the chairman of our nominating and corporate governance committee from January 2011 through September 2013. Mr. Gravina also currently serves on the boards of trustees of FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA and FS Global Credit Opportunities FundD and has served in such role since each funds inception in January 2013. He is a member of FS Global Credit Opportunities Funds valuation committee and nominating and corporate governance committee. Mr. Gravina also currently serves as chairman and chief executive officer of EvolveIP Holdings, LLC, a cloud-based technology provider, which he cofounded in 2007. Previously, from 2000 to 2005,
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Mr. Gravina served as president and chief executive officer and director of ATX Communications, Inc., a NASDAQ publicly traded communications company. Mr. Gravina also served as chairman of the board of directors of ATX Communications, Inc. from 2005 to 2006. Mr. Gravina led the multibillion dollar merger in 2000 between publicly-traded CoreComm Limited and Voyager.net, and privately-held ATX Telecommunications Services, of which he was co-chief executive officer and cofounder since 1987. Mr. Gravina is a member of the board of directors, chairman of the audit and foundation committees and is a member of the finance committee of the Philadelphia College of Osteopathic Medicine and is a member of other charitable and civic boards. Mr. Gravina received his B.S. in Business Administration from Villanova University.
Mr. Gravina has served as a member of various boards, including public company and charitable and civic organizations. In addition, his service as chairman of both public and private companies, including a private investment firm that he cofounded have provided him, in the opinion of our of board of directors, with experience and insight which is beneficial to us.
Michael J. Heller is a shareholder at the law firm of Cozen OConnor, P.C., where he currently serves as the firms chief executive officer, and has served in such capacity since January 1, 2013. Immediately prior to that, Mr. Heller was the president and executive partner of Cozen OConnor, P.C. from October 2011 to December 2013. He also currently serves on the board of trustees of FS Energy and Power Fund, the board of directors of FS Investment Corporation II, and the board of directors of FS Investment Corporation III and has presided in such roles since September 2010, February 2012, and February 2014, respectively. He previously served as the chairman of FS Energy and Power Funds nominating and corporate governance committee from April 2011 through September 2013 and has served as a member of its valuation committee since April 2011. He is also chairman of FS Investment Corporation IIs nominating and corporate governance committee and serves as a member of its valuation committee and has presided in such roles since February 2012 and September 2013, respectively. Mr. Heller is also a member of FS Investment Corporation IIIs valuation committee and has presided in such role since February 2014. Mr. Heller is a corporate and securities lawyer, whose practice is devoted to representing private equity and venture capital funds as well as counseling entrepreneurs and middle-market businesses in various corporate matters, including the structuring of capital-raising transactions and merger and acquisition transactions. Prior to becoming the chief executive officer of Cozen OConnor, P.C., Mr. Heller was the chairman of the Business Law Department from January 2007, and he served as vice-chairman of Cozen OConnor, P.C.s Business Law Department from 2002 until January 2007. Mr. Heller has been a member of the board of directors of Beachbody, LLC since November 2012. In addition, Mr. Heller has been a member of the boards of directors of Cozen OConnor, P.C. and Hanover Fire and Casualty Insurance Company, a privately held property and casualty insurance company, and a member of the board of trustees of Thomas Jefferson University Hospital since January 2007, May 2004 and July 2012, respectively. Mr. Heller received a B.S. in Accounting, summa cum laude, from The Pennsylvania State University, and a J.D., magna cum laude, from Villanova University, where he was a Law Review editor and a member of the Order of the Coif.
Mr. Heller has extensive experience in corporate and securities law matters and has represented various private equity and venture capital funds. Further, Mr. Heller serves on the boards of several private companies and civic and charitable organizations. These activities have provided him, in the opinion of our board of directors, with experience and insight which is beneficial to us.
Independent Directors
Gregory P. Chandler has been chief financial officer of Emtec, Inc., a global information technology services provider, since May 2009. Mr. Chandler has also been a member of Emtec Inc.s board of directors since 2005 where he served as chairman of the audit committee from 2005 through 2009. He also currently serves on the board of trustees of FS Energy and Power Fund and has presided in that role since September 2010. He is also the chairman of FS Energy and Power Funds audit committee and a member of FS Energy and Power Funds valuation committee and has presided in such roles since April 2011. Mr. Chandler presently serves as a
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director and chairman of the audit committee of the RBB Funds and serves on the board of the Enterprise Center, a non-profit organization. Mr. Chandler presently serves as a director of Spectrum Systems LLP and as an officer and director of GCVC Consulting. Previously, he served as managing director, Investment Banking, at Janney Montgomery Scott LLC from 1999 to April 2009. From 1995 to 1999, he was with PricewaterhouseCoopers, or PwC, and its predecessor Coopers and Lybrand where he assisted companies in the Office of the CFO Practice and also worked as a certified public accountant. During his tenure at PwC, he spent the majority of his time in the Investment Company practice. Mr. Chandler served as a logistics officer with the United States Army for four years. Mr. Chandlers degrees include a B.S. in Engineering from the United States Military Academy at West Point and an M.B.A. from Harvard Business School. He is also a Certified Public Accountant (inactive).
Mr. Chandler has extensive experience in valuations and in negotiating debt, equity and mergers and acquisitions transactions in a variety of industries with both public and private companies. In addition, Mr. Chandler has experience managing the audits of mutual funds, hedge funds and venture capital funds. This experience has provided Mr. Chandler, in the opinion of our board of directors, with experience and insight which is beneficial to us.
Barry H. Frank is a partner in the law firm of Archer & Greiner, P.C. (formerly Pelino & Lentz, P.C.) where he has been a partner since he joined the firm in 2003. Prior to joining Archer & Greiner, P.C., Mr. Frank was a partner in the law firm of Schnader, Harrison, Segal & Lewis, or Schnader, from 2000 through 2003. Previously, Mr. Frank had been a partner in the law firm of Mesirov, Gelman, Jaffe, Cramer & Jamieson, or Mersirov Gelman, from 1987 until 2000, when Mesirov Gelman merged with Schnader. From 1975 through 1987, Mr. Frank was a partner in the law firm of Pechner, Dorfman, Wolfe, Rounick & Cabot. Mr. Frank has focused his practice on business and corporate taxation and business and estate planning. Mr. Frank received a B.S. from Pennsylvania State University and a J.D. from the Temple University School of Law. Mr. Frank served on the board of directors of Deb Shops, Inc., formerly listed on NASDAQ, from 1989 through 2007. He also served on the audit committee of Deb Shops, Inc. from 1989 through October 2007 and was chairman of the audit committee from 1989 through 2003.
Mr. Frank has extensive legal knowledge as a practicing attorney, including his legal experience related to business and corporate taxation and business planning, as well as his service on the board and audit committee of a NASDAQ exchange-listed company. Mr. Frank provides experience our board of directors has deemed relevant to the duties required to be performed by our directors.
Michael J. Hagan served as the President of LifeShield, Inc., or LifeShield, from June 2013 to May 2014, a leading wireless home security company which was acquired by and became a division of DirecTV in 2013. He previously served as the chairman, president and chief executive officer of LifeShield from December 2009 to May 2013. Prior to his employment by LifeShield, Mr. Hagan served as chairman of NutriSystem, Inc., or NutriSystem, from 2002 to November 2008, as chief executive officer of NutriSystem from 2002 to May 2008 and as president of NutriSystem from July 2006 to September 2007. Prior to joining NutriSystem, Mr. Hagan was the co-founder of Verticalnet Inc., or Verticalnet, and held a number of executive positions at Verticalnet since its founding in 1995, including chairman of the board from 2002 to 2005, president and chief executive officer from 2001 to 2002, executive vice president and chief operating officer from 2000 to 2001 and senior vice president prior to that time. Mr. Hagan has served on the board of directors of NutriSystem since February 2012, presiding in the role of chairman of the board since April 2012, and has also served on the board of directors of ICG Group, Inc. since June 2007. Mr. Hagan previously served as a director of NutriSystem from 2002 to November 2008 and Verticalnet from 1995 to January 2008. Mr. Hagan also served as a member of the board of trustees of American Financial Realty Trust from 2003 to June 2007. Mr. Hagan holds a B.S. in Accounting from Saint Josephs University.
Mr. Hagan has significant experience as an entrepreneur and senior executive at public and private organizations. Mr. Hagan also has extensive experience in corporate finance, financial reporting and accounting and controls. This experience has provided Mr. Hagan, in the opinion of our board of directors, with experience and insight which is beneficial to us.
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Jeffrey K. Harrow has been chairman of Sparks Marketing Group, Inc., or Sparks, since 2001. Mr. Harrow is responsible for both operating divisions of Sparks, which includes Sparks Custom Retail and Sparks Exhibits & Environments, with offices throughout the United States and China. Sparks clients include a number of Fortune 500 companies. Prior to joining Sparks, Mr. Harrow served as president and chief executive officer of CMPExpress.com from 1999 to 2000. Mr. Harrow created the strategy that allowed CMPExpress.com to move from a Business-to-Consumer marketplace into the Business-to-Business sector. In 2000, Mr. Harrow successfully negotiated the sale of CMPExpress.com to Cyberian Outpost (NASDAQ ticker: COOL). From 1982 through 1998, Mr. Harrow was the president, chief executive officer and a director of Travel One, a national travel management company. Mr. Harrow was responsible for growing the company from a single office location to more than 100 offices in over 40 cities and to its rank as the 6th largest travel management company in the United States. Under his sales strategy, annual revenues grew from $8 million to just under $1 billion. During this time, Mr. Harrow purchased nine travel companies in strategic cities to complement Travel Ones organic growth. In 1998, Mr. Harrow and his partners sold Travel One to American Express. In addition to serving as a board member of Sparks, Mr. Harrow serves on the board of directors of FS Investment Corporation III and as the chairman of is valuation committee and has presided in such roles since February 2014. Mr. Harrows past directorships include service as a director of Cherry Hill National Bank, Hickory Travel Systems, Marlton Technologies and Ovation Travel Group and the Deans Board of Advisors of The George Washington University School of Business. Mr. Harrow is a graduate of The George Washington University School of Government and Business Administration, where he received his B.B.A. in 1979.
Mr. Harrow has served in a senior executive capacity at various companies, as well as a member of various boards. His extensive service at various companies has provided him, in the opinion of our board of directors, with experience and insight which is beneficial to us.
Paul Mendelson served as the chief financial officer of Lincoln Investment Planning, Inc., a broker dealer and registered investment adviser, or Lincoln Investment, from 1994 until February 2011 and currently serves as a senior advisor for business development for Lincoln Investment. As chief financial officer, Mr. Mendelson was responsible for all financial reporting, controls, planning and regulatory issues. His activities also included acquisitions, consulting with independent branch offices and negotiating contracts, and, as a member of the executive committee, he participated in strategic planning. Mr. Mendelson has served as a member of the board of directors of FS Investment Corporation II since February 2012 and also serves as chairman of FS Investment Corporation IIs audit committee and as a member of its valuation committee. Mr. Mendelson previously served as a member of the board of trustees of FS Energy and Power Fund from September 2010 through March 2012, as well as a member of FS Energy and Power Funds audit committee and chairman of its valuation committee from May 2011 through March 2012. From 1996 to 1999, Mr. Mendelson also led the technology and operations divisions of Lincoln Investment. Prior to joining Lincoln Investment in 1994, Mr. Mendelson spent 20 years in various positions, including controller, chief financial officer, vice president, president and trustee for a group of commonly-owned, privately- held businesses, in industries including manufacturing, retail, service and real estate. In addition, Mr. Mendelson spent two years with Arthur Andersen and Company, an international public accounting firm. Mr. Mendelson received a B.S. degree in Accounting from Lehigh University and an M.B.A. degree from the Wharton School of the University of Pennsylvania. He is a member of the American Institute of Certified Public Accountants and holds a Series 27 Securities License.
Mr. Mendelson has extensive experience concerning financial reporting, controls, planning and regulatory issues by virtue of his previous position as chief financial officer of a broker-dealer and registered investment adviser and various other positions he held during the twenty years prior thereto. In addition, our board of directors considered his B.S. degree in accounting and his M.B.A. to be beneficial to us.
Pedro A. Ramos is a partner with the law firm of Schnader Harrison Segal & Lewis, LLP, or Schnader, where he advises clients in the business, nonprofit and government sectors, focusing on transactions, financings, compliance, risk management and investigations. From June 2009 until the firms attorneys joined Schnader in August 2013, Mr. Ramos was a partner with the law firm of Trujillo, Rodriguez & Richards, LLC and led the
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firms government, education and social sector practice. From June 2007 to June 2009, Mr. Ramos was a partner with the law firm of Blank Rome LLP in its employment, benefits and labor group and its government relations practice. Mr. Ramos previously served as Managing Director of the City of Philadelphia from April 2005 to June 2007 and as City Solicitor from March 2004 to April 2005. Before working for the City of Philadelphia, Mr. Ramos served as vice president and chief of staff to the president of the University of Pennsylvania from January 2002 to March 2004. From September 1992 to January 2002, Mr. Ramos served as an attorney with the law firm of Ballard Spahr Andrews & Ingersoll, LLP in its employee benefits group. From November 2011 to October 2013, Mr. Ramos served as the chairman of the School Reform Commission, which oversees the School District of Philadelphia. Mr. Ramos served on the Board of the School District of Philadelphia from December 1995 through December 2001, with his last two years as president of that board. Mr. Ramos serves on several civic and professional associations and is a member of the boards of Project H.O.M.E., the Philadelphia Zoo, the Independence Foundation, the Ed Snider Youth Hockey Foundation and CDC Development Solutions. Mr. Ramos graduated cum laude with a J.D. from the University of Michigan Law School and graduated with a B.A. from the University of Pennsylvania.
Mr. Ramos extensive service in the private and public sectors has provided him, in the opinion of our board of directors, with experience and insight which is beneficial to us.
Executive Officers
The following persons serve as our executive officers in the following capacities:
NAME |
AGE | POSITIONS HELD | ||||
Michael C. Forman |
53 | Chief Executive Officer | ||||
Sean Coleman |
44 | Managing Director | ||||
Salvatore Faia |
51 | Chief Compliance Officer | ||||
William Goebel |
40 | Chief Financial Officer | ||||
Zachary Klehr |
35 | Executive Vice President | ||||
Brad Marshall |
41 | Senior Portfolio Manager | ||||
Gerald F. Stahlecker |
48 | President | ||||
Stephen S. Sypherd |
37 | Vice President, Treasurer and Secretary |
The address for each executive officer is c/o FS Investment Corporation, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104, except for Mr. Marshall whose address is c/o GSO Capital Partners, 345 Park Avenue, 31st Floor, New York, New York 10154.
Executive Officers Who are Not Directors
Sean Coleman has served as our managing director since February 2014. Mr. Coleman also serves as a managing director of investment management of Franklin Square Holdings and its affiliated investment advisers, FB Advisor, FS Investment Advisor, LLC, FSIC II Advisor, LLC, FS Global Advisor, LLC and FSIC III Advisor, LLC. Mr. Coleman also serves on the investment committee of FB Advisor. Before joining Franklin Square Holdings and its affiliated investment advisers in October 2013, Mr. Coleman worked at Golub Capital, where he served in various capacities, including as managing director in the direct lending group and as chief financial officer and treasurer of its BDC. Before he joined Golub Capital in September 2005, Mr. Coleman worked in merchant and investment banking, including at Goldman, Sachs & Co. and Wasserstein Perella & Co. Mr. Coleman earned a B.A. in History from Princeton University and an M.B.A. with Distinction from Harvard Business School, where he received the Loeb Award for academic excellence in finance.
Salvatore Faia has served as our chief compliance officer since May 2008. Mr. Faia also serves as the chief compliance officer of FS Investment Corporation II, FS Energy and Power Fund, FS Investment Corporation III, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA and FS Global Credit
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Opportunities FundD, and has presided in such roles since July 2011, April 2011, December 2013, June 2013, June 2013 and June 2013, respectively. Also, Mr. Faia served as the chief compliance officer for FB Advisor from November 2008 to December 2010. Since 2004, Mr. Faia has served as the president of Vigilant Compliance, LLC, a full service compliance firm serving mutual funds and the investment industry. In connection with his role as president of Vigilant Compliance, LLC, he currently serves as chief compliance officer for a number of mutual funds and investment advisers. Mr. Faia has also served as trustee to EIP Growth and Income Fund since May 2005.
From 2002 to 2004, Mr. Faia served as senior legal counsel for PFPC Worldwide, Inc., and from 1997 to 2001, he was a partner with an AmLaw 100 law firm. Mr. Faia has extensive experience with mutual funds, hedge funds, investment advisers, broker-dealers and the investment management industry. In addition to being an experienced attorney with respect to the 1940 Act and the Investment Advisers Act of 1940, as amended, he is a Certified Public Accountant, and holds various Financial Industry Regulatory Authority Securities Licenses. Mr. Faia is a member of the Investment Company Institutes chief compliance officer committee. Mr. Faia graduated from the University of Pennsylvania Law School with his J.D., and received his degree in accounting and finance from La Salle University.
William Goebel has served as our chief financial officer since March 2011. Mr. Goebel has also served as chief financial officer of FS Investment Corporation II, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA and FS Global Credit Opportunities FundD, and has presided in such role since July 2011, January 2013, January 2013 and January 2013, respectively, and served as chief financial officer of FS Energy and Power Fund from February 2011 to November 2012. Prior to joining us, Mr. Goebel held a senior manager audit position with Ernst & Young LLP in the firms asset management practice from 2003 to January 2011, where he was responsible for the audits of regulated investment companies, private investment partnerships, investment advisers and broker-dealers. Mr. Goebel began his career at a regional public accounting firm, Tait, Weller and Baker LLP in 1997. Mr. Goebel received a B.S. in Economics from the Wharton School of the University of Pennsylvania in 1997. He is a Certified Public Accountant and holds the CFA Institutes Chartered Financial Analyst designation.
Zachary Klehr has served as our executive vice president since January 2013. Mr. Klehr also currently serves as executive vice president of FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA and FS Global Credit Opportunities FundD, and has presided in such roles since January 2013, January 2013, June 2013, January 2013, January 2013 and January 2013, respectively. Mr. Klehr has also served in various senior officer capacities for Franklin Square Holdings and its affiliated investment advisers, FB Advisor, FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC, and FS Global Advisor, LLC, since the later of February 2011 or such entitys inception date, including as executive vice president since September 2012. In this role, he focuses on fund administration, portfolio management, fund operations, research, education and communications. Prior to joining Franklin Square Holdings, Mr. Klehr served as a vice president at Versa Capital Management, or Versa, a private equity firm with approximately $1 billion in assets under management, from July 2007 to February 2011. At Versa, he sourced, underwrote, negotiated, structured and managed investments in middle-market distressed companies, special situations and distressed debt. Prior to Versa, Mr. Klehr spent five years at Goldman, Sachs & Co., starting as an analyst in the Investment Banking Division, then in the executive office working on firm-wide strategy covering hedge funds and other complex multi-faceted clients of the firm. Later, he joined the Financial Sponsors Group as an associate where he focused on leveraged buyouts, acquisitions and equity and debt financings for private equity clients. Mr. Klehr received his M.B.A., with honors, from the Wharton School of the University of Pennsylvania and his B.A., cum laude, also from the University of Pennsylvania. He is active in his community and serves on the board of trustees of The Philadelphia School where he is a member of the executive, governance, advancement, finance and investment committees.
Brad Marshall has served as our Senior Portfolio Manager since April 2014. Mr. Marshall also serves as a managing director and senior portfolio manager at Blackstone and GDFM. Mr. Marshall oversees the investment
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activities for us, FS Investment Corporation II and FS Investment Corporation III, which are each sub-advised by GDFM, and is a member of GDFMs investment committee. Since joining GSO in 2005, Mr. Marshall has been involved with portfolio management and the ongoing analysis and evaluation of fixed income investment opportunities in the energy and power sectors. Before joining GSO, Mr. Marshall worked in various roles at the Royal Bank of Canada, or RBC, including fixed income research and business development within RBCs private equity funds effort. Prior to his time with RBC, Mr. Marshall helped develop a private equity funds business for TAL Global, a Canadian asset management division of Canadian Imperial Bank of Commerce, an, prior to that, he co-founded a microchip verification software company where he served as chief finance officer. Mr. Marshall received an M.B.A. from McGill University in Montreal where he was an Academic All-Canadian and a B.A. (Honors) in Economics from Queens University in Kingston, Canada.
Gerald F. Stahlecker has served as our president since April 2013 and before that as executive vice president since March 2010. He has served as executive vice president of FB Advisor and Franklin Square Holdings since January 2010. Mr. Stahlecker also serves as the executive vice president of FS Energy and Power Fund, FS Investment Advisor, LLC, FS Investment Corporation II , FSIC II Advisor, LLC, FS Investment Corporation III, FSIC III Advisor, LLC, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA, FS Global Credit Opportunities FundD and FS Global Advisor, LLC, and has presided in such roles since September 2010, September 2010, July 2011, November 2011, June 2013, October 2013, January 2013, January 2013, January 2013 and January 2013, respectively. Mr. Stahlecker was an independent director and served as a member of the audit committee and as chairman of the valuation committee from our inception in December 2007 to December 2009 when he resigned as a director in order to join our affiliates, FB Advisor and Franklin Square Holdings. Mr. Stahlecker is a former founding partner of Radcliffe Capital Management, L.P., or Radcliffe, an SEC-registered investment advisory firm which manages the Radcliffe Funds, a family of Cayman Islands-based, master-feeder structured hedge funds, as well as separately manages accounts for an institutional investor base. Radcliffe pursues convertible arbitrage, high-yield debt, special situations and event-driven investment strategies. From its founding in October 2002 until selling his interest in Radcliffe in July 2009, Mr. Stahlecker served as managing director and chief operating officer of Radcliffe and was the co-chair of its investment committee. Prior to co-founding Radcliffe and its affiliated entities, from May 1998 through October 2002, Mr. Stahlecker served as an officer and director of Rose Glen Capital Management, L.P., or Rose Glen, a predecessor to Radcliffe. Rose Glen managed hedge funds focusing on directly-negotiated, structured debt and equity investments in public companies. Mr. Stahlecker has extensive experience in structuring and negotiating investment transactions on behalf of investors and issuers and has participated in numerous distressed and special situation restructurings on behalf of investors.
From 1992 to 1998, Mr. Stahlecker was an attorney at Klehr Harrison, a Philadelphia-based law firm, where he practiced corporate and securities law. While at Klehr Harrison, Mr. Stahlecker represented hedge funds, venture capital funds and other institutional investors pursuing structured equity and debt investments in public and private companies. Prior to attending law school, from 1987 to 1989, Mr. Stahlecker worked as a senior analyst at Furash & Company, a consulting boutique in Washington, D.C., where he advised banks and other financial institutions regarding mergers and acquisitions, restructurings, asset/liability management and strategic planning. Mr. Stahlecker received his B.S. in Industrial Management, with concentrations in Finance and Strategic Planning, from Carnegie Mellon University and his J.D. from Villanova University Law School, where he was an editor of the Villanova University Environmental Law Journal. Mr. Stahlecker serves on the board of directors of the Investment Program Association, an industry trade group, and previously served on the board of trustees of The Philadelphia School where he served as a member of its advancement, finance and investment committees.
Stephen S. Sypherd has served as our vice president, treasurer and secretary since January 2013. Mr. Sypherd also currently serves as vice president, treasurer and secretary of FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA and FS Global Credit Opportunities FundD, and has presided in such roles since January 2013, January 2013, June 2013, January 2013, January 2013 and January 2013, respectively.
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Mr. Sypherd has also served in various senior officer capacities for Franklin Square Holdings and its affiliated investment advisers, FB Advisor, FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC, since the later of August 2010 or such entitys inception date, including as senior vice president since December 2011 and general counsel since January 2013. He is responsible for legal and compliance matters across all entities and investment products of Franklin Square Holdings. Prior to joining Franklin Square Holdings, Mr. Sypherd served for eight years as an attorney at Skadden, Arps, Slate, Meagher & Flom LLP, where he practiced corporate and securities law. Mr. Sypherd received his B.A. in Economics from Villanova University and his J.D. from the Georgetown University Law Center, where he was an executive editor of the Georgetown Law Journal.
Committees of the Board of Directors
Our board of directors has the following committees:
Audit Committee
The audit committee is responsible for selecting, engaging and discharging our independent accountants, reviewing the plans, scope and results of the audit engagement with our independent accountants, approving professional services provided by our independent accountants (including compensation therefor), reviewing the independence of our independent accountants and reviewing the adequacy of our internal controls over financial reporting. The members of the audit committee are Messrs. Chandler, Frank and Mendelson, all of whom are independent. Mr. Chandler serves as the chairman of the audit committee. Our board of directors has determined that Messrs. Chandler and Mendelson are audit committee financial experts as defined under rules promulgated by the SEC. The audit committee held five meetings during the fiscal year ended December 31, 2013.
Valuation Committee
The valuation committee establishes guidelines and makes recommendations to our board of directors regarding the valuation of our loans and investments. The members of the valuation committee are Messrs. Chandler, Frank, Heller and Mendelson, all of whom are independent. Mr. Frank serves as chairman of the valuation committee. The valuation committee held four meetings during the fiscal year ended December 31, 2013.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee selects and nominates directors for election by our stockholders, selects nominees to fill vacancies on our board of directors or a committee thereof, develops and recommends to our board of directors a set of corporate governance principles and oversees the evaluation of our board of directors. The nominating and corporate governance committee considers candidates suggested by its members and other directors, as well as our management and stockholders. A stockholder who wishes to recommend a prospective nominee for our board of directors must provide notice to our corporate secretary in accordance with the requirements set forth in our bylaws. See Description of Our Capital StockProvisions of the Maryland General Corporation Law and Our Charter and BylawsAdvance Notice Provisions for Stockholder Nominations and Stockholder Proposals for a description of our stockholder nomination procedure. The members of the nominating and corporate governance committee are Messrs. Harrow, Hagan and Ramos, each of whom are independent. Mr. Harrow serves as chairman of the nominating and corporate governance committee. The nominating and corporate governance committee held five meetings during the fiscal year ended December 31, 2013.
Compensation Committee
The compensation committee is responsible for determining, or recommending to our board of directors for determination, the compensation, if any, of our chief executive officer and all of our other executive officers,
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reviewing our reimbursement to FB Advisor of the allocable portion of our executive officers and their respective staffs on an annual basis and has the authority to engage compensation consultants following consideration of certain factors related to such consultants independence. The members of the compensation committee are Messrs. Chandler, Frank and Mendelson, each of whom are independent. Mr. Chandler serves as chairman of the compensation committee. The compensation committee was established on April 16, 2014 and therefore did not hold any meetings during the fiscal year ended December 31, 2013.
Compensation of Directors
The table below sets forth the compensation received by each of our directors for service during the fiscal year ended December 31, 2013:
Name of Director |
Fees Earned or Paid in Cash |
Total Compensation |
||||||
David J. Adelman |
| | ||||||
Gregory P. Chandler |
$ | 140,000 | $ | 140,000 | ||||
Michael C. Forman |
| | ||||||
Barry H. Frank |
$ | 140,000 | $ | 140,000 | ||||
Thomas J. Gravina |
$ | 116,250 | $ | 116,250 | ||||
Michael J. Hagan |
$ | 101,250 | $ | 101,250 | ||||
Jeffrey K. Harrow |
$ | 108,750 | $ | 108,750 | ||||
Michael J. Heller |
$ | 110,000 | $ | 110,000 | ||||
Paul Mendelson |
$ | 115,000 | $ | 115,000 | ||||
Pedro A. Ramos |
$ | 31,848 | $ | 31,848 |
Our directors who do not also serve in an executive officer capacity for us or FB Advisor are entitled to receive annual cash retainer fees, fees for participating in in-person board and committee meetings and annual fees for serving as a committee chairperson, determined based on our net assets as of the end of each fiscal quarter. These directors are Messrs. Chandler, Frank, Hagan, Harrow, Gravina, Heller, Mendelson and Ramos. Amounts payable under the arrangement are determined and paid quarterly in arrears as follows:
Net Asset Value |
Annual
Cash Retainer |
Board/Committee Meeting Fee |
Annual Chairperson Fee |
|||||||||
$0 to $100 million |
$ | 0 | $ | 0 | $ | 0 | ||||||
$100 million to $300 million |
$ | 25,000 | $ | 1,000 | $ | 5,000 | ||||||
$300 million to $500 million |
$ | 40,000 | $ | 1,000 | $ | 5,000 | ||||||
$500 million to $1 billion |
$ | 60,000 | $ | 1,500 | $ | 20,000 | ||||||
> $1 billion |
$ | 80,000 | $ | 2,500 | $ | 20,000 |
We also reimburse each of the above directors for all reasonable and authorized business expenses in accordance with our policies as in effect from time to time, including reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and each committee meeting not held concurrently with a board meeting.
We pay Mr. Hagan an annual retainer of $25,000, determined and paid quarterly, for his service as lead independent director.
We do not pay compensation to our directors who also serve in an executive officer capacity for us or FB Advisor.
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Compensation of Executive Officers
Our executive officers do not receive any direct compensation from us. We do not currently have any employees and do not expect to have any employees. Services necessary for our business are provided by individuals who are employees of FB Advisor or by individuals who were contracted by us or by FB Advisor to work on behalf of us, pursuant to the terms of the administration agreement. Each of our executive officers is an employee of FB Advisor or an outside contractor, and the day-to-day investment operations and administration of our portfolio are managed by FB Advisor. In addition, we will reimburse FB Advisor for our allocable portion of expenses incurred by FB Advisor in performing its obligations under the administration agreement.
Under the terms of the former investment advisory agreement, when our registration statement related to our initial public offering was declared effective by the SEC and we were successful in satisfying the minimum offering requirement, FB Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering of common stock until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On January 2, 2009, we satisfied the minimum offering requirement. We paid total reimbursements of $0, $0, $0 and $641 to FB Advisor and its affiliates during the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011, respectively. The reimbursements are recorded as a reduction of capital. As of March 31, 2014, no amounts remain reimbursable to FB Advisor and its affiliates under this arrangement.
The investment advisory agreement and the administration agreement provide that FB Advisor (and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FB Advisor) shall be entitled to indemnification (including reasonable attorneys fees and amounts reasonably paid in settlement) for any liability or loss suffered by FB Advisor, and FB Advisor shall be held harmless for any loss or liability suffered by us, arising out of the performance of any of its duties or obligations under the investment advisory agreement or the administration agreement, respectively, or otherwise as our investment adviser or administrator, respectively; provided, however, that FB Advisor cannot be indemnified for any liability arising out of willful misfeasance, bad faith, or negligence in the performance of FB Advisors duties or by reason of the reckless disregard of FB Advisors duties and obligations under the investment advisory agreement or the administration agreement, as applicable.
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The management of our investment portfolio is the responsibility of FB Advisor and its investment committee, which is currently led by Michael C. Forman, chief executive officer of FB Advisor and chairman of its investment committee. The other members of FB Advisors investment committee are Gerald F. Stahlecker, Zachary Klehr and Sean Coleman. For more information regarding the business experience of Messrs. Forman, Stahlecker, Klehr and Coleman, see ManagementBoard of Directors and Executive Officers. FB Advisors investment committee must unanimously approve each new investment that we make.
The members of FB Advisors investment committee are not employed by us and receive no compensation from us in connection with their portfolio management activities. Consistent with Franklin Square Holdings integrated culture, Franklin Square Holdings has one firm-wide compensation and incentive structure, which covers investment personnel who render services to us on behalf of FB Advisor. Franklin Square Holdings compensation structure is designed to align the interests of the investment personnel serving us with those of our stockholders and to provide a direct financial incentive to ensure that all of Franklin Square Holdings resources, knowledge and relationships are utilized to maximize risk-adjusted returns for each strategy.
Each of Franklin Square Holdings senior executives, including each of the investment personnel who render services to us on behalf of FB Advisor, receives a base salary and is eligible for a discretionary bonus.
All final compensation decisions are made by the management committee of Franklin Square Holdings based on input from managers. Compensation and other incentives are not formulaic, but rather are judgment and merit driven, and are determined based on a combination of overall firm performance, individual contribution and performance and relevant market and competitive compensation practices for other businesses.
The directors, officers and other personnel of FB Advisor allocate their time between advising us and managing other investment activities and business activities in which they may be involved, including managing and operating FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund. Therefore, FB Advisor, its personnel and certain affiliates may experience conflicts of interest in allocating management time, services and functions among us and any other business ventures in which they or any of their key personnel, as applicable, are or may become involved. This could result in actions that are more favorable to other affiliated entities than to us.
Pursuant to an investment sub-advisory agreement between FB Advisor and GDFM, GDFM assists FB Advisor in identifying investment opportunities and making investment recommendations for approval by FB Advisor. In addition, to the extent requested by FB Advisor, GDFM may assist with the monitoring of our portfolio and may make managerial assistance available to certain of our portfolio companies.
Investment Personnel
Our senior staff of investment personnel currently consists of the members of FB Advisors investment committee, Messrs. Forman, Stahlecker, Klehr and Coleman.
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In addition to managing our investments, the directors, officers and other personnel of FB Advisor also currently manage the following entities:
Name |
Entity | Investment Focus |
Gross Assets(1)(2) |
|||||
FS Energy and Power Fund |
BDC | Primarily invests in debt and income-oriented equity securities of privately-held U.S. companies in the energy and power industry. | $ | 2,717,712,000 | ||||
FS Investment Corporation II |
BDC | Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. | $ | 3,734,428,000 | ||||
FS Investment Corporation III(3) |
BDC | Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. | | |||||
FS Global Credit Opportunities Fund(4) |
Closed-end |
Primarily invests in secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments. | $ | 63,946,000 |
(1) | As of March 31, 2014, except as otherwise noted below. |
(2) | The advisory fees earned by each of FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FB Global Advisor, LLC, the investment advisers of FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund, respectively, are based on the performance of each respective entity. |
(3) | FS Investment Corporation III commenced operations on April 2, 2014 upon meeting its minimum offering requirement of raising gross proceeds of $2.5 million in its continuous public offering from persons who were not affiliated with FS Investment Corporation III or its investment adviser, FSIC III Advisor, LLC. |
(4) | FS Global Credit Opportunities Fund commenced operations on December 12, 2013. The FSGCOF Offered Funds, which have the same investment objectives and strategies as FS Global Credit Opportunities Fund, currently offer common shares of beneficial interest to the public and invest substantially all of the net proceeds of their respective offerings in FS Global Credit Opportunities Fund. Gross assets shown as of December 31, 2013. |
The table below shows the dollar range of shares of common stock beneficially owned as of December 31, 2013 by each member of the investment committee of FB Advisor, based on closing price of our common stock as reported on the NYSE as of June 13, 2014:
Name of Investment Committee Member |
Dollar Range
of Equity Securities in FS Investment Corporation(1) |
|||
Michael C. Forman |
$ | Over $1,000,000 | ||
Gerald F. Stahlecker |
None | |||
Zachary Klehr |
$ | 50,001-$100,000 | ||
Sean Coleman |
None |
(1) | Dollar ranges are as follows: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or over $1,000,000. |
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Key Personnel of the Sub-Adviser
GDFMs team of dedicated investment professionals provide assistance to FB Advisor pursuant to the investment sub-advisory agreement. Below is biographical information relating to certain key personnel involved in rendering such services:
Douglas I. Ostrover is a senior managing director of Blackstone and a founder of GSO. Before co-founding GSO in 2005, Mr. Ostrover was a managing director of Credit Suisse First Boston, or CSFB, and chairman of the Leveraged Finance Group of CSFB. Prior to that, he was global co-head of the Leveraged Finance Group of CSFB. He was responsible for all of CSFBs origination, distribution and trading activities relating to high yield securities, leveraged loans, high yield credit derivatives and distressed securities. Mr. Ostrover was a member of CSFBs Management Council and the Fixed Income Operating Committee. Mr. Ostrover joined CSFB in November 2000 when CSFB acquired Donaldson, Lufkin & Jenrette, or DLJ, where he was a managing director in charge of High Yield and Distressed Sales, Trading and Research. Mr. Ostrover had been a member of DLJs high yield team since he joined the firm in 1992. Mr. Ostrover received a B.A. in Economics from the University of Pennsylvania and an M.B.A. from the Stern School of Business of New York University. He is on the Board of Directors of the Michael J. Fox Foundation.
Daniel H. Smith is a senior managing director of Blackstone and is head of GDFM. Mr. Smith joined GSO from RBC in 2005. At RBC, Mr. Smith was a managing partner and head of RBC Capital Partners Debt Investments business, RBCs alternative investments unit responsible for the management of $2.5 billion in capital and a portfolio of merchant banking investments. Prior to joining RBC, Mr. Smith worked at Indosuez Capital, a division of Credit Agricole Indosuez, where he was the co-head and managing director responsible for management of the firms $4.0 billion in collateralized loan obligations and a member of the investment committee responsible for a portfolio of private equity co-investments and mezzanine debt investments. Previously, Mr. Smith worked at Van Kampen and Frye Louis Capital Management. Mr. Smith received a Masters degree in Management from the J.L. Kellogg Graduate School of Management at Northwestern University and a B.S. in Petroleum Engineering from the University of Southern California.
Louis Salvatore is a senior managing director of Blackstone and head of portfolio management of GSO. Mr. Salvatore focuses on coordinating all of GSOs Investment Committee functions as well as sourcing and investing capital in both public and private opportunities. Mr. Salvatore is a member of GSOs Investment Committee. Before joining GSO in 2005, Mr. Salvatore was a principal of DLJ Investment Partners, the mezzanine fund of CSFBs Alternative Capital Division. Mr. Salvatore joined CSFB in 2000 when it acquired DLJ, where he was a member of the Merchant Banking Group. He had been a member of DLJs Leveraged Finance Group, specializing in corporate restructurings. Prior to that, he worked for Kidder Peabody. Mr. Salvatore received a B.A. in Economics from Cornell University and an M.B.A. from the Wharton School of the University of Pennsylvania.
Robert Petrini is a senior managing director of Blackstone where he focuses on private debt and middle market private equity investing. Mr. Petrini has been involved in the firms investments in the debt and equity of numerous private companies as well as public market investments. Before joining GSO Capital in 2005, Mr. Petrini was a principal in CSFBs Alternative Capital Division. Mr. Petrini joined CSFB when the firm acquired DLJ. Prior to the acquisition of DLJ, Mr. Petrini was a member of DLJs Leveraged Finance Group, specializing in financial sponsor transactions. Mr. Petrini graduated magna cum laude with a B.S. in economics from the Wharton School of the University of Pennsylvania. Mr. Petrini is a member of the Boards of Directors of Stolle Machinery and United Site Services and also serves as a board observer on many of GSOs investments.
Brad Marshall is a managing director and senior portfolio manager at Blackstone. Mr. Marshall also serves as a managing director and senior portfolio manager of GDFM. For more information regarding the business experience of Mr. Marshall, see ManagementBoard of Directors and Executive OfficeExecutive Officers Who are Not Directors.
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James Roche is a managing director at Blackstone. Mr. Roche heads up the effort to directly originate private investments for us, FS Investment Corporation II and FS Investment Corporation III. Since joining GSO, Mr. Roche has been involved in the research, analysis, and management of investments within the firms collateralized debt portfolios, separate account mandates, and closed-end funds, with an emphasis on special situations investments. Before joining Blackstone in 2005, Mr. Roche was a partner at RBC Capital Partners, where he held similar responsibilities. Mr. Roche has over 20 years of credit and related experience, including credit, structuring, and origination positions at Crédit Agricole Indosuez, Fitch IBCA, Inc., MetLife Capital Corporation, and NationsCredit Commercial Corporation (a unit of Bank of America). He received a B.A from the University of Connecticut and completed selected graduate coursework at the Hartford Graduate Center, an affiliate of Rensselaer Polytechnic Institute.
Marc Baliotti is a managing director with Blackstone. He joined Blackstone in 2005 and is a senior member of GSOs mezzanine team, handling sourcing, due diligence, structuring, and management of investments for the funds. Prior to joining GSO, Mr. Baliotti was a Principal of AIG Highstar Capital, an energy and infrastructure-focused private equity fund with over $5 billion of assets under management. His responsibilities there included sourcing investment opportunities, negotiating and structuring transactions, and managing portfolio company investments. Prior to that, Mr. Baliotti worked at Advanstar Communications Inc., a portfolio company of DLJ Merchant Banking Partners, or DLJMB, and as an Associate at DLJMB. Mr. Baliotti received a B.S. in Economics with distinction from the U.S. Naval Academy and an M.B.A. from Villanova University while on active duty in the U.S. Navy. Mr. Baliotti serves on the Board of Directors of Colt Defense and Heartland Food Companies, and he previously served on the boards of American Ref-Fuel, ArrMaz Custom Chemicals, Bluewater Thermal Processing, and Heartland Automotive Holdings.
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The following table sets forth certain information as of March 31, 2014 with respect to each company in which we had a debt or equity/other investment. Other than these investments, our only relationships with our portfolio companies are the managerial assistance we may separately provide to our portfolio companies, which services would be ancillary to our investments and the board observer or participation rights we may receive. As of March 31, 2014, we did not control and were not an affiliate of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to control a portfolio company if we owned 25% or more of its voting securities and would be an affiliate of a portfolio company if we owned 5% or more of its voting securities.
For information relating to the value of our investments in our portfolio companies, see our consolidated schedule of investments as of March 31, 2014, at page F-6.
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
||||
Senior Secured Loans 1st Lien | ||||||
A.P. Plasman Inc. 5245 Burke Street Windsor, ON N9A 6J3 Canada |
A.P. Plasman is a manufacturer of injection mold, exterior trim components, coupled with high value-add painting, assembly and tooling capabilities. | $ | 48,650 | |||
AccentCare, Inc. 17855 North Dallas Parkway Suite 150 Dallas, TX 75287 |
AccentCare is a provider of home healthcare services. | $ | 1,880 | |||
American Pacific Corp. 3883 Howard Hughes Parkway Suite 700 Las Vegas, NV 89169 |
American Pacific is a manufacturer of fine and specialty chemicals serving government aerospace and defense and pharmaceutical industries. | $ | 4,963 | |||
American Racing and Entertainment, LLC 2384 West River Road Nichols, NY 13812 |
American Racing and Entertainment was founded to acquire, develop and operate two racing and gaming operations. | $ | 21,000 | |||
AP Exhaust Acquisition, LLC 300 Dixie Trail Goldsboro, NC 27530 |
AP Exhaust manufactures and distributes aftermarket replacement emission and exhaust products for a broad array of vehicular and industrial applications. | $ | 15,000 | |||
Aspect Software, Inc. 300 Apollo Drive Chelmsford, MA 01824 |
Aspect Software is a provider of solutions to the contact center industry. | $ | 6,238 | |||
Attachmate Corp. 705 5th Avenue South Suite 1100 Seattle, WA 98104 |
Attachmate is a supplier of enterprise solutions that include systems and security management and host connectivity to corporations, government organizations and a network of distributors and resellers. | $ | 5,304 |
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Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
||||
Avaya Inc. 4655 Great America Parkway Santa Clara, CA 95054 |
Avaya is a global provider of next-generation business collaboration and communications solutions, providing unified communications, real-time video collaboration, contact center, networking and related services to companies of all sizes around the world. | $ | 4,150 | |||
Azure Midstream Energy LLC 1250 Wood Branch Park Drive Suite 100 Houston, TX 77079 |
Azure Midstream operates as a gas distributor and provides midstream services to natural gas producers. | $ | 4,381 | |||
BlackBrush TexStar L.P. 18615 Tuscany Stone Suite 300 San Antonio, TX 78258 |
BlackBrush TexStar focuses on natural gas and crude oil production and natural gas gathering and treatment. | $ | 14,020 | |||
Boomerang Tube, LLC 14567 North Outer Forty Suite 500 Chesterfield, MO 63017 |
Boomerang operates a greenfield manufacturing facility that produces highly engineered tubular goods for consumption in the U.S. and Canadian natural gas and crude oil drilling markets. | $ | 18,185 | |||
Cadillac Jack, Inc. 2450 Satellite Boulevard Duluth, GA 30096 |
Cadillac Jack designs, manufactures and operates electronic bingo and slot machine products. | $ | 34,587 | |||
Caesars Entertainment Operating Co. One Caesars Palace Drive Las Vegas, NV 89109 |
Caesars Entertainment is a gaming company serving many regions in the U.S., including Las Vegas and Atlantic City. | $ | 14,709 | |||
Caesars Entertainment Resort Properties, LLC One Caesars Palace Drive Las Vegas, NV 89109 |
Caesars Entertainment Resort Properties is the property company of Caesars Entertainment Corp. Caesars Entertainment properties include Harrahs Las Vegas, Rio, Flamingo Las Vegas, Harrahs Atlantic City, Paris Las Vegas, and Harrahs Laughlin. | $ | 68,570 | |||
Capital Vision Services, LLC 1950 Old Gallows Road Suite 520 Vienna, VA 22182 |
Capital Vision is the holding company for MyEyeDr, a retailer of eyewear products and operator of vision care units throughout Washington D.C., Maryland and Virginia. | $ | 24,444 | (1) | ||
Cengage Learning, Inc. 20 Channel Center Street Boston, MA 02210 |
Cengage is a publisher of textbooks, reference materials and other educational resources for the post-secondary, professional training and library reference markets. | $ | 6,723 |
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CITGO Petroleum Corp. 1293 Eldridge Parkway Houston, TX 77077 |
CITGO is an independent crude oil refiner and marketer. | $ | 9,959 | |||
Clear Channel Communications, Inc. 200 East Basse Road San Antonio, TX 78209 |
Clear Channel is a provider of a spectrum of multi-platform advertising and marketing solutions for partners and world-class entertainment for listeners. | $ | 14,002 | |||
Clover Technologies Group, LLC 4200 Columbus Street Ottawa, IL 61350 |
Clover Technologies (4L Holdings) is a collector and recycler of empty ink and toner cartridges in the aftermarket imaging supplies industry and provides comprehensive recycling services for small electronics. | $ | 6,170 | |||
Corel Corp. 1600 Carling Avenue Ottawa, ON K1Z 8R7 Canada |
Corel is a global packaged software company. | $ | 118,833 | |||
Corner Investment PropCo, LLC One Caesars Palace Drive Las Vegas, NV 89109 |
Corner Investment is an operating subsidiary of Caesars Entertainment Corp. | $ | 44,937 | |||
CoSentry.Net, LLC 12700 West Dodge Road Omaha, NE 68154 |
CoSentry provides data center solutions and technical services for large and mid-sized enterprises, particularly organizations valuing the stringent demands of a compliance regulated environment and the leverage of secure data management. | $ | 54,364 | |||
Crestwood Holdings LLC 700 Louisiana Street Suite 2060 Houston, TX 77022 |
Crestwood Holdings engages in the acquisition and development of midstream oil-and-gas assets. | $ | 5,640 | |||
Dent Wizard International Corp. 4710 Earth City Expressway Bridgeton, MO 63044 |
Dent Wizard is an automotive reconditioning services company with management systems and infrastructure developed over more than 25 years. | $ | 149,372 | (2) | ||
Eastman Kodak Co. 343 State Street Rochester, NY 14650 |
Eastman Kodak provides digital photography and printing products and services for consumer markets. | $ | 10,627 | |||
Education Management LLC 210 6th Avenue 33rd Floor Pittsburgh, PA 15222 |
Education Management is a provider of private post-secondary education services in North America. | $ | 19,034 | |||
ERC Ireland Holdings Ltd. 1 Heuston South Quarter St. Johns Road Dublin 8 Ireland |
Eircom is a provider of domestic and international voice and data communications for both the retail and wholesale carrier markets in Ireland. | $ | 15,200 |
150
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Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Extreme Reach, Inc. 75 2nd Avenue Suite 720 Needham, MA 02494 |
Extreme Reach offers a video platform for integrated TV, online, and mobile advertising. | $ | 4,077 | |||
FairPoint Communications, Inc. 521 E. Morehead Street Charlotte, NC 28202 |
FairPoint Communications provides communications services in rural and small urban communities, offering an array of services, including high speed data, internet access, data transport, voice, video and other broadband enabled product offerings. | $ | 12,882 | |||
Flanders Corp. 531 Flanders Filters Road Washington, NC 27889 |
Flanders designs, manufactures and markets air filters and related products for commercial and residential use. | $ | 36,813 | |||
Florida Gaming Centers, Inc. 3500 NW 37th Avenue Miami, FL 33142 |
Florida Gaming is an owner and operator of casinos and gambling facilities in Florida. | $ | 13,030 | |||
FR Utility Services LLC 11500 Ironbridge Road Chester, VA 23831 |
FR Utility provides critical outsourced services for the maintenance of transmission, distribution, and substation infrastructure to electrical utilities. | $ | 6,405 | |||
Fram Group Holdings Inc. One North Wacker Drive Suite 4400 Chicago, IL 60606 |
Fram Group Holdings is a subsidiary of Autoparts Holdings, a manufacturer and marketer of consumer-branded automotive products for the aftermarket consumer. | $ | 1,323 | |||
Harlan Sprague Dawley, Inc. 8520 Allison Pointe Blvd. Suite 400 Indianapolis, IN 46250 |
Harlan is a provider of essential pre-clinical and non-clinical contract research and research modelling services. | $ | 1,192 | |||
HBC Solutions, Inc. 9800 South Meridian Boulevard Suite 300 Englewood, CO 80112 |
HBC Solutions is a provider of hardware and software that enables media companies to create, manage, distribute and monetize video content. | $ | 81,371 | |||
ILC Industries, LLC 105 Wilbur Place Bohemia, NY 11716 |
ILC Industries manufactures defense, aerospace, security, and industrial products. | $ | 9,293 | |||
Infiltrator Systems, Inc. 4 Business Park Road Old Saybrook, CT 06475 |
Infiltrator Systems is a manufacturer of plastic leaching chambers designed for use in commercial and residential septic and storm water management. | $ | 200,000 | |||
Infogroup Inc. 1020 East 1st Street Papillion, NE 68046 |
Infogroup is a provider of data-driven marketing solutions that help its clients cost effectively acquire new customers as well as retain new ones. | $ | 610 |
151
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Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Insight Equity A.P. X, L.P. 7000 Sunwood Drive NW Ramsey, MN 55303 |
Vision-Ease Lens (Insight Equity A.P. X, L.P.) develops, manufactures, markets, and sells ophthalmic lenses. | $ | 63,984 | |||
Intralinks, Inc. 150 E 42nd St 8th Floor New York, NY 10017 |
Intralinks is a provider of software-as-service workspaces to exchange and manage time-sensitive, confidential information. | $ | 14,853 | |||
inVentiv Health, Inc. 1 Van de Graaff Drive Burlington, MA 01803 |
inVentiv Health is a provider of global outsourced services to the pharmaceutical, biotechnology, medical device, diagnostics and healthcare industries. The Company provides a broad range of clinical development, commercialization and consulting services to support its clients ability to develop and successfully commercialize their products and services. | $ | 2,709 | |||
Lantiq Deutschland GmbH Lilienthalstrasse 15 85579 Neubiberg Germany |
Lantiq provides highly integrated, flexible end-to-end semiconductor solutions for next generation networks and the digital home. | $ | 11,592 | |||
Larchmont Resources, LLC P.O. Box 18756 Oklahoma City, OK 73154 |
Larchmont owns oil and gas leases through participation in the Chesapeake Energy Corporation Founders Well Participation Program. | $ | 10,958 | |||
Leading Edge Aviation Services, Inc. 3132 Airway Avenue Costa Mesa, CA 92626 |
Leading Edge provides aircraft painting services for commercial, private and military aircrafts. | $ | 43,380 | (3) | ||
Leedsworld Inc. 400 Hunt Valley Road New Kensington, PA 15068 |
Leedsworld (Polyconcept) supplies a wide range of promotional lifestyle and gift products within the promotional products industry. | $ | 9,640 | |||
Maritime Telecommunications Network, Inc. 3044 N. Commerce Parkway Miramar, FL 33025 |
Maritime Telecommunications is a global satellite services provider to the Cruise Line, Oil & Gas, Military/Government and other markets. MTN serves as the complete outsource provider of a full suite of satellite-based telecommunications including voice, data and internet services for cruise ships. | $ | 4,029 | |||
MB Precision Holdings LLC 109 Apremont Way P.O. Box 828 Westfield, MA 01086 |
MB Precision provides precision machining, fabrication, assembly and test services for the aerospace & defense, energy, oil & gas and power generation markets. | $ | 13,467 |
152
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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MetoKote Corp. 1340 Neubrecht Road Lima, OH 45801 |
MetoKote employs a broad cross-section of coating technologies in delivering its coating solutions, including electrocoating, powder coating and liquid paint. | $ | 23,760 | (4) | ||
Micronics, Inc. 200 West Road Portsmouth, NH 03801 |
Micronics is a global designer and manufacturer of inline solid-liquid filtration solutions for mission-critical industrial process applications. | $ | 22,034 | |||
MMI International Ltd. Labuan Financial Park 15th Floor Jalan Merdeka, Labuan 87000 Malaysia |
MMI International is a precision manufacturing technology company with a key focus on producing mechanical and electro-mechanical components for the hard disk drive industry. | $ | 10,065 | |||
MMM Holdings, Inc. 350 Chardón Avenue Suite 500, Torre Chardón San Juan, PR 00918 |
Aveta (MMM) is a medical management company caring for Medicare beneficiaries and commercial members through its network of providers throughout the U.S. and Puerto Rico. | $ | 9,619 | |||
MModal Inc. 5000 Meridian Boulevard Suite 200 Franklin, TN 37067 |
MModal is a provider of clinical documentation solutions providing clinical narrative capture services, speech and language understanding technology and clinical documentation workflow solutions for the healthcare industry. | $ | 6,641 | |||
Mood Media Corp. 99 Sante Drive Concord ON L4K 3C4 Canada |
Mood Media provides in-store audio, visual, and scent branding services to retail companies in North America, Europe, Asia and Australia. | $ | 2,983 | |||
MSO of Puerto Rico, Inc. 350 Chardón Avenue Suite 500, Torre Chardón San Juan, PR 00918 |
MSO is a medical management company caring for Medicare beneficiaries and commercial members through its network of providers in Puerto Rico. | $ | 6,994 | |||
New HB Acquisition, LLC P.O. Box 419593 Kansas City, MO 64141 |
Hostess Brands provides baked goods including breads, cakes, and doughnuts. | $ | 3,862 | |||
New Star Metals Inc. 835 McClintock Drive Suite 100 Burr Ridge, IL 60527 |
New Star Metals provides steel processing, building products, and supply chain management across a diverse array of end markets. | $ | 40,000 |
153
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Nova Wildcat Amerock, LLC Three Glenlake Parkway Atlanta, GA 30328 |
Amerock, Ashland, Bulldog, Shur-Line, and Drapery Hardware design, manufacture, and market consumer and commercial products worldwide. Together they operate in six segments: Home Solutions, Writing, Tools, Commercial Products, Baby & Parenting, and Specialty. | $ | 20,000 | |||
Panda Sherman Power, LLC 4100 Spring Valley Road Suite 1001 Dallas, TX 75244 |
Panda is a Dallas-based independent power provider that has developed, financed, constructed and operated large-scale power generation projects. | $ | 9,206 | |||
Panda Temple Power, LLC 4100 Spring Valley Road Suite 1001 Dallas, TX 75244 |
Panda is a Dallas-based independent power provider that has developed, financed, constructed and operated large-scale power generation projects. | $ | 3,000 | |||
Princeton Review, Inc. 111 Speen Street Framingham, MA 01701 |
Princeton Review provides online, instructor-led, and print products and services that address the needs of students, parents, educators and institutions for most major post-secondary and graduate admission and aptitude exams. | $ | 967 | |||
PRV Aerospace, LLC 2600 94th Street SW Suite 150 Everett, WA 98204 |
PRV Aerospace is a precision manufacturer and supplier of flight critical components, subassemblies and assemblies to tier 1 aero-structures and aero-equipment suppliers and to aircraft original equipment manufacturers for commercial and defense platforms. | $ | 4,847 | |||
RBS Holding Co. LLC 30 East 33rd Street 10th Floor New York, NY 10016 |
RBS Holding is a direct marketer and manufacturer of direct mail fundraising solutions primarily for non-profit organizations. | $ | 6,229 | |||
Reddy Ice Holdings, Inc. 8750 North Central Expressway Suite 1800 Dallas, TX 75231 |
Reddy Ice manufactures and distributes packaged ice products in the U.S. | $ | 1,168 | |||
Safariland, LLC 13386 International Parkway Jacksonville, FL 32218 |
Safariland is a provider of security and law enforcement products and services, delivering a full-range of customer-specific solutions. | $ | 155,200 | |||
Shell Topco L.P. 2533 South West Street Wichita, KS 67217 |
Latshaw Enterprises (Shell Topco) is a manufacturer of industrial products including brake cables, high end electronic components and other equipment. | $ | 32,612 |
154
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Sirius Computer Solutions, Inc. 10100 Reunion Place Suite 1000 San Antonio, TX 78216 |
Sirius is an IT solutions provider primarily serving small to medium businesses in the U.S. | $ | 7,458 | |||
Smile Brands Group Inc. 8105 Irvine Center Drive Suite 1500 Irvine, CA 92618 |
Smile Brands is a provider of support services to general and multi-specialty dental offices in the U.S. | $ | 29,777 | |||
Sorenson Communication, Inc. 4192 South Riverboat Road Salt Lake City, UT 84123 |
Sorenson Communication is a provider of IP-based video communication technology and services to the deaf and hard of hearing population in the U.S. | $ | 65,711 | |||
Sports Authority, Inc. 1050 West Hampden Avenue Englewood, CO 80110 |
Sports Authority is a retailer of sporting goods and apparel. | $ | 21,993 | |||
Stallion Oilfield Holdings, Inc. 950 Corbindale Suite 300 Houston, TX 77024 |
Stallion Oilfield Holdings provides total well site support, production and logistical services to exploration companies and drilling contractors nationwide. | $ | 4,806 | |||
Swiss Watch International, Inc. 101 South State Road 7 Suite 201 Hollywood, FL 33023 |
The SWI Group designs and manufactures watches and time pieces. | $ | 47,359 | |||
Technicolor SA 1-5 rue Jeanne d'Arc Issy les Moulineaux, 92130 France |
Technicolor provides video and audio production, post-production and distribution services to content creators, network service providers and broadcasters. | $ | 32,537 | |||
Tervita Corp. 500, 140 10th Avenue SE Calgary AB Canada |
Tervita is an independent, vertically integrated environmental management company serving the oil and gas industry. | $ | 7,948 | |||
Therakos, Inc. 10 North High Street West Chester, PA 19380 |
Therakos attempts to discover new technologies and therapeutic applications that empower the immune response and improve patient outcomes. | $ | 26,460 | |||
ThermaSys Corp. 2776 Gunter Park Dr E Montgomery, AL 36109 |
ThermaSys is a manufacturer of heat exchangers for end markets including power generation, industrial, construction equipment, and automotive engines. | $ | 9,727 | |||
Totes Isotoner Corp. 9655 International Boulevard Cincinnati, OH 45246 |
Totes is a designer, distributor and retailer of high-quality branded functional accessories. | $ | 6,524 |
155
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Tri-Northern Acquisition, Inc. 135 Crossways Park Drive Suite 101 Woodbury, NY 11797 |
Tri-Northern is a distributor of surveillance and home automation, providing state-of-the-art CCTV, IP Video, access control, fire, intrusion, sound, and communications solutions. | $ | 65,968 | (5) | ||
Virtual Radiologic Corp. 11995 Singletree Lane Suite 500 Eden Prairie, MN 55344 |
Virtual Radiologic is a technology-enabled national radiology practice working in partnership with local radiologists and hospitals to provide radiology services. | $ | 3,440 | |||
VPG Group Holdings LLC 9820 Westpoint Drive Suite 300 Indianapolis, IN46256 |
VPG Group is a specialist in transformer recycling, repair, and disposal, as well as scrap cable, wire and metal recycling. | $ | 62,590 | |||
Willbros Group, Inc. 4400 Post Oak Parkway Suite 1000 Houston, TX 77027 |
Willbros provides project management, engineering, material procurement, maintenance and life-cycle extension services to the global oil and gas industries, both upstream and downstream, and to the utility transmission and distribution industry. | $ | 15,259 | |||
Senior Secured Loans 2nd Lien |
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Advance Pierre Foods, Inc. 9990 Princeton-Glendale Road Cincinnati, OH 45246 |
Advance Pierre is a producer of formed, pre-cooked and ready-to-cook protein products, compartmentalized meals, and hand-held convenience sandwiches sold to schools, fast food restaurants, food distributors and food retailers. | $ | 22,266 | |||
Advantage Sales & Marketing Inc. 18100 Von Karman Avenue Suite 1000 Irvine, CA 92612 |
Advantage Sales is a sales and marketing agency in the U.S., providing outsourced sales, marketing and merchandising services to manufacturers, suppliers and producers of consumer packaged goods. | $ | 14,844 | |||
Affordable Care, Inc. 4990 Highway 70 West Kinston, NC 28504 |
Affordable Care is a provider of dental practice management services and on-site denture laboratories focused exclusively on dentures. | $ | 39,514 | |||
Alliance Laundry Systems LLC P.O. Box 990 Shepard Street Ripon, WI 54971 |
Alliance Laundry is a manufacturer of laundry equipment and targets three end-customer groups: laundromats, multi-housing laundry sites and on-premise laundries such as hospitals and hotels. | $ | 1,995 | |||
American Energy - Utica, LLC 301 NW 63rd Street Suite 600 Oklahoma City, OK 73116 |
American Energy is an exploration and production company formed to acquire and develop unconventional resources in the Utica Shale. | $ | 129,574 | (6) |
156
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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American Racing and Entertainment, LLC 2384 West River Road Nichols, NY 13812 |
American Racing and Entertainment was founded to acquire, develop and operate two racing and gaming operations. | $ | 16,319 | |||
Asurion, LLC 648 Grassmere Park Suite 300 Nashville, TN 37211 |
Asurion is a provider of value-added services to the wireless industry, carrying a dominant role in handset protection and related services markets. | $ | 3,144 | |||
Attachmate Corp. 705 5th Avenue South Suite 1100 Seattle, WA 98104 |
Attachmate is a supplier of enterprise solutions that include systems and security management and host connectivity to corporations, government organizations and a network of distributors and resellers. | $ | 30,494 | |||
Brasa (Holdings) Inc. 14881 Quorum Drive Suite 750 Dallas, TX 75254 |
Brasa Holdings is the direct parent of Fogo de Chao, a chain of Brazilian steak-house restaurants across the U.S. and in Brazil. | $ | 10,823 | |||
Brock Holdings III, Inc. 10343 Sam Houston Park Drive Suite 200 Houston, TX 77064 |
Brock is a provider of industrial maintenance solutions in the refining, chemical, power and other industries. | $ | 7,682 | |||
Camp International Holding Co. 999 Marconi Avenue Ronkonkoma, NY 11779 |
Camp International provides web-enabled aviation management products and services. Its CAMP product suite includes maintenance management, inventory control and flight scheduling applications. | $ | 6,297 | |||
CHG Buyer Corp. 6440 South Millrock Drive Suite 175 Salt Lake City, UT 84121 |
CHG is a privately held company that provides physician staffing services, recruiting physicians in a wide array of specialties for temporary and permanent assignments at hospitals and medical practices throughout the U.S. | $ | 5,067 | |||
Consolidated Precision Products Corp. 4200 West Valley Blvd. Pomona, CA 91769 |
Consolidated Precision focuses on superalloy precision casting of components used in the aerospace, power generation, and other industrial markets. | $ | 16,670 | |||
DAE Aviation Holdings, Inc. 1524 West 14th Street Tempe, AZ 85281 |
DAE is a leading independent provider of aftermarket MRO services to the regional, business, and military aircraft markets. | $ | 5,693 | |||
DEI Sales, Inc. One Viper Way Vista, CA 92081 |
Directed Electronics is a designer and marketer of consumer branded audio speaker, vehicle security and convenience, home/mobile audio and video, and satellite radio products in the U.S. | $ | 56,881 |
157
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Eastman Kodak Co. 343 State Street Rochester, NY 14650 |
Eastman Kodak provides digital photography and printing products and services for consumer markets. | $ | 48,821 | |||
EZE Software Group LLC 260 Franklin Street Boston, MA 02110 |
EZE Software provides software solutions to buy-side financial institutions. The software-platform business consists primarily of EZE Castle Software LLC and RealTick LLC. | $ | 2,360 | |||
Fram Group Holdings Inc. One North Wacker Drive Suite 4400 Chicago, IL 60606 |
Fram Group Holdings is a subsidiary of Autoparts Holdings, a manufacturer and marketer of consumer-branded automotive products for the aftermarket consumer. | $ | 1,994 | |||
Ikaria Acquisition Inc. 53 Frontage Road Hampton, NJ 08827 |
Ikaria is a biotherapeutics company focusing on R&D, manufacturing, and sales and marketing in pursuit of easier breathing for critically ill patients. | $ | 4,963 | |||
ILC Industries, LLC 105 Wilbur Place Bohemia, NY 11716 |
ILC Industries manufactures defense, aerospace, security, and industrial products. | $ | 27,114 | |||
Kronos Inc. 297 Billerica Road Chelmsford, MA 01824 |
Kronos Incorporated provides workforce management solutions in the cloud. | $ | 26,998 | |||
LM U.S. Member LLC 1500 Citywest Boulevard Houston, TX 77042 |
Landmark Aviation is an aviation services company that offers a wide variety of services at MRO repair centers, fixed based operation networks in the U.S., UK, and France, and within its aircraft sales, charter and management business. | $ | 9,252 | |||
OSP Group, Inc. 463 7th Avenue New York, NY 10018 |
OSP Group operates an online plus-sized retail clothing market. | $ | 145,000 | |||
P2 Upstream Acquisition Co. 1670 Broadway, Suite 2800 Denver, CO 80202 |
P2 Upstream is an independent technology provider of mission-critical software, data and analytics solutions to the upstream oil and gas industry. | $ | 4,052 | |||
Paw Luxco II Sarl 2-4 Rue Eugene Ruppert Luxembourg - 2453 Luxembourg |
Jack Wolfskin produces outdoor functional clothing in Germany. | $ | 19,933 | |||
Pelican Products, Inc. 23215 Early Avenue Torrance, CA 90505 |
Pelican Products designs, develops, and manufactures watertight protective cases and technically advanced professional lighting equipment. | $ | 6,558 |
158
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Pregis Corp. 1650 Lake Cook Road Deerfield, IL 60015 |
Pregis is an international manufacturer, marketer, and supplier of protective packaging products and specialty packaging solutions. | $ | 49,320 | |||
PSAV Acquisition Corp. 1700 East Golf Road #400 Schaumburg, IL 60173 |
Audio Visual provides audiovisual equipment, staging services and related technology support for live events and meetings. | $ | 78,822 | |||
Ranpak Corp. 7990 Auburn Road Concord Township, OH 44077 |
Ranpak makes paper-packaging material that cushions and protects products during shipping. | $ | 3,294 | |||
Sensus USA Inc. 8601 Six Forks Road Suite 300 Raleigh, NC 27615 |
Sensus is a provider of end-to-end utility infrastructure solutions. | $ | 8,576 | |||
SESAC Holdings Inc. 55 Music Square East Nashville, TN 37203 |
SESAC is one of three performing-rights organizations in the U.S. | $ | 2,962 | |||
Stadium Management Corp. 1701 Bryant Street Denver, CO 80204 |
Stadium Management is a venue management company that provides private management services for public assembly facilities. | $ | 57,500 | |||
TravelCLICK, Inc. 7 Times Square 38th Floor New York, NY 10036 |
TravelCLICK is a provider of reservation solutions, business intelligence and digital marketing solutions to the global hospitality industry. | $ | 34,635 | |||
Travelport LLC 300 Galleria Pkwy Atlanta, GA 30339 |
Travelport connects travel agencies, websites, and corporations with travel suppliers worldwide. | $ | 20,426 | |||
Vertafore, Inc. 11724 NE 195th Street Bothell, WA 98011 |
Vertafore is a provider of specialized software solutions and information for the insurance industry, | $ | 14,713 | |||
Wall Street Systems Holdings, Inc. 1345 Avenue of the Americas New York, NY 10105 |
Wall Street Systems provides functionally rich, integrated and scalable solutions for improved workflow, control, and overall productivity for corporate treasury, bank treasury, central banking, FX trading and global back office operations. | $ | 6,881 | |||
Senior Secured Bonds |
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Advanced Lighting Technologies, Inc. 32000 Aurora Rd Solon, OH 44139 |
Advanced Lighting designs, manufactures, and markets energy efficient metal halide white light source components and systems. | $ | 76,958 |
159
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Allen Systems Group, Inc. 1333 Third Avenue South Naples, FL 34102 |
Allen Systems provides a variety of software and services for enterprise performance, operations, and application management. | $ | 30,907 | |||
Aspect Software, Inc. 300 Apollo Drive Chelmsford, MA 01824 |
Aspect Software is a provider of solutions to the contact center industry. | $ | 4,000 | |||
Avaya Inc. 4655 Great America Parkway Santa Clara, CA 95054 |
Avaya is a global provider of next-generation business collaboration and communications solutions, providing unified communications, real-time video collaboration, contact center, networking and related services to companies of all sizes around the world. | $ | 19,022 | |||
Caesars Entertainment Operating Co. One Caesars Palace Drive Las Vegas, NV 89109 |
Caesars Entertainment is a gaming company serving many regions in the U.S., including Las Vegas and Atlantic City. | $ | 19,094 | |||
Caesars Entertainment Resort Properties, LLC One Caesars Palace Drive Las Vegas, NV 89109 |
Caesars Entertainment Resort Properties is the property company of Caesars Entertainment Corp. Caesars Entertainment properties include Harrahs Las Vegas, Rio, Flamingo Las Vegas, Harrahs Atlantic City, Paris Las Vegas, and Harrahs Laughlin. | $ | 54,301 | |||
FairPoint Communications, Inc. 521 E. Morehead Street Suite 500 Charlotte, NC 28202 |
FairPoint Communications provides communications services in rural and small urban communities, offering an array of services, including high speed data, internet access, data transport, voice, video and other broadband enabled product offerings. | $ | 16,750 | |||
FourPoint Energy, LLC 8450 E. Crescent Parkway Suite 400 Greenwood Village, CO 80111 |
FourPoint Energy is a private oil and gas exploration and production company. | $ | 12,878 | |||
Global A&T Electronics Ltd. 5 Serangoon North Avenue 5 Singapore, 554916 |
Global A&T Electronics, through its subsidiary United Test and Assembly Center, provides semiconductor assembly and test services for a range of integrated circuits, including memory, mixed signal, analog, logic, and radio frequency. | $ | 9,000 | |||
HOA Restaurant Group, LLC 1815 The Exchange Southeast Atlanta, GA 30339 |
HOA Restaurant Group is an owner, operator, and franchisor of bar and grill concept casual dining restaurants under the Hooters brand. | $ | 14,110 |
160
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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JW Aluminum Co. 435 Old Mount Holly Road Mt. Holly, SC 29445 |
JW Aluminum produces specialty flat-rolled aluminum products in the U.S. | $ | 62,735 | |||
Kinetic Concepts, Inc. 12930 Interstate 10 West San Antonio, TX 78249 |
Kinetic Concepts is a medical technology company serving the wound care, regenerative medicine and therapeutic support systems markets. | $ | 11,168 | |||
Logans Roadhouse Inc. 3011 Armory Drive Suite 300 Nashville, TN 37204 |
Logan's Roadhouse is a chain of restaurants that was founded in 1991 in Lexington, Kentucky. | $ | 30,769 | |||
Neff Rental LLC 3750 NW 87th Avenue Miami, FL 33178 |
Neff Rental provides equipment rental services for construction companies, golf course developers, industrial plants, the oil industry, and governments. | $ | 7,573 | |||
Ryerson Inc. 227 West Monroe Street 27th Floor Chicago, IL 60606 |
Ryerson processes and distributes carbon steel, stainless steel, and alloy steels in the U.S., Canada, Mexico, China, and India. | $ | 3,100 | |||
SFX Entertainment, Inc. 430 Park Avenue 6th Floor New York, NY 10022 |
SFX Entertainment, Inc. engages in the production of live events and entertainment electronic music culture content in the United States. | $ | 10,500 | |||
Sorenson Communication, Inc. 4192 South Riverboat Road Salt Lake City, UT 84123 |
Sorenson Communication is a provider of IP-based video communication technology and services to the deaf and hard of hearing population in the U.S. | $ | 36,624 | |||
Speedy Cash Intermediate Holdings Corp. 3527 N. Ridge Road Wichita, KS 67205 |
Speedy Cash provides payday loans, title loans and cash checking in the U.S., Canada, and the U.K. | $ | 5,077 | |||
Subordinated Debt | ||||||
Alta Mesa Holdings, L.P. 15021 Katy Freeway Suite 400 Houston, TX 77094 |
Alta Mesa is an onshore oil and natural gas acquisition, exploitation, exploration, and production company. | $ | 11,605 | |||
Aurora Diagnostics, LLC 11025 RCA Center Drive Suite 300 Palm Beach Gardens, FL 33410 |
Aurora is a specialized diagnostics company providing services that play a key role in the diagnosis of cancer and other diseases. | $ | 18,104 |
161
Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
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Avaya Inc. 4655 Great America Parkway Santa Clara, CA 95054 |
Avaya is a global provider of next-generation business collaboration and communications solutions, providing unified communications, real-time video collaboration, contact center, networking and related services to companies of all sizes around the world. | $ | 19,228 | |||
Comstock Resources, Inc. 5300 Town & Country Blvd Frisco, TX 75034 |
Comstock engages in the acquisition, development, production and exploration of oil and natural gas properties in the U.S. | $ | 7,204 | |||
Flanders Corp. 531 Flanders Filters Road Washington, NC 27889 |
Flanders designs, manufactures and markets air filters and related products for commercial and residential use. | $ | 20,646 | |||
Ipreo Holdings LLC 1359 Broadway New York, NY 10018 |
Ipreo provides software that helps investment banks to originate and distribute municipal and corporate bonds. | $ | 9,967 | |||
Kinetic Concepts, Inc. 12930 Interstate 10 West San Antonio, TX 78249 |
Kinetic Concepts is a medical technology company serving the wound care, regenerative medicine and therapeutic support systems markets. | $ | 23,622 | |||
KODA Distribution Group, Inc. 262 Harbor Drive 3rd Floor Stamford, CT 06902 |
KODA Distribution Group specializes in chemicals distribution, serving customers by providing coatings, adhesives, sealants and elastomers, as well as construction, care, lubricants, inks, and plastics end markets. | $ | 34,355 | |||
Monitronics International, Inc. 2350 Valley View Lane Dallas, TX 75234 |
Monitronics is engaged in the business of providing security alarm monitoring services. | $ | 2,250 | |||
Mood Media Corp. 99 Sante Drive Concord ON L4K 3C4 Canada |
Mood Media provides in-store audio, visual, and scent branding services to retail companies in North America, Europe, Asia and Australia. | $ | 42,039 | |||
QR Energy, L.P. 5 Houston Center Houston, TX 77010 |
QR Energy owns and acquires oil and natural gas properties in North America and its properties consist of mature, legacy onshore oil and natural gas reservoirs with long-lived, predictable production profiles. | $ | 3,211 | |||
RKI Exploration & Production, LLC 3817 NW Expressway Suite 950 Oklahoma City, OK 73116 |
RKI is an exploration and production company operating in the Permian and Wyoming Power River Basin. | $ | 10,900 |
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Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
||||
Samson Investment Co. Two West Second St. Tulsa, OK 74103 |
Samson is an exploration and production company. | $ | 10,000 | |||
Sequel Industrial Products Holdings, LLC 480 Hercules Drive Colchester, VT 05446 |
Sequel Industrial Products is a manufacturer of specialty components used in engineered systems that store and transport highly corrosive liquids and gases. | $ | 15,563 | |||
Sidewinder Drilling Inc. 952 Echo Lane Houston, TX 77024 |
Sidewinder is a contract land drilling company that provides contract drilling services to exploration and production companies. | $ | 8,000 | |||
ThermaSys Corp. 2776 Gunter Park Dr. E Montgomery, AL 36109 |
ThermaSys is a manufacturer of heat exchangers for end markets including power generation, industrial, construction equipment, and automotive engines. | $ | 131,542 | |||
VPG Group Holdings LLC 9820 Westpoint Drive Suite 300 Indianapolis, IN 46256 |
VPG Group is a specialist in transformer recycling, repair, and disposal, as well as scrap cable, wire and metal recycling. | $ | 5,056 | |||
Collateralized Securities | ||||||
American Capital Ltd. 2 Bethesda Metro Center 14th Floor Bethesda, MD 20814 |
American Capital, Ltd. is the asset manager of the ACASC 2013-2A B. | $ | 29,573 | |||
Apidos Capital Management 712 Fifth Avenue 10th Floor New York, NY 10019 |
Apidos Capital Management is the asset manager of Apidos CDO IV. | $ | 1,327 | |||
Ares Management LLC 2000 Avenue of the Stars 12th Floor Los Angeles, CA 90067 |
Ares Management LLC is the asset manager of Ares 2007 CLO 11A. | $ | 3,359 | |||
Carlyle Investment Management 430 Park Avenue New York, NY 10022 |
Carlyle Investment Management is the asset manager of Carlyle Azure CLO. | $ | 11,253 | |||
Carlyle Investment Management 430 Park Avenue New York, NY 10022 |
Carlyle Investment Management is the asset manager of Wind River CLO Ltd. 2012 1A. | $ | 37,277 | |||
JP Morgan Chase and Co. 277 Park Avenue New York, NY 10172 |
JP Morgan is the asset manager of the JPMorgan Chase Bank, N.A. Credit-Linked Notes. | $ | 16,633 |
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Name and Address of Portfolio Company |
Nature of its Principal Business |
Amortized Cost of Investment (in thousands) |
||||
Lightpoint Capital Management 200 West Monroe Chicago, IL 60603 |
Lightpoint Capital Management is the asset manager of Lightpoint CLO 2006 V. | $ | 3,836 | |||
Prudential Fixed Income Two Gateway Center 4th Floor Newark, NJ 07102 |
Prudential Fixed Income is the asset manager of Dryden CDO 23A. | $ | 6,252 | |||
Stone Tower Debt Advisors 152 West 57th Street New York, NY 10019 |
Stone Tower Debt Advisors is the asset manager of Rampart CLO 2007 1A. | $ | 3,413 | |||
Stone Tower Debt Advisors 152 West 57th Street New York, NY 10019 |
Stone Tower Debt Advisors is the asset manager of Stone Tower CLO VI. | $ | 2,772 |
Name and Address of Portfolio Company |
Nature of its Principal Business |
Title
of Securities Held by Us |
Percentage of Class Held (7) |
Amortized Cost of Investment (in thousands) |
||||||||
Equity/Other | ||||||||||||
American Energy Ohio Holdings, LLC 301 NW 63rd Street Suite 600 Oklahoma City, OK 73116 |
American Energy is an exploration and production company formed to acquire and develop unconventional resources in the Utica Shale. | Common Equity | 0.9 | % | $ | 7,387 | ||||||
AP Exhaust Acquisition, LLC 300 Dixie Trail Goldsboro, NC 27530 |
AP Exhaust manufactures and distributes aftermarket replacement emission and exhaust products for a broad array of vehicular and industrial applications. | Common Equity | 0.8 | % | $ | 811 | ||||||
Aquilex Corp. 2225 Skyland Court Norcross, GA 30071 |
Aquilex is a provider of critical maintenance, repair, and industrial cleaning solutions to the energy industry. | Common Equity | 1.5 | % | $ | 1,087 | ||||||
Aquilex Corp. 2225 Skyland Court Norcross, GA 30071 |
Aquilex is a provider of critical maintenance, repair, and industrial cleaning solutions to the energy industry. | Common Equity | 3.3 | % | $ | 1,690 | ||||||
Burleigh Point, Ltd. One Billabong Place Burleigh Heads QLD 4220 Australia |
Billabong International Limited (BBG) engages in the marketing, distribution, wholesaling and retailing of apparel, accessories, eyewear, wetsuits and hard goods in the board sports sector. | Warrants | 40.8 | % | $ | 1,898 |
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Name and Address of Portfolio Company |
Nature of its Principal Business |
Title
of Securities Held by Us |
Percentage of Class Held (7) |
Amortized Cost of Investment (in thousands) |
||||||||
CoSentry.Net, LLC 12700 West Dodge Road Omaha, NE 68154 |
CoSentry provides data center solutions and technical services for large and mid-sized enterprises, particularly organizations valuing the stringent demands of a compliance regulated environment and the leverage of secure data management. | Preferred Equity | 2.9 | % | $ | 2,500 | ||||||
Eastman Kodak Co. 343 State Street Rochester, NY 14650 |
Eastman Kodak provides digital photography and printing products and services for consumer markets. | Common Equity | 0.1 | % | $ | 1,202 | ||||||
ERC Ireland Holdings Ltd. 1 Heuston South Quarter St. Johns Road Dublin 8 Ireland |
Eircom is a provider of domestic and international voice and data communications for both the retail and wholesale carrier markets in Ireland. | Common Equity | 0.9 | % | $ | 4,731 | ||||||
ERC Ireland Holdings Ltd. 1 Heuston South Quarter St. Johns Road Dublin 8 Ireland |
Eircom is a provider of domestic and international voice and data communications for both the retail and wholesale carrier markets in Ireland. | Warrants | 0.9 | % | $ | 2,288 | ||||||
Flanders Corp. 531 Flanders Filters Road Washington, NC 27889 |
Flanders designs, manufactures and markets air filters and related products for commercial and residential use. | Common Equity | 7.0 | % | $ | 5,000 | ||||||
Florida Gaming Centers, Inc. 3500 NW 37th Avenue Miami, FL 33142 |
Florida Gaming is an owner and operator of casinos and gambling facilities in Florida. | Warrants | 5.2 | % | $ | 0 | ||||||
Florida Gaming Corp. 3500 NW 37th Avenue Miami, FL 33142 |
Florida Gaming is an owner and operator of casinos and gambling facilities in Florida. | Warrants | 4.5 | % | $ | 0 | ||||||
FourPoint Energy, LLC 8450 E. Crescent Parkway Suite 400 Greenwood Village, CO 80111 |
FourPoint Energy is a private oil and gas exploration and production company. | Common Equity | 40.8 | % | $ | 2,601 | ||||||
HBC Solutions, Inc. 9800 South Meridian Boulevard Suite 300 Englewood, CO 80112 |
HBC Solutions is a provider of hardware and software that enables media companies to create, manage, distribute and monetize video content. | Common Equity | 3.2 | % | $ | 3,051 | ||||||
Ipreo Holdings LLC 1359 Broadway New York, NY 10018 |
Ipreo provides software that helps investment banks originate and distribute municipal and corporate bonds. | Common Equity | 0.4 | % | $ | 1,000 |
165
Name and Address of Portfolio Company |
Nature of its Principal Business |
Title
of Securities Held by Us |
Percentage of Class Held (7) |
Amortized Cost of Investment (in thousands) |
||||||||
JW Aluminum Co. 435 Old Mount Holly Road Mt. Holly, SC 29445 |
JW Aluminum produces specialty flat-rolled aluminum products in the U.S. | Common Equity | 4.4 | % | $ | 3,225 | ||||||
Leading Edge Aviation Services, Inc. 3132 Airway Avenue Costa Mesa, CA 92626 |
Leading Edge provides aircraft painting services for commercial, private and military aircrafts. | Common Equity | 2.6 | % | $ | 464 | ||||||
Leading Edge Aviation Services, Inc. 3132 Airway Avenue Costa Mesa, CA 92626 |
Leading Edge provides aircraft painting services for commercial, private and military aircrafts. | Preferred Equity | 2.9 | % | $ | 1,303 | ||||||
MB Precision Holdings LLC 109 Apremont Way P.O. Box 828 Westfield, MA 01086 |
MB Precision provides precision machining, fabrication, assembly and test services for the aerospace & defense, energy, oil & gas and power generation markets. | Common Equity | 0.9 | % | $ | 450 | ||||||
Micronics, Inc. 200 West Road Portsmouth, NH 03801 |
Micronics is a global designer and manufacturer of inline solid-liquid filtration solutions for mission-critical industrial process applications. | Common Equity | 4.0 | % | $ | 500 | ||||||
Micronics, Inc. 200 West Road Portsmouth, NH 03801 |
Micronics is a global designer and manufacturer of inline solid-liquid filtration solutions for mission-critical industrial process applications. | Preferred Equity | 4.0 | % | $ | 500 | ||||||
Milagro Holdings, LLC 1301 McKinney Street Houston, TX 77010 |
Milagro was formed for the purpose of exploring, developing and acquiring natural gas and oil properties along the Gulf of Mexico. | Common Equity | 4.3 | % | $ | 50 | ||||||
Milagro Holdings, LLC 1301 McKinney Street Houston, TX 77010 |
Milagro was formed for the purpose of exploring, developing and acquiring natural gas and oil properties along the Gulf of Mexico. | Preferred Equity | 10.5 | % | $ | 11,180 | ||||||
New Star Metals Inc. 835 McClintock Drive Suite 100 Burr Ridge, IL 60527 |
New Star Metals provides steel processing, building products, and supply chain management across a diverse array of end markets. | Common Equity | 0.5 | % | $ | 750 | ||||||
Plains Offshore Operations Inc. 700 Milam Street Suite 3100 Houston, TX 77002 |
Plains Offshore is a subsidiary of Freeport-McMoRan Copper & Gold (NYSE: FCX), or FCX, and was formed to develop FCXs assets located in the Gulf of Mexico in water depths of 500 feet or more. | Preferred Equity | 11.1 | % | $ | 58,931 |
166
Name and Address of Portfolio Company |
Nature of its Principal Business |
Title
of Securities Held by Us |
Percentage of Class Held (7) |
Amortized Cost of Investment (in thousands) |
||||||||
Plains Offshore Operations Inc. 700 Milam Street Suite 3100 Houston, TX 77002 |
Plains Offshore is a subsidiary of Freeport-McMoRan Copper & Gold (NYSE: FCX), or FCX, and was formed to develop FCXs assets located in the Gulf of Mexico in water depths of 500 feet or more. | Common Equity | 11.1 | % | $ | 1,722 | ||||||
PSAV Acquisition Corp. 1700 East Golf Road #400 Schaumburg, IL 60173 |
Audio Visual provides audiovisual equipment, staging services and related technology support for live events and meetings. | Common Equity | 3.8 | % | $ | 10,000 | ||||||
Safariland, LLC 13386 International Parkway Jacksonville, FL 32218 |
Safariland is a provider of security and law enforcement products and services, delivering a full-range of customer-specific solutions. | Common Equity | 4.9 | % | $ | 2,500 | ||||||
Safariland, LLC 13386 International Parkway Jacksonville, FL 32218 |
Safariland is a provider of security and law enforcement products and services, delivering a full-range of customer-specific solutions. | Preferred Equity | 100.0 | % | $ | 21,228 | ||||||
Safariland, LLC 13386 International Parkway Jacksonville, FL 32218 |
Safariland is a provider of security and law enforcement products and services, delivering a full-range of customer-specific solutions. | Warrants | 0.9 | % | $ | 473 | ||||||
Sequel Industrial Products Holdings, LLC 480 Hercules Drive Colchester, VT 05446 |
Sequel Industrial Products is a manufacturer of specialty components used in engineered systems that store and transport highly corrosive liquids and gases. | Common Equity | 26.7 | % | $ | 3,400 | ||||||
Sequel Industrial Products Holdings, LLC 480 Hercules Drive Colchester, VT 05446 |
Sequel Industrial Products is a manufacturer of specialty components used in engineered systems that store and transport highly corrosive liquids and gases. | Preferred Equity | 88.2 | % | $ | 9,398 | ||||||
Sequel Industrial Products Holdings, LLC 480 Hercules Drive Colchester, VT 05446 |
Sequel Industrial Products is a manufacturer of specialty components used in engineered systems that store and transport highly corrosive liquids and gases. | Warrants | 88.2 | % | $ | 13 | ||||||
ThermaSys Corp. 2776 Gunter Park Dr E Montgomery, AL 36109 |
ThermaSys is a manufacturer of heat exchangers for end markets including power generation, industrial, construction equipment, and automotive engines. | Common Equity | 2.9 | % | $ | 1 |
167
Name and Address of Portfolio Company |
Nature of its Principal Business |
Title
of Securities Held by Us |
Percentage of Class Held (7) |
Amortized Cost of Investment (in thousands) |
||||||||
ThermaSys Corp. 2776 Gunter Park Dr E Montgomery, AL 36109 |
ThermaSys is a manufacturer of heat exchangers for end markets including power generation, industrial, construction equipment, and automotive engines. | Preferred Equity | 3.1 | % | $ | 5,181 | ||||||
VPG Group Holdings LLC 9820 Westpoint Drive Suite 300 Indianapolis, IN 46256 |
VPG Group is a specialist in transformer recycling, repair, and disposal, as well as scrap cable, wire and metal recycling. | Common Equity | 7.5 | % | $ | 3,638 |
(1) | Amount includes a $1,869 unfunded commitment for Capital Vision Services, LLC. |
(2) | Amount includes a $14,500 unfunded commitment for Dent Wizard International Corp. |
(3) | Amount includes a $6,250 unfunded commitment for Leading Edge Aviation Services, Inc. |
(4) | Amount includes a $3,810 unfunded commitment for MetoKote Corp. |
(5) | Amount includes a $11,379 unfunded commitment for Tri-Northern Acquisition, Inc. |
(6) | Amount includes a $52,833 unfunded commitment for American EnergyUtica, LLC. |
(7) | Percentage of class held is calculated on a fully diluted basis and is based on the best available information at the time of calculation. |
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Overview of FB Advisor
Management Services and Responsibilities
FB Advisor is registered as an investment adviser under the Advisers Act and serves as our investment adviser pursuant to the investment advisory agreement in accordance with the 1940 Act. As an investment adviser registered under the Advisers Act, FB Advisor has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, FB Advisor has a fiduciary responsibility for the safekeeping and use of all our funds and assets, whether or not in its immediate possession or control. As such, FB Advisor may not employ, or permit another to employ, our funds or assets in any manner except for our exclusive benefit. FB Advisor is prohibited from contracting away the fiduciary obligation owed to us and our stockholders under common law.
Subject to the overall supervision of our board of directors, FB Advisor provides us with investment advisory services. Under the terms of the investment advisory agreement, FB Advisor:
| determines the composition and allocation of our portfolio, the nature and timing of the changes therein and the manner of implementing such changes; |
| identifies, evaluates and negotiates the structure the investments we make; |
| executes, monitors and services the investments we make; |
| determines the securities and other assets we will purchase, retain or sell; and |
| performs due diligence on prospective portfolio companies. |
FB Advisor will also seek to ensure that we maintain adequate reserves for normal replacements and contingencies (but not for payment of fees payable to it) by causing us to retain a reasonable percentage of offering proceeds, revenues or other sources of reserves. FB Advisors services under the investment advisory agreement may not be exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. In addition, FB Advisor will perform certain administrative services under the administration agreement. See Administrative Services.
Advisory Fees
We pay FB Advisor a fee for its services under the investment advisory agreement consisting of two componentsa base management fee and an incentive fee based on our performance. The cost of both the base management fee payable to FB Advisor and any incentive fees it earns will ultimately be borne by our stockholders.
Base Management Fee
The base management fee is calculated at an annual rate of 2.0% of our average gross assets. As described further below, pending stockholder approval of amendments to the investment advisory agreement, FB Advisor has agreed, effective April 1, 2014, to voluntarily waive a portion of the base management fee to which it is entitled under the former investment advisory agreement and the investment advisory agreement so that the fee equals 1.75% of the average value of our gross assets. There can be no assurance this waiver will continue in the future. The base management fee is payable quarterly in arrears and is calculated based on the average weekly value of our gross assets during the most recently completed calendar quarter. The base management fee may or may not be taken in whole or in part at the discretion of FB Advisor. All or any part of the base management fee not taken as to any quarter will be deferred without interest and may be taken in such other quarter as FB Advisor shall determine. The base management fee for any partial month or quarter will be appropriately prorated.
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Incentive Fee
The incentive fee in the investment advisory agreement consists of two parts. The first part, which we refer to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears based upon our pre-incentive fee net investment income for the immediately preceding quarter. The subordinated incentive fee on income will be subject to a quarterly hurdle rate, expressed as a rate of return on our net assets for the most recently completed calendar quarter, of 2.0% (8.0% annualized), subject to a catch up feature. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus the our operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The calculation of the subordinated incentive fee on income for each quarter is as follows:
| No incentive fee is payable to FB Advisor in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate of 2.0%; |
| 100% of our pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any calendar quarter (10.0% annualized) is payable to FB Advisor. We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 2.5%) as the catch-up. The catch-up provision is intended to provide FB Advisor with an incentive fee of 20.0% on all of our pre-incentive fee net investment income when our pre-incentive fee net investment income reaches 2.5% in any calendar quarter; and |
| 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter (10.0% annualized) is payable to FB Advisor once the hurdle rate is reached and the catch-up is achieved (20.0% of all pre-incentive fee net investment income thereafter will be allocated to FB Advisor). |
The subordinated incentive fee on income is subject to the total return requirement, which provides that no incentive fee in respect of our 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 our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, 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 our pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation 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 quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.
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The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
Quarterly Subordinated Incentive Fee on Income
Pre-incentive fee net investment income
(expressed as a percentage of net assets)
Percentage of pre-incentive fee net investment income allocated to income-related portion of incentive fee
(subject to total return requirement)
These calculations will be appropriately prorated for any period of less than three months and adjusted, if appropriate, for any equity capital raises or repurchases during the applicable calendar quarter. These calculations also assume that the total return requirement described above will not reduce the payment of any subordinated incentive fee on income.
The second part of the incentive fee, which we refer 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 will equal 20.0% of our incentive fee capital gains, which will equal our 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.
All percentages are based on our net assets.
Example 1: Subordinated Incentive Fee on Income for Each Calendar Quarter before Total Return Requirement Calculation (*):
Scenario 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate(1) = 2.00%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 0.55%
Pre-incentive fee net investment income does not exceed the hurdle rate, therefore there is no subordinated incentive fee on income payable.
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Scenario 2
Assumptions
Investment income (including interest, dividends, fees, etc.) = 2.90%
Hurdle rate(1) = 2.00%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 2.20%
Subordinated incentive fee on Income = 100% × pre-incentive fee net investment income (subject to catch-up)(4)
= 100% × (2.20% 2.00%)
= 0.20%
Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the catch-up provision, therefore the subordinated incentive fee on income is 0.20%.
Scenario 3
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.50%
Hurdle rate(1) = 2.00%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 2.80%
Catch up = 100% × pre-incentive fee net investment income (subject to catch-up)(4)
Subordinated incentive fee on income = 100% × catch-up + (20% × (pre-incentive fee net investment income 2.5%))
Catch up | = 2.50% 2.00% | |
= 0.50% |
Subordinated incentive fee on income = (100% × 0.50%) + (20.00% × (2.80% 2.50%))
= 0.50% + (20.00% × 0.30%)
= 0.50% + 0.06%
= 0.56%
Pre-incentive fee net investment income exceeds the hurdle rate and fully satisfies the catch-up provision, therefore the subordinated incentive fee on income is 0.56%.
(1) | Represents 8.00% annualized hurdle rate. |
(2) | Represents 2.00% annualized base management fee on average gross assets. Example assumes gross assets are equal to our net assets. |
(3) | Excludes organizational and offering expenses. |
(4) | The catch-up provision is intended to provide the Adviser with an incentive fee of 20.00% on all pre-incentive fee net investment income when our net investment income exceeds 2.50% in any calendar quarter. |
172
Example 2: Subordinated Incentive Fee on Income for Each Calendar Quarter with Total Return Requirement Calculation (*):
Scenario 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.50%
Hurdle rate(1) = 2.00%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 2.80%
Cumulative incentive fees accrued and/or paid for preceding eleven calendar quarters = $9,000,000
20.0% of cumulative net increase in net assets resulting from operations over current and preceding eleven calendar quarters = $8,000,000
Although our pre-incentive fee net investment income exceeds the hurdle rate of 2.00% (as shown in Scenario 3 of Example 1 above), no subordinated incentive fee on income is payable because 20.00% of the cumulative net increase in net assets resulting from operations over the then current and eleven preceding calendar quarters did not exceed the cumulative income and capital gains incentive fees accrued and/or paid for the preceding eleven calendar quarters.
Scenario 2
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.50%
Hurdle rate(1) = 2.00%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 2.80%
Cumulative incentive fees accrued and/or paid for preceding eleven calendar quarters = $9,000,000
20.0% of cumulative net increase in net assets resulting from operations over current and preceding eleven calendar quarters = $10,000,000
Because our pre-incentive fee net investment income exceeds the hurdle rate of 2.00% and because 20.00% of the cumulative net increase in net assets resulting from operations over the then current and eleven preceding calendar quarters exceeds the cumulative income and capital gains incentive fees accrued and/or paid for the preceding eleven calendar quarters, a subordinated incentive fee on income (in an amount not to exceed $1,000,000 (i.e. $10,000,000 minus $9,000,000)) would be payable, as shown in Scenario 3 of Example 1 above.
(1) | Represents 8.00% annualized hurdle rate. |
(2) | Represents 2.00% annualized base management fee on average gross assets. Example assumes gross assets are equal to our net assets. |
(3) | Excludes organizational and offering expenses. |
(4) | The catch-up provision is intended to provide the Adviser with an incentive fee of 20.00% on all pre-incentive fee net investment income when our net investment income exceeds 2.50% in any calendar quarter. |
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Example 3: Incentive Fee on Capital Gains (*):
Scenario 1:
Assumptions
Year 1: $20 million investment made in Company A (Investment A), and $30 million investment made in Company B (Investment B)
Year 2: Investment A sold for $50 million and fair market value (FMV) of Investment B determined to be $32 million
Year 3: FMV of Investment B determined to be $25 million
Year 4: Investment B sold for $31 million
The Incentive Fee on Capital Gains would be:
Year 1: None
Year 2: Incentive fee on capital gains of $6 million ($30 million realized capital gains on sale of Investment A multiplied by 20.00%)
Year 3: None - $5 million (20.00% multiplied by ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6 million (previous capital gains fee paid in Year 2)
Year 4: Incentive fee on capital gains of $200,000 - $6.2 million ($31 million cumulative realized capital gains multiplied by 20.00%) less $6 million (incentive fee on capital gains taken in Year 2)
Scenario 2
Assumptions
Year 1: $20 million investment made in Company A (Investment A), $30 million investment made in Company B (Investment B) and $25 million investment made in Company C (Investment C)
Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million
Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million
Year 4: FMV of Investment B determined to be $35 million
Year 5: Investment B sold for $20 million
The capital gains incentive fee, if any, would be:
Year 1: None
Year 2: $5 million incentive fee on capital gains - 20.00% multiplied by $25 million ($30 million realized capital gains on Investment A less unrealized capital depreciation on Investment B)
Year 3: $1.4 million incentive fee on capital gains - $6.4 million (20.00% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capital depreciation)) less $5 million incentive fee on capital gains received in Year 2
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Year 4: None
Year 5: None - $5 million (20.00% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million)) less $6.4 million cumulative incentive fee on capital gains paid in Year 2 and Year 3
* | The returns shown are for illustrative purposes only. No incentive fee will be payable to FB Advisor in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate. Positive returns are shown to demonstrate the fee structure and there is no guarantee that positive returns will be realized. Actual returns may vary from those shown in the examples above. |
Amendments related to NYSE Listing
In anticipation of the listing of our common stock on the NYSE, FB Advisor recommended that the investment advisory agreement be amended. The amended investment advisory agreement would lower the quarterly hurdle rate used in calculating the subordinated incentive fee on income portion of the incentive fee from 2.0% (8.0% annualized) under the investment advisory agreement to 1.875% (7.5% annualized), or the amended hurdle rate. Accordingly, if the amended investment advisory agreement is approved by stockholders, the calculation of the subordinated incentive fee on income for each quarter under the amended investment advisory agreement will be as follows:
| No incentive fee will payable to FB Advisor in any calendar quarter in which our pre-incentive fee net investment income does not exceed the amended hurdle rate of 1.875% (7.5% annualized); |
| 100% of our pre-incentive fee net investment income, if any, that exceeds the amended hurdle rate but is less than or equal to 2.34375% in any calendar quarter (9.375% annualized) (as compared to 2.5% in any calendar quarter (10% annualized) under the investment advisory agreement) will be payable to FB Advisor. We refer to this portion of our pre-incentive fee net investment income (which exceeds the amended hurdle rate but is less than or equal to 2.34375%) as the amended catch-up. The amended catch-up provision is intended to provide FB Advisor with an incentive fee of 20.0% on all of our pre-incentive fee net investment income when our pre-incentive fee net investment income reaches 2.34375% (9.375% annualized) on net assets in any calendar quarter; and |
| 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.34375% in any calendar quarter (9.375% annualized) (as compared to 2.5% in any calendar quarter (10% annualized) under the investment advisory agreement) will be payable to FB Advisor once the amended hurdle rate is reached and the amended catch-up is achieved (20.0% of all pre-incentive fee net investment income thereafter will be allocated to FB Advisor). |
Under the amended investment advisory agreement, the subordinated incentive fee on income will continue to be subject to the total return requirement. Accordingly, pursuant to the amended investment advisory agreement, 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 our pre-incentive fee net investment income for such calendar quarter exceeds the amended hurdle rate of 1.875%, subject to the amended 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. There will be no accumulation of amounts on the amended hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the quarterly amended hurdle rate and there will be no delay of payment if prior quarters are below the quarterly amended hurdle rate.
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The following is a graphical representation of the calculation of the income-related portion of the incentive fee under the amended investment advisory agreement:
Quarterly Subordinated Incentive Fee on Income
Pre-incentive fee net investment income
(expressed as a percentage of net assets)
The amended investment advisory agreement would also reduce the base management fee payable by us to FB Advisor from 2.0% to 1.75% of the average value of our gross assets. Our board of directors has approved this amendment, and we have called a special meeting of our stockholders for June 23, 2014, at which our stockholders will be asked to vote on the proposal. Pending stockholder approval of the amended investment advisory agreement, FB Advisor has agreed, effective April 1, 2014, to voluntarily waive a portion of the base management fee to which it is entitled under the former investment advisory agreement and the investment advisory agreement so that the fee equals 1.75% of the average value of our gross assets. There can be no assurance this waiver will continue in the future.
These calculations will be appropriately prorated for any period of less than three months and adjusted, if appropriate, for any equity capital raises or repurchases during the applicable calendar quarter. These calculations also assume that the total return requirement described above will not reduce the payment of any subordinated incentive fee on income.
For purposes of the examples below, we have assumed that the amended investment advisory agreement described above is approved by our stockholders.
Example: Subordinated Incentive Fee on Income for Each Calendar Quarter Under the Amended Investment Advisory Agreement(*):
Scenario 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 1.25%
Amended hurdle rate(1) = 1.875%
Base management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 0.6125%
Pre-incentive fee net investment income does not exceed the amended hurdle rate, therefore there is no subordinated incentive fee on income payable.
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Scenario 2
Assumptions
Investment income (including interest, dividends, fees, etc.) = 2.80%
Amended hurdle rate(1) = 1.875%
Base management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 2.1625%
Subordinated incentive fee on income = 100% × pre-incentive fee net investment income (subject to amended catch-up)(4)
= 100% × (2.1625% 1.875%)
= 0.2875%
Pre-incentive fee net investment income exceeds the amended hurdle rate, but does not fully satisfy the amended catch-up provision, therefore the subordinated incentive fee on income is 0.2875%.
Scenario 3
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.50%
Amended hurdle rate(1) = 1.875%
Base management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income (base management fee + other expenses) = 2.8625%
Amended catch-up = 100% × pre-incentive fee net investment income (subject to catch-up)(4)
Subordinated incentive fee on income = 100% × catch-up + (20.0% × (pre-incentive fee net investment income 2.34375%))
Amended Catch-up = 2.34375% 1.875%
= 0.46875%
Subordinated incentive fee on income = (100% × 0.46875%) + (20.0% × (2.8625% 2.34375%))
= 0.46875% + (20% × 0.51875%)
= 0.46875% + 0.10375%
= 0.5725%
Pre-incentive fee net investment income exceeds the amended hurdle rate and fully satisfies the amended catch-up provision, therefore the subordinated incentive fee on income is 0.5725%.
(1) | Represents 7.5% annualized amended hurdle rate. |
(2) | Represents 1.75% annualized base management fee on average gross assets. Examples assume assets are equal to our net assets. |
(3) | Excludes organizational and offering expenses. |
(4) | The amended catch-up provision is intended to provide FB Advisor with an incentive fee of 20.0% on all pre-incentive fee net investment income when our net investment income exceeds 2.34375% in any calendar quarter. |
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* | The returns shown are for illustrative purposes only. If stockholders approve the amended investment advisory agreement, no incentive fee will be payable to FB Advisor in any calendar quarter in which our pre-incentive fee net investment income does not exceed the amended hurdle rate. Positive returns are shown to demonstrate the fee structure and there is no guarantee that positive returns will be realized. Actual returns may vary from those shown in the examples above. The example above does not consider any limitations on the calculation of the subordinated incentive fee on income that may result from the total return requirement. |
Duration and Termination
The investment advisory agreement became effective upon the listing of our common stock on the NYSE on April 16, 2014. Unless earlier terminated as described below, the investment advisory agreement will remain in effect until April 2016 and will remain in effect from year-to-year thereafter if approved annually by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. An affirmative vote of the holders of a majority of our outstanding voting securities is also necessary in order to make material amendments to the investment advisory agreement.
The investment advisory agreement will automatically terminate in the event of its assignment. The investment advisory agreement may be terminated at any time by (a) the vote of a majority of our outstanding voting securities, (b) the vote of our board of directors or (c) FB Advisor, without the payment of any penalty, upon 60 days written notice. Without the vote of a majority of our outstanding voting securities, the investment advisory agreement may not be materially amended.
Indemnification
The investment advisory agreement provides that FB Advisor (and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FB Advisor) shall be entitled to indemnification (including reasonable attorneys fees and amounts reasonably paid in settlement) for any liability or loss suffered by FB Advisor, and FB Advisor shall be held harmless for any loss or liability suffered by us, arising out of the performance of any of its duties or obligations under the investment advisory agreement or otherwise as our investment adviser; provided, however, that FB Advisor cannot be indemnified for any liability arising out of willful misfeasance, bad faith, or negligence in the performance of FB Advisors duties or by reason of the reckless disregard of FB Advisors duties and obligations under the investment advisory agreement.
Organization of FB Advisor
FB Advisor is a Delaware limited liability company that is registered as an investment adviser under the Advisers Act. The principal address of FB Advisor is FB Income Advisor, LLC, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104.
Overview of GDFM
GDFM acts as our sub-adviser pursuant to an investment sub-advisory agreement with FB Advisor and is registered as an investment adviser with the SEC under the Advisers Act. GDFM is a Delaware limited liability company with principal offices located at 345 Park Avenue, New York, New York 10154.
Under the terms of the sub-advisory agreement, GDFM assists FB Advisor in managing our portfolio in accordance with our stated investment objectives and policies. This assistance includes making investment recommendations, monitoring and servicing our investments, performing due diligence on prospective portfolio companies and providing research and other investment advisory services for us. However, all investment decisions are ultimately the responsibility of FB Advisors investment committee.
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The investment sub-advisory agreement provides that GDFM will receive 50% of all fees payable to FB Advisor under the investment advisory agreement with respect to each year.
The investment sub-advisory agreement may be terminated at any time, without the payment of any penalty, upon 60 days written notice by GDFM or, if our board of directors or the holders of a majority of our outstanding voting securities determine that it should be terminated, by FB Advisor.
Board Approval of the Investment Advisory Agreement and Investment Sub-Advisory Agreements
The investment advisory agreement was last approved by our board of directors at meetings held on April 11, 2013 and April 23, 2013, and was most recently approved by our stockholders on July 17, 2013 at the reconvened 2013 annual meeting of stockholders. The investment advisory agreement became effective on April 16, 2014 upon the listing of our common stock on the NYSE. On May 5, 2014, our board of directors approved certain amendments to the investment advisory agreement, and we have called a special meeting of our stockholders for June 23, 2014, at which our stockholders will be asked to vote on the proposal. The investment sub-advisory agreement was approved by our board of directors on May 13, 2008 and became effective upon our meeting the minimum offering requirement in January 2009. After an initial two-year term, such agreements must be re-approved annually by our board of directors. In August 2013, the board of directors re-approved the investment sub-advisory agreement and extended its terms for a period of twelve months, subject to earlier termination in accordance with its terms.
Such approvals were made in accordance with, and on the basis of an evaluation satisfactory to our board of directors as required by, Section 15(c) of the 1940 Act and applicable rules and regulations thereunder, including a consideration of, among other factors, (i) the nature, quality and extent of the advisory and other services to be provided under the agreements, (ii) the investment performance of the personnel who manage investment portfolios with objectives similar to ours, (iii) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives and (iv) information about the services to be performed and the personnel performing such services under each of the agreements.
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Pursuant to the administration agreement, we reimburse FB Advisor for administrative expenses it incurs on our behalf overseeing our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FB Advisor also performs, or oversees the performance of, our corporate operations and required administrative services.
There is no separate fee paid by us to FB Advisor in connection with the services provided under the administration agreement. However, we reimburse FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities thereunder. FB Advisor allocates the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics.
The initial term of the administration agreement is two years and thereafter continues automatically for successive annual periods, provided that such continuance is specifically approved at least annually by: (a) the vote of our board of directors; and (b) the vote of a majority of our directors who are not parties to the administration agreement or interested persons (as such term is defined in Section 2(a)(19) of the 1940 Act) of any such party.
The administration agreement may be terminated at any time by either us or FB Advisor, without the payment of any penalty, upon 60 days written notice.
The administration agreement provides that FB Advisor (and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FB Advisor) shall be entitled to indemnification (including reasonable attorneys fees and amounts reasonably paid in settlement) for any liability or loss suffered by FB Advisor, and FB Advisor shall be held harmless for any loss or liability suffered by us, arising out of the performance of any of its duties or obligations under the administration agreement or otherwise as our administrator; provided, however, that FB Advisor cannot be indemnified for any liability arising out of willful misfeasance, bad faith, or negligence in the performance of FB Advisors duties or by reason of the reckless disregard of FB Advisors duties and obligations under the administration agreement.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We have entered into the investment advisory agreement with FB Advisor. Pursuant to the investment advisory agreement, we pay FB Advisor a base management fee and an incentive fee. See Investment Advisory Agreement for a description of how the fees payable to FB Advisor are determined.
Our executive officers, certain of our directors and certain debt finance professionals of Franklin Square Holdings who perform services for us on behalf of FB Advisor are also officers, trustees, managers, and/or key professionals of Franklin Square Holdings, our former dealer manager and other Franklin Square Holdings entities, including FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund. These persons have legal obligations with respect to those entities that are similar to their obligations to us. In the future, these persons and other affiliates of Franklin Square Holdings may organize other debt-related programs and acquire for their own account debt-related investments that may be suitable for us. In addition, Franklin Square Holdings may grant equity interests in FB Advisor to certain management personnel performing services for FB Advisor.
Allocation of FB Advisors Time
We rely on FB Advisor to manage our day-to-day activities and to implement our investment strategy. FB Advisor and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities which are unrelated to us. As a result of these activities, FB Advisor, its employees and certain of its affiliates will have conflicts of interest in allocating their time between us and other activities in which they are or may become involved, including the management of FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC II Advisor, LLC, FS Investment Corporation II, FSIC III Advisor, LLC, FS Investment Corporation III, FS Global Advisor, LLC and FS Global Credit Opportunities Fund. FB Advisor and its employees will devote only as much of its or their time to our business as FB Advisor and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time. Therefore, FB Advisor, its personnel and certain affiliates may experience conflicts of interest in allocating management time, services and functions among us and any other business ventures in which they or any of their key personnel, as applicable, are or may become involved. This could result in actions that are more favorable to other affiliated entities than to us.
However, we believe that the members of FB Advisors senior management and the other key debt finance professionals have sufficient time to fully discharge their responsibilities to us and to the other businesses in which they are involved. We believe that our affiliates and executive officers will devote the time required to manage our business and expect that the amount of time a particular executive officer or affiliate devotes to us will vary during the course of the year and depend on our business activities at the given time. We expect that our executive officers and affiliates will generally devote more time to programs raising and investing capital than to programs that have completed their offering stages, though from time to time each program will have its unique demands. Because many of the operational aspects of Franklin Square Holdings-sponsored programs are very similar, there are significant efficiencies created by the same team of individuals at the adviser providing services to multiple programs. For example, FB Advisor has streamlined the structure for financial reporting, internal controls and investment approval processes for the programs.
Allocation of GDFMs Time
We rely, in part, on GDFM to assist in identifying investment opportunities and making investment recommendations to FB Advisor. GDFM, its affiliates and their respective members, partners, officers and employees will devote as much of their time to our activities as they deem necessary and appropriate. GDFM and its affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may be in competition with us and/or may involve substantial time and resources of GDFM. Also, in connection with such business activities, GDFM and its affiliates may have existing business relationships or access to material, non-
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public information that may prevent it from recommending investment opportunities that would otherwise fit within our investment objectives. All of these factors could be viewed as creating a conflict of interest in that the time and effort of the members of GDFM, its affiliates and their officers and employees will not be devoted exclusively to our business but will be allocated between us and the management of the assets of other advisees of GDFM and its affiliates. For example, GDFM also serves as the investment sub-adviser to FS Investment Corporation II and FS Investment Corporation III and GSO, the parent of GDFM, serves as investment sub-adviser to FS Energy and Power Fund and FS Global Credit Opportunities Fund.
Competition and Allocation of Investment Opportunities
Employees of FB Advisor are simultaneously providing investment advisory services to other affiliated entities, including the investment advisers to Franklin Square Holdings three other affiliated BDCs, FS Energy and Power Fund, FS Investment Corporation II and FS Investment Corporation III and Franklin Square Holdings affiliated closed-end management investment company, FS Global Credit Opportunities Fund. FS Investment Corporation II and FS Investment Corporation III are publicly-registered BDCs that invest primarily in senior secured loans and second lien secured loans of private U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. FS Energy and Power Fund is a publicly-registered BDC that invests primarily in debt and income-oriented equity securities of privately-held U.S. companies in the energy and power industry. FS Global Credit Opportunities Fund is a publicly-registered closed-end management investment company that invests primarily in secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments. In addition, GDFM and its affiliates manage several other investment vehicles.
FB Advisor may determine it appropriate for us and one or more other investment accounts managed by FB Advisor, GDFM or any of their respective affiliates to participate in an investment opportunity. To the extent we are able to make co-investments with investment accounts managed by FB Advisor, GDFM or their respective affiliates, these co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating accounts. In addition, conflicts of interest or perceived conflicts of interest may also arise in determining which investment opportunities should be presented to us and other participating accounts.
To mitigate these conflicts, FB Advisor will seek to execute such transactions on a fair and equitable basis and in accordance with its allocation policies, taking into account various factors, which may include: the source of origination of the investment opportunity; investment objectives and strategies; tax considerations; risk, diversification or investment concentration parameters; characteristics of the security; size of available investment; available liquidity and liquidity requirements; regulatory restrictions; and/or such other factors as may be relevant to a particular transaction.
As FB Advisors senior management team consists of the same management team that runs the investment advisers to Franklin Square Holdings three other affiliated BDCs, FS Energy and Power Fund, FS Investment Corporation II and FS Investment Corporation III, and Franklin Square Holdings affiliated closed-end management investment company, FS Global Credit Opportunities Fund, it is possible that some investment opportunities will be provided to FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III or FS Global Credit Opportunities Fund rather than us.
Expense Support and Conditional Reimbursement Agreement
Pursuant to the expense reimbursement agreement, Franklin Square Holdings agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from proceeds of the sale of shares of our common stock or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use
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such dividends or other distribution proceeds to fund our distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to our stockholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense support payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to shares of our common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means our total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
Franklin Square Holdings is controlled by our chairman and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters.
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Administration Agreement
Pursuant to the administration agreement, FB Advisor provides administrative services necessary for our operation, including providing general ledger accounting, fund accounting, legal services, investor relations and other administrative services. There is no separate fee paid by us to FB Advisor in connection with the services provided under the administration agreement, provided, however, that we reimburse FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities thereunder. See Administrative Services.
Trademark License Agreement
Pursuant to the Trademark License Agreement, Franklin Square Holdings granted us a non-exclusive, non-transferable, royalty-free right and license to use name FS Investment Corporation and other certain trademarks, or the Licensed Marks, as a component of our name (and in connection with marketing the investment advisory and other services that FB Advisor may provide to us). Other than with respect to this limited license, we have no other rights to the Licensed Marks. The Trademark License Agreement may be terminated by Franklin Square Holdings or us on sixty days prior written notice and expires if FB Advisor or one of Franklin Square Holdings affiliates ceases to serve as investment adviser to us. Furthermore, Franklin Square Holdings may terminate the Trademark License Agreement at any time and in its sole discretion, in the event that Franklin Square Holdings or we receives notice of any third party claim arising out of our use of the Licensed Marks or if we attempts to assign or sublicense the Trademark License Agreement or any of our rights or duties under the Trademark License Agreement without the prior written consent of Franklin Square Holdings. FB Advisor is a third-party beneficiary of the Trademark License Agreement.
Affiliated Dealer Manager
Our former dealer manager for our continuous public offering of common stock was FS2, which is an affiliate of ours. Under the previously effective dealer manager agreement among us, FB Advisor and FS2, FS2 was entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of our common stock in our continuous public offering, all or a portion of which were re-allowed to selected broker-dealers. Our continuous public offering closed to new investors in May 2012.
Investments
As a BDC, we may be limited in our ability to invest in any portfolio company in which any fund or other client managed by FB Advisor, GDFM or any of their respective affiliates has an investment. We may also be limited in our ability to co-invest in a portfolio company with FB Advisor, GDFM or one or more of their respective affiliates. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. We believe this relief may not only enhance our ability to further our investment objectives and strategy, but may also increase favorable investment opportunities for us, in part by allowing us to participate in larger investments, together with our co-investment affiliates, than would be available to us if we had not obtained such relief. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance. In general, we may not invest in general partnerships or joint ventures with affiliates (other than publicly registered affiliates) unless we meet several conditions, including that there are no duplicate fees to FB Advisor and GDFM. As a result, we could be limited in our ability to invest in certain portfolio companies in which GDFM or any of its affiliates are investing or are invested. Our ability to invest in general partnerships or joint ventures with non-affiliates that own specific assets is also subject to several conditions, including requirements that we own a controlling interest in any entity, and that no duplicate fees are allowed to FB Advisor and GDFM.
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CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
After satisfaction of the minimum offering requirement, no person will be deemed to control us, as such term is defined in the 1940 Act. The following table sets forth, as of June 10, 2014, information with respect to the beneficial ownership of our common stock by:
| each person known to us to beneficially own more than 5% of the outstanding shares of our common stock; |
| each member of our board of directors and each executive officer; and |
| all of the members of our board of directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules promulgated by the SEC and includes voting or investment power with respect to the securities. There are no shares of common stock subject to options that are currently exercisable or exercisable within 60 days of June 10, 2014.
Shares Beneficially Owned as of June 10, 2014 |
||||||||
Name(1) | Number of Shares |
Percentage(2) | ||||||
Interested Directors |
||||||||
David J. Adelman |
34,063 | * | ||||||
Michael C. Forman(3) |
147,682 | * | ||||||
Thomas J. Gravina |
| | ||||||
Michael Heller |
15,487 | * | ||||||
Independent Directors |
||||||||
Gregory P. Chandler |
| | ||||||
Barry H. Frank(4) |
59,289 | * | ||||||
Michael J. Hagan |
| | ||||||
Jeffrey K. Harrow |
| | ||||||
Paul Mendelson |
7,414 | * | ||||||
Pedro A. Ramos |
| | ||||||
Executive Officers |
||||||||
Sean Coleman |
| | ||||||
Salvatore Faia |
| | ||||||
William Goebel |
| | ||||||
Zachary Klehr |
6,475 | * | ||||||
Brad Marshall |
10,078 | * | ||||||
Gerald F. Stahlecker |
| | ||||||
Stephen S. Sypherd |
| | ||||||
All directors and executive officers as a group (17 persons) |
280,488 | * |
* | Less than one percent. |
(1) | The address of each of the beneficial owners set forth above is c/o FS Investment Corporation, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104, except for Mr. Marshall whose address is c/o GSO Capital Partners LP, 345 Park Avenue, 31st Floor, New York, New York 10154. |
(2) | Based on a total of 239,026,360 shares of common stock issued and outstanding on June 10, 2014. |
(3) | Includes 5,526 Shares held in trust; 9,094 shares held by spouse in trust; 2,286 shares held for the benefit of minor children in trust; and 8,068 shares held in a 401(k) account. |
(4) | Includes 27,861 shares held in an IRA account; 27,791 shares held by spouse in an IRA account; and 3,637 shares held in a joint account with spouse. |
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The following table sets forth, as of December 31, 2013, the dollar range of our equity securities that are beneficially owned by each member of our board of directors, based on the closing price of our shares of common stock as reported on the NYSE on June 13, 2014.
Name of Director |
Dollar Range of Equity Securities Beneficially Owned (1)(2)(3) | |
Interested Directors: |
||
Michael C. Forman |
Over $100,000 | |
David J. Adelman |
Over $100,000 | |
Michael J. Heller |
Over $100,000 | |
Thomas J. Gravina |
None | |
Independent Directors: |
||
Gregory P. Chandler |
None | |
Barry H. Frank |
Over $100,000 | |
Michael J. Hagan |
None | |
Jeffrey K. Harrow |
None | |
Paul Mendelson |
$50,001-$100,000 | |
Pedro A. Ramos |
None |
(1) | Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) promulgated under the Exchange Act. |
(2) | The dollar range of equity securities beneficially owned by our directors is calculated by multiplying the closing price of our common stock as reported on the NYSE on June 13, 2014, times the number of shares of common stock beneficially owned. |
(3) | The dollar range of equity securities beneficially owned are: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000 or over $100,000. |
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DISTRIBUTION REINVESTMENT PLAN
Subject to our board of directors discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on a monthly or quarterly basis. Following the commencement of our operations, we declared our first distribution on January 29, 2009.
We have adopted our new distribution reinvestment plan, which became effective as of June 2, 2014, that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors declares a cash distribution, then stockholders who have not elected to opt out of our new distribution reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock as described below. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.
No action will be required on the part of a registered stockholder to have its cash distributions reinvested in shares of our common stock. A registered stockholder will be able to elect to receive an entire cash distribution in cash by notifying DST Systems, Inc., the plan administrator and our transfer agent and registrar, in writing, so that notice is received by the plan administrator no later than 10 days prior to the record date for a cash distribution. Those stockholders whose shares are held by a broker or other financial intermediary may be able to receive distributions in cash by notifying their broker or other financial intermediary of their election. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock. The plan administrator will set up an account for shares acquired through our new distribution reinvestment plan for each stockholder who has not affirmatively elected to receive distributions in cash.
With respect to each cash distribution pursuant to our new distribution reinvestment plan, we reserve the right to either issue new shares of our common stock or purchase shares of our common stock in the open market in connection with implementation of our new distribution reinvestment plan. Unless we, in our sole discretion, otherwise direct the plan administrator, (A) if the per share Market Price (as defined in our new distribution reinvestment plan) is equal to or greater than the estimated net asset value per share (rounded up to the nearest whole cent) on the payment date for the cash distribution, then we will issue shares of our common stock at the greater of (i) net asset value per share or (ii) 95% of the Market Price; or (B) if the Market Price is less than the net asset value per share, then, in our sole discretion, (i) shares of our common stock will be purchased in open market transactions for the accounts of participants to the extent practicable, or (ii) we will issue shares of our common stock at net asset value per share. Pursuant to the terms of our new distribution reinvestment plan, the number of shares of our common stock to be issued to a participant will be determined by dividing the total dollar amount of the cash distribution payable to a participant by the price per share at which we issue 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 our common stock purchased in the open market.
There will be no brokerage charges or other sales charges on newly-issued shares of our common stock acquired by a participant under our new distribution reinvestment plan. The plan administrators service fee, if any, and expenses for administering our new distribution reinvestment plan will be paid for by us.
If a stockholder receives cash distributions in the form of common stock, such stockholder generally will be subject to the same federal, state and local tax consequences as if it elected to receive distributions in cash. The stockholders basis for determining gain or loss upon the sale of common stock received in a cash distribution will be equal to the total dollar amount of the distribution payable in cash. Any stock received in a cash distribution will have a holding period for tax purposes commencing on the day following the day on which the shares of our common stock are credited to the stockholders account.
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We reserve the right to amend, suspend or terminate our new distribution reinvestment plan in accordance with our new distribution reinvestment plan. Our new distribution reinvestment plan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any cash distribution; if such notice is mailed fewer than 30 days prior to such record date, such termination will be effective immediately following the payment date for such cash distribution. A participant may terminate its account under our new distribution reinvestment plan by so notifying the plan administrator, which termination will be effective immediately if the participants notice is received by the plan administrator no later than 10 days prior to the record date for a cash distribution.
All correspondence concerning our new distribution reinvestment plan should be directed to the plan administrator by mail at FS Investment Services, P.O. Box 219095, Kansas City, Missouri 64121-9095 or by telephone at (877) 628-8575.
If you hold your common stock with a brokerage firm that does not participate in the plan, you will not be able to participate in the plan and any dividend reinvestment may be effected on different terms than those described above. Consult your financial advisor for more information.
We have filed our new distribution reinvestment plan with the SEC as an exhibit to the registration statement of which this prospectus is a part. You may obtain a copy of the plan by request to the plan administrator or by contacting us at Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104, by calling us collect at (215) 495-1150 or by visiting our website at www.fsinvestmentcorp.com.
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DESCRIPTION OF OUR CAPITAL STOCK
The following description is based on relevant portions of the Maryland General Corporation Law and on our charter and bylaws. This summary is not intended to be complete, and we refer you to the Maryland General Corporation Law and our charter and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, for a more detailed description of the provisions summarized below.
Capital Stock
Our charter authorizes us to issue up to 500,000,000 shares of stock, of which 450,000,000 shares are classified as common stock, par value $0.001 per share, and 50,000,000 shares are classified as preferred stock, par value $0.001 per share. A majority of the board of directors, without any action by our stockholders, may amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. Our common stock trades on the NYSE under the ticker symbol FSIC. There are no outstanding options or warrants to purchase our stock. No stock has been authorized for issuance under any equity compensation plans.
The last reported closing market price of our common stock on June 13, 2014 was $10.34 per share. As of June 10, 2014, we had 5,186 stockholders of record.
The following are our outstanding classes of securities as of June 10, 2014:
Title of Class |
Amount Authorized |
Amount Held by Us or for Our Account |
Amount Outstanding |
|||||||||
Common Stock, par value $0.001 per share |
450,000,000 | | 239,026,360 |
Our charter also contains a provision permitting the board of directors to classify or reclassify any unissued shares of common stock or preferred stock in one or more classes or series of common stock or preferred stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption of the common stock or preferred stock. We believe that the power to classify or reclassify unissued shares of capital stock and thereafter issue the classified or reclassified shares provides us with increased flexibility in structuring possible future financings and investments and in meeting other needs that might arise.
Common Stock
Under the terms of our charter, all shares of our common stock will have equal rights as to voting. Except as may be provided by our board of directors in setting the terms of classified or reclassified stock, shares of our common stock will have no preemptive, exchange, conversion or redemption rights and will be freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock will be entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as may be provided by our board of directors in setting the terms of classified or reclassified stock, the holders of our common stock will possess exclusive voting power. There will be no cumulative voting. As permitted by the MGCL, our charter provides that the presence of stockholders entitled to cast one-third of the votes entitled to be cast at a meeting of stockholders will constitute a quorum.
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Limitation on Liability of Directors and Officers; Indemnification and Advancement of Expenses
Maryland law permits a Maryland corporation to include in its charter a provision expanding or limiting the liability of its directors and officers to the corporation and its stockholders for money damages, but a corporation may not include any provision that restricts or limits the liability of directors or officers to the corporation or its stockholders:
(a) | to the extent that it is proved that the person actually received an improper benefit or profit in money, property or services; or |
(b) | to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the persons action, or failure to act, was the request of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. |
Our charter contains a provision which limits directors and officers liability to us and our stockholders for money damages, to the maximum extent permitted by Maryland law. In addition, we have obtained directors and officers liability insurance.
Under the MGCL, a Maryland corporation may indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service to the corporation or at its request, unless it is established that the act or omission of the indemnified party was material to the matter giving rise to the proceeding and (i) the act or omission was committed in bad faith or was the result of active and deliberate dishonesty, or (ii) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. Maryland law does not permit indemnification in respect of any proceeding in which the party seeking indemnification shall have been adjudged to be liable to the corporation. Further, a party may not be indemnified for a proceeding brought by that party against the corporation, except (i) for a proceeding brought to enforce indemnification or (ii) if the charter or bylaws, a resolution of the corporations board of directors or an agreement approved by the corporations board of directors to which the corporation is a party expressly provides otherwise.
Our charter permits us to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual (a) who is a present or former director or officer of ours and who is made or threatened to be made a party to a proceeding by reason of his or her service in that capacity, or (b) who, while a director or officer of ours and at our request, serves or has served as a director, officer, partner, member, manager or trustee of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to a proceeding by reason of his or her service in such capacity and from and against any claim or liability to which such person may become subject or such person may incur, in each case to the fullest extent permitted by Maryland law.
Our charter provides that any provisions of the charter relating to limiting liability of directors and officers or to indemnifying directors and officers are subject to any applicable limitations in the 1940 Act.
Our bylaws obligate us to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual who (a) is a present or former director or officer of ours and who is made or threatened to be made a party to a proceeding by reason of his or her service in that capacity, or (b) while a director or officer of ours and at our request, serves or has served as a director, officer, partner, member, manager or trustee of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to a proceeding by reason of his or her service in such capacity and from and against any claim or liability to which such person may become subject or such person may incur, in each case to the fullest extent permitted by Maryland law and the 1940 Act. Our charter and bylaws also permit us to provide such indemnification and advancement for expenses to a person who served a
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predecessor of ours in any of the capacities described in (a) or (b) above and to any employee or agent of ours or a predecessor our. In accordance with the 1940 Act, we will not indemnify any person for any liability to which such person would be subject by reason of such persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
Provisions of the Maryland General Corporation Law and Our Charter and Bylaws
The MGCL and our charter and bylaws contain provisions that could make it more difficult for a potential acquirer to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.
Board of Directors
Our charter provides that the number of directors will be ten, and may be increased or decreased by our board of directors in accordance with our bylaws. Our bylaws provide that the number of directors may not be less than the minimum number required by the MGCL or more than twelve. Our charter also provides that the directors, other than any director elected solely by holders of one or more classes or series of preferred stock, shall be classified, with respect to the terms for which they severally hold office, into three classes, as nearly equal in number as possible as determined by the board of directors. Generally, at each annual meeting of stockholders, the successors to the class of directors whose term expires at such meeting shall be elected for a three-year term and until their successors are duly elected and qualify. Our directors may be elected to an unlimited number of successive terms.
Our bylaws provide that a director shall be elected only if such director receives the affirmative vote of a majority of the total votes cast for and affirmatively withheld as to such director at a meeting of stockholders duly called and at which a quorum is present. However, directors shall be elected by a plurality of votes cast at a meeting of stockholders duly called and at which a quorum is present if the number of nominees is greater than the number of directors to be elected at the meeting.
Except as may be provided by our board of directors in setting the terms of any class or series of preferred stock, pursuant to an election in our charter as permitted by the MGCL, any and all vacancies on our board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act.
Pursuant to our charter, subject to the rights, if any, of holders of one or more classes or series of preferred stock to elect or remove one or more directors, any director may be removed from office at any time only for cause and only by the affirmative vote of at least two-thirds of the votes entitled to cast generally in the election of directors. Pursuant to our bylaws, any director may resign at any time by delivering his or her resignation to the board of directors, the chairman of the board or the secretary, which resignation shall take effect immediately upon its receipt or at such later time specified in the resignation.
We currently have a total of ten members of the board of directors, six of whom are independent directors. A director is considered independent if he or she is not an interested person as that term is defined under Section 2(a)(19) of the 1940 Act. Our charter provides that a majority of our board of directors must be independent directors except for a period of up to 60 days after the death, removal or resignation of an independent director pending the election of his or her successor.
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Action by Stockholders
The MGCL provides that stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous consent in lieu of a meeting (unless the charter permits the consent in lieu of a meeting to be less than unanimous, which our charter does not). These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that, with respect to an annual meeting of stockholders, nominations of persons for election to our board of directors and the proposal of business to be considered by stockholders may be made only (a) pursuant to our notice of the meeting, (b) by our board of directors or (c) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to our board of directors at a special meeting may be made only (x) pursuant to our notice of the meeting, (y) by our board of directors or (z) provided that our board of directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.
The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.
Calling of Special Meetings of Stockholders
Our bylaws provide that special meetings of stockholders may be called by our board of directors and certain of our officers. In addition, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by our secretary upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at the meeting.
Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, consolidate, sell all or substantially all of its assets or engage in a share exchange, unless the transaction is advised by its board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Under our charter, provided that our directors then in office have approved and declared the action advisable and submitted such action to the stockholders, action that requires stockholder approval, including amending our charter, our dissolution, a merger, consolidation or a sale of all or substantially all of our assets must be approved by the affirmative vote of stockholders entitled to cast at least a majority of all the votes
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entitled to be cast on the matter. Notwithstanding the foregoing, the affirmative vote of the holders of shares entitled to cast at least 80% of all the votes entitled to be cast on the matter, with each class that is entitled to vote on the matter voting as a separate class, shall be required to effect any amendment to our charter to make our common stock a redeemable security or convert us, whether by merger or otherwise, from a closed-end company to an open-end company (as such terms are defined in the 1940 Act), to cause our liquidation or dissolution or any amendment to our charter to effect any such liquidation or dissolution, or to amend certain charter provisions, provided that, if the Continuing Directors (as defined in our charter), by a vote of at least two-thirds of such Continuing Directors, in addition to approval by the board of directors, approve such amendment, the affirmative vote of only the holders of stock entitled to cast a majority of all the votes entitled to be cast on the matter shall be required.
Our charter and bylaws provide that our board of directors will have the exclusive power to make, alter, amend or repeal any provision of our bylaws.
No Appraisal Rights
In certain extraordinary transactions, the MGCL provides the right to dissenting stockholders to demand and receive the fair value of their shares, subject to certain procedures and requirements set forth in the statute. Those rights are commonly referred to as appraisal rights. Except with respect to appraisal rights arising in connection with the Control Share Acquisition Act discussed below, as permitted by the MGCL, our charter provides that stockholders will not be entitled to exercise appraisal rights.
Distribution Policy
Subject to our board of directors discretion and applicable legal restrictions, we currently intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors.
During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of an investors investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders.
We currently intend to continue to make our ordinary distributions in the form of cash out of assets available for distribution. We have adopted our new distribution reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors declares a cash distribution, then our stockholders who have not elected to opt out of our new distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock rather than receiving the cash distribution. No action is required on the part of a registered stockholder to have their cash distribution reinvested in shares of our common stock. Registered stockholders must notify our transfer agent in writing if they wish to opt out of our new distribution reinvestment plan. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, they should contact such broker or financial intermediary regarding their option to elect to receive distributions in cash in lieu of shares of our common stock. See Distribution Reinvestment Plan for more information.
We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings, our sponsor. We have not established limits on the amount of funds we may use from available sources to make distributions. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.
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Control Share Acquisitions
The MGCL provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, which we refer to as the Control Share Acquisition Act. Shares owned by the acquirer, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
| one-tenth or more but less than one-third; |
| one-third or more but less than a majority; or |
| a majority or more of all voting power. |
The requisite stockholder approval must be obtained each time an acquirer crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the corporations board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The corporations right to repurchase control shares is subject to certain conditions and limitations, including compliance with the 1940 Act. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
The Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the corporations charter or bylaws. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of our shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future (before or after a control share acquisition). However, we will amend our bylaws to repeal such provision (so as to be subject to the Control Share Acquisition Act) only if our board of directors determines that it would be in our best interests and if the staff of the SEC does not object to our determination that our being subject to the Control Share Acquisition Act does not conflict with the 1940 Act.
Stockholder Liability
The MGCL provides that our stockholders are under no obligation to us or our creditors with respect to their shares other than the obligation to pay to us the full amount of the consideration for which their shares were issued.
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Under our charter, our stockholders shall not be liable for any debt, claim, demand, judgment or obligation of any kind by reason of being a stockholder, nor shall any stockholder be subject to any personal liability by reason of being a stockholder.
Business Combinations
Under the MGCL, certain business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. We refer to these provisions as the Business Combination Act. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
| any person who beneficially owns 10% or more of the voting power of the corporations shares; or |
| an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. |
A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors and approved by the affirmative vote of at least:
| 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
| two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the corporations common stockholders receive a minimum price, as defined under the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business Combination Act, provided that the business combination is first approved by our board of directors, including a majority of the directors who are not interested persons as defined in the 1940 Act. This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or our board of directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Additional Provisions of the Maryland General Corporation Law
The MGCL provides that a Maryland corporation that is subject to the Exchange Act and has at least three outside directors can elect by resolution of the board of directors to be subject to some corporate governance provisions that may be inconsistent with the corporations charter and bylaws. Under the applicable statute, a
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board of directors may classify itself without the vote of stockholders. A board of directors classified in that manner cannot be altered by amendment to the charter of the corporation. Further, the board of directors may, by electing into applicable statutory provisions and notwithstanding the charter or bylaws:
| provide that a special meeting of stockholders will be called only at the request of stockholders entitled to cast at least a majority of the votes entitled to be cast at the meeting; |
| reserve for itself the right to fix the number of directors; |
| provide that a director may be removed only by the vote of the holders of two-thirds of the stock entitled to vote; |
| retain for itself sole authority to fill vacancies created by the death, removal or resignation of a director; and |
| provide that all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors, in office, even if the remaining directors do not constitute a quorum. |
In addition, if the board of directors is classified, a director elected to fill a vacancy under this provision will serve for the balance of the unexpired term instead of until the next annual meeting of stockholders. A board of directors may implement all or any of these provisions without amending the charter or bylaws and without stockholder approval. A corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute. We are not prohibited from implementing any or all of the statute. Our board of directors has elected into the applicable statutory provisions, which provide that, except as may be provided by the board in setting the terms of any class of preferred stock, any vacancies on the board may be filled only by a majority of the directors then in office, even if less than a quorum, and a director elected to fill a vacancy will serve for the balance of the unexpired term.
Conflict with the 1940 Act
Our bylaws provide that, if and to the extent that any provision of the MGCL, including the Control Share Acquisition Act (if we amend our bylaws to be subject to such act) and the Business Combination Act, or any provision of our charter or bylaws conflicts with any mandatory provision of the 1940 Act, the applicable provision of the 1940 Act will control.
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DESCRIPTION OF OUR PREFERRED STOCK
Under the terms of our charter, our board of directors is authorized to issue shares of preferred stock in one or more classes or series without stockholder approval. The board of directors has discretion to determine the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of each series of preferred stock.
Preferred stock may be issued with rights and preferences that would adversely affect the holders of common stock. Preferred stock may also be used as an anti-takeover device. Every issuance of preferred stock will be required to comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance of preferred stock and before any distribution is made with respect to our common stock and before any purchase of common stock is made, the aggregate involuntary liquidation preference of such preferred stock together with the aggregate involuntary liquidation preference or aggregate value of all other senior securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such distribution or purchase price, as the case may be, and (2) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if distributions on such preferred stock are in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions.
We currently have no preferred stock issued or outstanding. Our board of directors has no present plans to issue shares of preferred stock, but it may do so at any time in the future without stockholder approval.
For any series of preferred stock that we may issue, our board of directors will determine and the prospectus supplement relating to such series will describe:
| the designation and number of shares of such series; |
| the rate and time at which, and the preferences and conditions under which, any dividends or other distributions will be paid on shares of such series, as well as whether such dividends or other distributions are participating or non-participating; |
| any provisions relating to convertibility or exchangeability of the shares of such series, including adjustments to the conversion price of such series; |
| the rights and preferences, if any, of holders of shares of such series upon our liquidation, dissolution or winding up of our affairs; |
| the voting powers, if any, of the holders of shares of such series; |
| any provisions relating to the redemption of the shares of such series; |
| any limitations on our ability to pay dividends or make distributions on, or acquire or redeem, other securities while shares of such series are outstanding; |
| any conditions or restrictions on our ability to issue additional shares of such series or other securities; |
| if applicable, a discussion of certain U.S. federal income tax considerations; and |
| any other relative powers, preferences and participating, optional or special rights of shares of such series, and the qualifications, limitations or restrictions thereof. |
All shares of preferred stock that we may issue will be identical and of equal rank except as to the particular terms thereof that may be fixed by our board of directors, and all shares of each series of preferred stock will be identical and of equal rank except as to the dates from which dividends or other distributions, if any, thereon will be cumulative.
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DESCRIPTION OF OUR SUBSCRIPTION RIGHTS
The following is a general description of the terms of the subscription rights we may issue from time to time. Particular terms of any subscription rights we offer will be described in the prospectus supplement relating to such subscription rights.
We may issue subscription rights to our stockholders to purchase common stock. Subscription rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the subscription rights. In connection with any subscription rights offering to our stockholders, we may enter into a standby underwriting, backstop or other arrangement with one or more persons pursuant to which such persons would purchase any offered securities remaining unsubscribed for after such subscription rights offering. In connection with a subscription rights offering to our stockholders, we would distribute certificates evidencing the subscription rights and a prospectus supplement to our stockholders on the record date that we set for receiving subscription rights in such subscription rights offering. Our common stockholders will indirectly bear all of the expenses incurred by us in connection with any subscription rights offerings, regardless of whether any common stockholder exercises any subscription rights.
A prospectus supplement will describe the particular terms of any subscription rights we may issue, including the following:
| the period of time the offering would remain open (which shall be open a minimum number of days such that all record holders would be eligible to participate in the offering and shall not be open longer than 120 days); |
| the title and aggregate number of such subscription rights; |
| the exercise price for such subscription rights (or method of calculation thereof); |
| the currency or currencies, including composite currencies, in which the price of such subscription rights may be payable; |
| if applicable, the designation and terms of the securities with which the subscription rights are issued and the number of subscription rights issued with each such security or each principal amount of such security; |
| the ratio of the offering (which, in the case of transferable rights, will require a minimum of three shares to be held of record before a person is entitled to purchase an additional share); |
| the number of such subscription rights issued to each stockholder; |
| the extent to which such subscription rights are transferable and the market on which they may be traded if they are transferable; |
| the date on which the right to exercise such subscription rights shall commence, and the date on which such right shall expire (subject to any extension); |
| if applicable, the minimum or maximum number of subscription rights that may be exercised at one time; |
| the extent to which such subscription rights include an over-subscription privilege with respect to unsubscribed securities and the terms of such over-subscription privilege; |
| any termination right we may have in connection with such subscription rights offering; |
| the terms of any rights to redeem, or call such subscription rights; |
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| information with respect to book-entry procedures, if any; |
| the terms of the securities issuable upon exercise of the subscription rights; |
| the material terms of any standby underwriting, backstop or other purchase arrangement that we may enter into in connection with the subscription rights offering; |
| if applicable, a discussion of certain U.S. federal income tax considerations applicable to the issuance or exercise of such subscription rights; and |
| any other terms of such subscription rights, including exercise, settlement and other procedures and limitations relating to the transfer and exercise of such subscription rights. |
Each subscription right will entitle the holder of the subscription right to purchase for cash or other consideration such amount of shares of common stock at such subscription price as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the subscription rights offered thereby. Subscription rights may be exercised as set forth in the prospectus supplement beginning on the date specified therein and continuing until the close of business on the expiration date for such subscription rights set forth in the prospectus supplement. After the close of business on the expiration date, all unexercised subscription rights will become void.
Upon receipt of payment and the subscription rights certificate properly completed and duly executed at the corporate trust office of the subscription rights agent or any other office indicated in the prospectus supplement we will forward, as soon as practicable, the shares of common stock purchasable upon such exercise. If less than all of the rights represented by such subscription rights certificate are exercised, a new subscription certificate will be issued for the remaining rights. Prior to exercising their subscription rights, holders of subscription rights will not have any of the rights of holders of the securities purchasable upon such exercise. To the extent permissible under applicable law, we may determine to offer any unsubscribed offered securities directly to persons other than stockholders, to or through agents, underwriters or dealers or through a combination of such methods, as set forth in the applicable prospectus supplement.
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The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer will be described in the prospectus supplement relating to such warrants.
We may issue warrants to purchase shares of our common stock, preferred stock or debt securities. Such warrants may be issued independently or together with shares of common stock, preferred stock or debt securities and may be attached or separate from such securities. We will issue each series of warrants under a separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with holders or beneficial owners of warrants.
A prospectus supplement will describe the particular terms of any series of warrants we may issue, including the following:
| the title and aggregate number of such warrants; |
| the price or prices at which such warrants will be issued; |
| the currency or currencies, including composite currencies, in which the price of such warrants may be payable; |
| if applicable, the designation and terms of the securities with which the warrants are issued and the number of warrants issued with each such security or each principal amount of such security; |
| in the case of warrants to purchase debt securities, the principal amount of debt securities purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which this principal amount of debt securities may be purchased upon such exercise; |
| in the case of warrants to purchase common stock or preferred stock, the number of shares of common stock or preferred stock, as the case may be, purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which these shares may be purchased upon such exercise; |
| the date on which the right to exercise such warrants shall commence and the date on which such right will expire (subject to any extension); |
| whether such warrants will be issued in registered form or bearer form; |
| if applicable, the minimum or maximum amount of such warrants that may be exercised at any one time; |
| if applicable, the date on and after which such warrants and the related securities will be separately transferable; |
| the terms of any rights to redeem, or call such warrants; |
| information with respect to book-entry procedures, if any; |
| the terms of the securities issuable upon exercise of the warrants; |
| if applicable, a discussion of certain U.S. federal income tax considerations; and |
| any other terms of such warrants, including terms, procedures and limitations relating to the exchange and exercise of such warrants. |
We and the warrant agent may amend or supplement the warrant agreement for a series of warrants without the consent of the holders of the warrants issued thereunder to effect changes that are not inconsistent with the
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provisions of the warrants and that do not materially and adversely affect the interests of the holders of the warrants.
Each warrant will entitle the holder to purchase for cash such common stock or preferred stock at the exercise price or such principal amount of debt securities as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the warrants offered thereby. Warrants may be exercised as set forth in the prospectus supplement beginning on the date specified therein and continuing until the close of business on the expiration date set forth in the prospectus supplement. After the close of business on the expiration date, unexercised warrants will become void.
Upon receipt of payment and a warrant certificate properly completed and duly executed at the corporate trust office of the warrant agent or any other office indicated in the prospectus supplement, we will, as soon as practicable, forward the securities purchasable upon such exercise. If less than all of the warrants represented by such warrant certificate are exercised, a new warrant certificate will be issued for the remaining warrants. If we so indicate in the applicable prospectus supplement, holders of the warrants may surrender securities as all or part of the exercise price for warrants.
Prior to exercising their warrants, holders of warrants will not have any of the rights of holders of the securities purchasable upon such exercise, including, in the case of warrants to purchase debt securities, the right to receive principal, premium, if any, or interest payments, on the debt securities purchasable upon exercise or to enforce covenants in the applicable indenture or, in the case of warrants to purchase common stock or preferred stock, the right to receive dividends or other distributions, if any, or payments upon our liquidation, dissolution or winding up or to exercise any voting rights.
Under the 1940 Act, we may generally only offer warrants provided that (a) the warrants expire by their terms within ten years, (b) the exercise or conversion price is not less than the current market value at the date of issuance, (c) our stockholders authorize the proposal to issue such warrants, and a majority of our directors who have no financial interest in the issuance and a majority of our independent directors approves such issuance on the basis that the issuance is in the best interests of us and our stockholders and (d) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities.
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DESCRIPTION OF OUR DEBT SECURITIES
We may issue debt securities in one or more series. The specific terms of each series of debt securities will be described in the particular prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities, you should read both this prospectus and the prospectus supplement relating to that particular series.
As required by federal law for all bonds and notes of companies that are publicly offered, the debt securities are governed by a document called an indenture. An indenture is a contract between us and a financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under Events of DefaultRemedies if an Event of Default Occurs. Second, the trustee performs certain administrative duties for us with respect to our debt securities.
Because this section is a summary, it does not describe every aspect of the debt securities and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of debt securities. For example, in this section, we use capitalized words to signify terms that are specifically defined in the indenture. We have filed the form of the indenture with the SEC. See Available Information for information on how to obtain a copy of the indenture.
A prospectus supplement, which will accompany this prospectus, will describe the particular terms of any series of debt securities being offered, including the following:
| the designation or title of the series of debt securities; |
| the total principal amount of the series of debt securities; |
| the percentage of the principal amount at which the series of debt securities will be offered; |
| the date or dates on which principal will be payable; |
| the rate or rates (which may be either fixed or variable) and/or the method of determining such rate or rates of interest, if any; |
| the date or dates from which any interest will accrue, or the method of determining such date or dates, and the date or dates on which any interest will be payable; |
| whether any interest may be paid by issuing additional securities of the same series in lieu of cash (and the terms upon which any such interest may be paid by issuing additional securities); |
| the terms for redemption, extension or early repayment, if any; |
| the currencies in which the series of debt securities are issued and payable; |
| whether the amount of payments of principal, premium or interest, if any, on a series of debt securities will be determined with reference to an index, formula or other method (which could be based on one or more currencies, commodities, equity indices or other indices) and how these amounts will be determined; |
| the place or places, if any, other than or in addition to The City of New York, of payment, transfer, conversion and/or exchange of the debt securities; |
| the denominations in which the offered debt securities will be issued; |
| the provision for any sinking fund; |
| any restrictive covenants; |
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| any Events of Default; |
| whether the series of debt securities are issuable in certificated form; |
| any provisions for defeasance or covenant defeasance; |
| if applicable, U.S. federal income tax considerations relating to original issue discount; |
| whether and under what circumstances we will pay additional amounts in respect of any tax, assessment or governmental charge and, if so, whether we will have the option to redeem the debt securities rather than pay the additional amounts (and the terms of this option); |
| any provisions for convertibility or exchangeability of the debt securities into or for any other securities; |
| whether the debt securities are subject to subordination and the terms of such subordination; |
| whether the debt securities are secured and the terms of any security interest; |
| the listing, if any, on a securities exchange; and |
| any other terms. |
The debt securities may be secured or unsecured obligations. Unless the prospectus supplement states otherwise, principal (and premium, if any) and interest, if any, will be paid by us in immediately available funds.
We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and other senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see Risk FactorsRisks Related to Business Development CompaniesRegulations governing our operation as a BDC and a RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.
General
The indenture provides that any debt securities proposed to be sold under this prospectus and the accompanying prospectus supplement, or offered debt securities, and any debt securities issuable upon the exercise of warrants or upon conversion or exchange of other offered securities, or underlying debt securities, may be issued under the indenture in one or more series.
For purposes of this prospectus, any reference to the payment of principal of or premium or interest, if any, on debt securities will include additional amounts if required by the terms of the debt securities.
The indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the indenture, when a single trustee is acting for all debt securities issued under the indenture, are called the indenture securities. The indenture also provides that there may be more than one trustee thereunder, each with respect to one or more different series of indenture securities. See Resignation of Trustee. At a time when two or more trustees are acting under the indenture, each with respect to only certain series, the term indenture securities means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is more than one trustee under the indenture, the powers and trust obligations of each trustee described in this prospectus will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are acting under the indenture, then the indenture securities for which each trustee is acting would be treated as if issued under separate indentures.
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The indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.
We refer you to the prospectus supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or our covenants that are described below, including any addition of a covenant or other provision providing event risk or similar protection.
We have the ability to issue indenture securities with terms different from those of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted when that series was created.
We expect that we will usually issue debt securities in book-entry only form represented by global securities.
Conversion and Exchange
If any debt securities are convertible into or exchangeable for other securities, the prospectus supplement will explain the terms and conditions of the conversion or exchange, including the conversion price or exchange ratio (or the calculation method), the conversion or exchange period (or how the period will be determined), if conversion or exchange will be mandatory or at the option of the holder or us, provisions for adjusting the conversion price or the exchange ratio and provisions affecting conversion or exchange in the event of the redemption of the underlying debt securities. These terms may also include provisions under which the number or amount of other securities to be received by the holders of the debt securities upon conversion or exchange would be calculated according to the market price of the other securities as of a time stated in the prospectus supplement.
Payment and Paying Agents
We will pay interest to the person listed in the applicable trustees records as the owner of the debt security at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the debt security on the interest due date. That day, often approximately two weeks in advance of the interest due date, is called the record date. Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling debt securities must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the debt securities to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called accrued interest.
Payments on Global Securities
We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holders right to those payments will be governed by the rules and practices of the depositary and its participants.
Payments on Certificated Securities
We will make payments on a certificated debt security as follows. We will pay interest that is due on an interest payment date to the holder of debt securities as shown on the trustees records as of the close of business on the regular record date. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee and/or at other offices that may be specified in the prospectus supplement or in a notice to holders against surrender of the debt security.
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Alternatively, if the holder asks us to do so, we will pay any amount that becomes due on the debt security by wire transfer of immediately available funds to an account at a bank in the United States on the due date. To request payment by wire, the holder must give the applicable trustee or other paying agent appropriate transfer instructions at least 15 business days before the requested wire payment is due. In the case of any interest payment due on an interest payment date, the instructions must be given by the person who is the holder on the relevant regular record date. Any wire instructions, once properly given, will remain in effect unless and until new instructions are given in the manner described above.
Payment when Offices are Closed
If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date, except as otherwise indicated in the attached prospectus supplement. Such payment will not result in a default under any debt security or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.
Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their debt securities.
Events of Default
You will have rights if an Event of Default occurs in respect of the debt securities of your series and is not cured, as described later in this subsection.
The term Event of Default in respect of the debt securities of your series means any of the following (unless the prospectus supplement relating to such debt securities states otherwise):
| we do not pay the principal of, or any premium on, a debt security of the series on its due date, and do not cure this default within five days; |
| we do not pay interest on a debt security of the series when due, and such default is not cured within 30 days; |
| we do not deposit any sinking fund payment in respect of debt securities of the series on its due date, and do not cure this default within five days; |
| we remain in breach of a covenant in respect of debt securities of the series for 90 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the trustee or holders of at least 25% of the principal amount of debt securities of the series; |
| we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 90 consecutive days; |
| on the last business day of each of 24 consecutive calendar months, we have an asset coverage of less than 100%, giving effect to any exemptive relief granted to us by the SEC; and |
| any other Event of Default in respect of debt securities of the series described in the applicable prospectus supplement occurs. |
An Event of Default for a particular series of debt securities does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of debt securities of any default, except in the payment of principal, premium or interest or in the payment of any sinking or purchase fund installment, if it considers the withholding of notice to be in the best interests of the holders.
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Remedies if an Event of Default Occurs
If an Event of Default has occurred and has not been cured, the trustee or the holders of at least 25% in principal amount of the debt securities of the affected series may (and the trustee shall at the request of such holders) declare the entire principal amount of all the debt securities of that series to be due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the debt securities of the affected series.
The trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an indemnity), security, or both, satisfactory to the trustee. If indemnity and/or security is provided, the holders of a majority in principal amount of the outstanding debt securities of the relevant series may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.
Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the debt securities, the following must occur:
| the holder must give your trustee written notice that an Event of Default has occurred and remains uncured; |
| the holders of at least 25% in principal amount of all outstanding debt securities of the relevant series must make a written request that the trustee take action because of the default and must offer the trustee indemnity, security, or both, satisfactory to the trustee, against the cost and other liabilities of taking that action; |
| the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity and/or security; and |
| the holders of a majority in principal amount of the debt securities must not have given the trustee a direction inconsistent with the above notice during that 60 day period. |
However, you are entitled at any time to bring a lawsuit for the payment of money due on your debt securities on or after the due date.
Holders of a majority in principal amount of the debt securities of the affected series may waive any past defaults other than:
| the payment of principal, any premium or interest; or |
| in respect of a covenant that cannot be modified or amended without the consent of each holder. |
Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.
Each year, we will furnish to each trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the debt securities, or else specifying any default.
Merger or Consolidation
Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We may also be permitted to sell all or substantially all of our assets to another entity. However, unless the
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prospectus supplement relating to certain debt securities states otherwise, we may not take any of these actions unless all the following conditions are met:
| where we merge out of existence or sell our assets, the resulting entity must agree to be legally responsible for our obligations under the debt securities; |
| immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing; |
| we must deliver certain certificates and documents to the trustee; and |
| we must satisfy any other requirements specified in the prospectus supplement relating to a particular series of debt securities. |
Modification or Waiver
There are three types of changes we can make to the indenture and the debt securities issued thereunder.
Changes Requiring Approval
First, there are changes that we cannot make to debt securities without specific approval of all of the holders. The following is a list of those types of changes:
| change the stated maturity of the principal of or interest on a debt security; |
| reduce any amounts due on a debt security; |
| reduce the amount of principal payable upon acceleration of the maturity of a security following a default; |
| adversely affect any right of repayment at the holders option; |
| change the place (except as otherwise described in the prospectus or prospectus supplement) or currency of payment on a debt security; |
| impair your right to sue for payment; |
| adversely affect any right to convert or exchange a debt security in accordance with its terms; |
| modify the subordination provisions in the indenture in a manner that is adverse to holders of the debt securities; |
| reduce the percentage of holders of debt securities whose consent is needed to modify or amend the indenture; |
| reduce the percentage of holders of debt securities whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults; |
| modify any other aspect of the provisions of the indenture dealing with supplemental indentures, modification and waiver of past defaults, changes to the quorum or voting requirements or the waiver of certain covenants; and |
| change any obligation we have to pay additional amounts. |
Changes Not Requiring Approval
The second type of change does not require any vote by the holders of the debt securities. This type is limited to clarifications, establishment of the form or terms of new securities of any series as permitted by the indenture and certain other changes that would not adversely affect holders of the outstanding debt securities in any material respect. We also do not need any approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.
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Changes Requiring Majority Approval
Any other change to the indenture and the debt securities would require the following approval:
| if the change affects only one series of debt securities, it must be approved by the holders of a majority in principal amount of that series; and |
| if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose. |
In each case, the required approval must be given by written consent. The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under Changes Requiring Your Approval.
Further Details Concerning Voting
When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security:
| for original issue discount securities, we will use the principal amount that would be due and payable on the voting date if the maturity of these debt securities were accelerated to that date because of a default; |
| for debt securities whose principal amount is not known (for example, because it is based on an index), we will use a special rule for that debt security described in the prospectus supplement; and |
| for debt securities denominated in one or more foreign currencies, we will use the U.S. dollar equivalent. |
Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption or if we, any other obligor, or any affiliate of us or any obligor own such debt securities. Debt securities will also not be eligible to vote if they have been fully defeased as described later under DefeasanceFull Defeasance.
We will generally be entitled to set any day as a record date for the purpose of determining the holders of outstanding indenture securities that are entitled to vote or take other action under the indenture. If we set a record date for a vote or other action to be taken by holders of one or more series, that vote or action may be taken only by persons who are holders of outstanding indenture securities of those series on the record date and must be taken within eleven months following the record date.
Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the debt securities or request a waiver.
Defeasance
The following provisions will be applicable to each series of debt securities unless we state in the applicable prospectus supplement that the provisions of covenant defeasance and full defeasance will not be applicable to that series.
Covenant Defeasance
Under current U.S. federal tax law, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the particular series was issued. This is called covenant
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defeasance. In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your debt securities. If applicable, you also would be released from the subordination provisions as described under the Indenture ProvisionsSubordination section below. In order to achieve covenant defeasance, we must do the following:
| defeasance must not result in a breach or violation of, or result in a default under, of the indenture or any of our other material agreements or instruments; |
| no default or event of default with respect to such debt securities shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days; |
| satisfy the conditions for covenant defeasance contained in any supplemental indentures; |
| if the debt securities of the particular series are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of such debt securities a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates; |
| we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit and just repaid the debt securities ourselves at maturity; and |
| we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers certificate stating that all conditions precedent to covenant defeasance have been complied with. |
If we accomplish covenant defeasance, you can still look to us for repayment of the debt securities if there were a shortfall in the trust deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the debt securities became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.
Full Defeasance
If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the debt securities of a particular series (called full defeasance) if we put in place the following other arrangements for you to be repaid:
| defeasance must not result in a breach or violation of, or constitute a default under, of the indenture or any of our other material agreements or instruments; |
| no default or event of default with respect to such debt securities shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days; |
| satisfy the conditions for full defeasance contained in any supplemental indentures; |
| if the debt securities of the particular series are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of such debt securities a combination of money and United States government or United States government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates. |
| we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit and just |
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repaid the debt securities ourselves at maturity. Under current U.S. federal tax law, the deposit and our legal release from the debt securities would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your debt securities and you would recognize gain or loss on the debt securities at the time of the deposit; and |
| we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers certificate stating that all conditions precedent to defeasance have been complied with. |
If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the debt securities. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If applicable, you would also be released from the subordination provisions described later under Indenture ProvisionsSubordination.
Form, Exchange and Transfer of Certificated Registered Securities
If registered debt securities cease to be issued in book-entry form, they will be issued:
| only in fully registered certificated form; |
| without interest coupons; and |
| unless we indicate otherwise in the prospectus supplement, in denominations of $1,000 and amounts that are multiples of $1,000. |
Holders may exchange their certificated securities, if any, for debt securities of smaller denominations or combined into fewer debt securities of larger denominations, as long as the total principal amount is not changed.
Holders may exchange or transfer their certificated securities, if any, at the office of their trustee. We have appointed the trustee to act as our agent for registering debt securities in the names of holders transferring debt securities. We may appoint another entity to perform these functions or perform them ourselves.
Holders will not be required to pay a service charge to transfer or exchange their certificated securities, if any, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holders proof of legal ownership.
If we have designated additional transfer agents for your debt security, they will be named in your prospectus supplement. We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.
If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.
If a registered debt security is issued in book-entry form, only the depositary will be entitled to transfer and exchange the debt security as described in this subsection, since it will be the sole holder of the debt security.
Resignation of Trustee
Each trustee may resign or be removed with respect to one or more series of indenture securities provided that a successor trustee is appointed to act with respect to these series. In the event that two or more persons are
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acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.
Subordination
Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and premium, if any) and interest, if any, on any indenture securities denominated as subordinated debt securities is to be subordinated to the extent provided in the indenture in right of payment to the prior payment in full of all Senior Indebtedness (as defined below), but our obligation to you to make payment of the principal of (and premium, if any) and interest, if any, on such subordinated debt securities will not otherwise be affected. In addition, no payment on account of principal (or premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on Senior Indebtedness has been made or duly provided for in money or moneys worth.
In the event that, notwithstanding the foregoing, any payment by us is received by the trustee in respect of subordinated debt securities or by the holders of any of such subordinated debt securities before all Senior Indebtedness is paid in full, the payment or distribution must be paid over to the holders of the Senior Indebtedness or on their behalf for application to the payment of all the Senior Indebtedness remaining unpaid until all the Senior Indebtedness has been paid in full, after giving effect to any concurrent payment or distribution to the holders of the Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness upon this distribution by us, the holders of such subordinated debt securities will be subrogated to the rights of the holders of the Senior Indebtedness to the extent of payments made to the holders of the Senior Indebtedness out of the distributive share of such subordinated debt securities.
By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover more, ratably, than holders of any subordinated debt securities. The indenture provides that these subordination provisions will not apply to money and securities held in trust under the defeasance provisions of the indenture.
Senior Indebtedness is defined in the indenture as the principal of (and premium, if any) and unpaid interest on:
| our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or guaranteed, for money borrowed that has been designated by us as Senior Indebtedness for purposes of the indenture by a company order delivered to the trustee; |
| senior securities; and |
| renewals, extensions, modifications and refinancings of any of this indebtedness. |
If this prospectus is being delivered in connection with the offering of a series of indenture securities denominated as subordinated debt securities, the accompanying prospectus supplement will set forth the approximate amount of our Senior Indebtedness outstanding as of a recent date.
Secured Indebtedness and Ranking
Certain of our indebtedness, including certain series of indenture securities, may be secured. The prospectus supplement for each series of indenture securities will describe the terms of any security interest for such series and will indicate the approximate amount of our secured indebtedness as of a recent date. Any unsecured indenture securities will effectively rank junior to any secured indebtedness, including any secured indenture securities, that we incur in the future to the extent of the value of the assets securing such future secured indebtedness. Our debt securities, whether secured or unsecured, will rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.
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In the event of our bankruptcy, liquidation, reorganization or other winding up, any of our assets that secure secured debt will be available to pay obligations on unsecured debt securities only after all indebtedness under such secured debt has been repaid in full from such assets. We advise you that there may not be sufficient assets remaining to pay amounts due on any or all unsecured debt securities then outstanding after fulfillment of this obligation. As a result, the holders of unsecured indenture securities may recover less, ratably, than holders of any of our secured indebtedness.
The Trustee under the Indenture
We intend to use a nationally recognized financial institution to serve as the trustee under the indenture.
Certain Considerations Relating to Foreign Currencies
Debt securities denominated or payable in foreign currencies may entail significant risks. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved and will be more fully described in the applicable prospectus supplement.
Book-Entry Debt Securities
The Depository Trust Company, or DTC, will act as securities depository for the debt securities. The debt securities will be issued as fully registered securities registered in the name of Cede & Co. (DTCs partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully- registered certificate will be issued for the debt securities, in the aggregate principal amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTCs participants, or Direct Participants, deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation, or DTCC.
DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly, or Indirect Participants. DTC has S&Ps rating: AA+. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.
Purchases of debt securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the debt securities on DTCs records. The ownership interest of each actual purchaser of each security, or the Beneficial Owner, is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are,
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however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the debt securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in debt securities, except in the event that use of the book-entry system for the debt securities is discontinued.
To facilitate subsequent transfers, all debt securities deposited by Direct Participants with DTC are registered in the name of DTCs partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of debt securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the debt securities; DTCs records reflect only the identity of the Direct Participants to whose accounts such debt securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the debt securities within an issue are being redeemed, DTCs practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the debt securities unless authorized by a Direct Participant in accordance with DTCs Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.s consenting or voting rights to those Direct Participants to whose accounts the debt securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Redemption proceeds, distributions, and dividend payments on the debt securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTCs practice is to credit Direct Participants accounts upon DTCs receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with their respective holdings shown on DTCs records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with respect to the debt securities at any time by giving reasonable notice to us or to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.
The information in this section concerning DTC and DTCs book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in our shares of common stock. This summary does not purport to be a complete description of the income tax considerations applicable to an investment in any of our securities. For example, we have not described tax consequences that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, traders in securities that elect to mark-to-market their securities holdings for tax purposes, pension plans and trusts, and financial institutions. This summary assumes that investors hold our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service, or IRS, regarding an offering. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
A U.S. stockholder generally is a beneficial owner of shares of our common stock who is for U.S. federal income tax purposes:
| a citizen or individual resident of the United States; |
| a corporation or other entity treated as a corporation, for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof; |
| a trust, if a court in the United States has primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust, or the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or |
| an estate, the income of which is subject to U.S. federal income taxation regardless of its source. |
A Non-U.S. stockholder generally is a beneficial owner of shares of our common stock that is not a U.S. stockholder nor a partnership for U.S. federal income tax purposes.
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner in a partnership holding shares of our common stock should consult his, her or its tax advisers with respect to the purchase, ownership and disposition of shares of our common stock.
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisers regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
Taxation in Connection with Holding Securities other than our Common Stock
We intend to describe in any prospectus supplement related to the offering of preferred stock, debt securities, warrants or rights offerings to purchase our common stock, the U.S. federal income tax considerations applicable to such securities as will be sold by us pursuant to that supplement, including, if applicable, the taxation of any debt securities that will be sold at an original issue discount
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Election to be Taxed as a RIC
We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute as dividends to our stockholders. To qualify for and maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to obtain RIC tax treatment, we must distribute to our stockholders, for each tax year, at least 90% of our investment company taxable income, which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses, or the annual distribution requirement.
Taxation as a RIC
If we:
| qualify as a RIC; and |
| satisfy the annual distribution requirement, |
then we will not be subject to federal income tax on the portion of our income or capital gain we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 of that calendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax, or the Excise Tax Avoidance Requirement. Any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been received by our U.S. stockholders on December 31 of the calendar year in which the dividend was declared. We generally will endeavor in each tax year to avoid any material U.S. federal excise tax on our earnings.
We have previously incurred, and can be expected to incur in the future, such excise tax on a portion of our income and gains. While we intend to distribute income and capital gains to minimize exposure to the 4% excise tax, we may not be able to, or may choose not to, distribute amounts sufficient to avoid the imposition of the tax entirely. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
| In order to qualify as a RIC for federal income tax purposes, we must, among other things: continue to qualify as a BDC under the 1940 Act at all times during each tax year; |
| derive in each tax year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, net income from certain qualified publicly-traded partnerships, or other income derived with respect to our business of investing in such stock or securities, or the 90% Income Test; and |
| diversify our holdings so that at the end of each quarter of the tax year: |
| at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and |
| no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that |
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are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain qualified publicly-traded partnerships, or the Diversification Tests. |
For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same tax year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash.
We intend to invest a portion of our net assets in below investment grade instruments. Investments in these types of instruments may present special tax issues for us. U.S. federal income tax rules are not entirely clear about issues such as when we may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable. We will address these and other issues to the extent necessary in order to seek to ensure that we distribute sufficient income so that we do not become subject to U.S. federal income or excise tax.
Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under Subchapter M of the Code. We may have to sell or otherwise dispose of some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain asset coverage tests are met. See RegulationSenior Securities. Moreover, our ability to sell or otherwise dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we sell or otherwise dispose of assets in order to meet the annual distribution requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
The remainder of this discussion assumes that we qualify as a RIC and have satisfied the annual distribution requirement.
Taxation of U.S. Stockholders
Distributions by us, including distributions pursuant to our new distribution reinvestment plan or where a stockholder can elect to receive cash or stock, generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our investment company taxable income will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate stockholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations, such
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distributions, or Qualifying Dividends, may be eligible for a maximum tax rate of either 15% or 20%, depending on whether the stockholders income exceeds certain threshold amounts. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the preferential maximum rate applicable to Qualifying Dividends or for the corporate dividends received deduction. Distributions of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly designated by us as capital gain dividends will be taxable to a U.S. stockholder as long-term capital gains that are currently generally taxable at a maximum rate of either 15% or 20% (depending on whether the stockholders income exceeds certain threshold amounts) in the case of individuals, trusts or estates, regardless of the U.S. stockholders holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholders adjusted tax basis in such stockholders common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder.
If a U.S. stockholder receives cash distributions in the form of common stock pursuant to our new distribution revinvestment plan, such stockholder generally will be subject to the same federal, state and local tax consequences as if it elected to receive distributions in cash. The U.S. stockholders basis for determining gain or loss upon the sale of common stock received in a cash distribution will be equal to the total dollar amount of the distribution payable in cash. Any stock received in a cash distribution will have a holding period for tax purposes commencing on the day following the day on which the shares of our common stock are credited to the U.S. stockholders account.
We may in the future decide to retain some or all of our net capital gains, but designate the retained amount as a deemed distribution. In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S. stockholders tax basis for his, her or its common stock. Since we expect to pay tax on any retained capital gains at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. stockholders other federal income tax obligations or may be refunded to the extent it exceeds a stockholders liability for federal income tax. A stockholder that is not subject to federal income tax or otherwise required to file a federal income tax return would be required to file a federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to use the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant tax year. We cannot treat any of our investment company taxable income as a deemed distribution.
For purposes of determining (1) whether the annual distribution requirement is satisfied for any year and (2) the amount of distributions paid for that year, we may, under certain circumstances, elect to treat a distribution that is paid during the following tax year as if it had been paid during the tax year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the distribution in the tax year in which the distribution is made. However, any distribution declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been received by our U.S. stockholders on December 31 of the calendar year in which the distribution was declared.
If an investor acquires shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though economically it may represent a return of his, her or its investment.
A stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of his, her or its shares of our common stock. The amount of gain or loss will be measured by the difference
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between such stockholders adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.
In general, individual U.S. stockholders currently are generally subject to a maximum federal income tax rate of either 15% or 20% (depending on whether the stockholders income exceeds certain threshold amounts) on their net capital gain (i.e., the excess of realized net long-term capital gains over realized net short-term capital losses), including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from us and net gains from redemptions or other taxable dispositions of our common stock) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceeds certain threshold amounts. Corporate U.S. stockholders currently are subject to federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate stockholders with net capital losses for a year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for a year, but may carry back such losses for three years or carry forward such losses for five years.
We (or if a U.S. stockholder holds shares through an intermediary, such intermediary) will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholders taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each years distributions generally will be reported to the IRS (including the amount of distributions, if any, eligible for the preferential maximum rate). Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholders particular situation.
The Code requires reporting of adjusted cost basis information for covered securities, which generally include shares of a RIC acquired after January 1, 2012, to the IRS and to taxpayers. Stockholders should contact their financial intermediaries with respect to reporting of cost basis and available elections for their accounts.
We may be required to withhold federal income tax, or backup withholding, currently at a rate of 28%, from all distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individuals taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholders federal income tax liability, provided that proper information is provided to the IRS.
Taxation of Non-U.S. Stockholders
Whether an investment in our shares is appropriate for a Non-U.S. stockholder will depend upon that persons particular circumstances. An investment in our shares by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult their tax advisers before investing in our common stock.
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Distributions of our investment company taxable income to Non-U.S. stockholders (including interest income and realized net short-term capital gains in excess of realized long-term capital losses, which generally would be free of withholding if paid to Non-U.S. stockholders directly) will be subject to withholding of federal tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits unless an applicable exception applies. If the distributions are effectively connected with a U.S. trade or business of the Non-U.S. stockholder, we will not be required to withhold federal tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements, although the distributions will be subject to federal income tax at the rates applicable to U.S. persons. (Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisers.)
In addition, under prior law applicable to tax years beginning before January 1, 2014 with respect to certain distributions made by RICs to Non-U.S. stockholders, no withholding was required and the distributions generally were not subject to federal income tax if (i) the distributions were properly designated in a notice timely delivered to our stockholders as interest-related dividends or short-term capital gain dividends, (ii) the distributions were derived from sources specified in the Code for such dividends and (iii) certain other requirements were satisfied. No assurance can be given as to whether legislation will be enacted to extend the application of this provision to tax years of RICs beginning on or after January 1, 2014. Even if this legislation were to be extended to tax years of RICs beginning on or after January 1, 2014, we do not currently anticipate that any significant amount of our distributions will be designated as eligible for this exemption from withholding.
Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be subject to federal withholding tax and generally will not be subject to U.S. federal income tax unless (i) the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States, or (ii) in the case of an individual stockholder, the stockholder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or the receipt of the distributions or gains and certain other conditions are met.
If we distribute our net capital gains in the form of deemed rather than actual distributions, a Non-U.S. stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholders allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a federal income tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate (or at a lower rate if provided for by an applicable treaty). Accordingly, investment in our shares of common stock may not be appropriate for a Non-U.S. stockholder.
A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to U.S. federal withholding tax, may be subject to information reporting and backup withholding of federal income tax on dividends unless the Non-U.S. stockholder provides us or the dividend paying agent with a U.S. nonresident withholding tax certificate (e.g., an IRS Form W-8BEN or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
Effective July 1, 2014, we will be required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends and (effective January 1, 2017) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding
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requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Stockholders may be requested to provide additional information to us to enable us to determine whether withholding is required.
Non-U.S. stockholders may also be subject to U.S. estate tax with respect to their investment in our common stock.
Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the shares.
Failure to Qualify as a RIC
If we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions would generally be taxable to our stockholders as ordinary dividend income. Subject to certain additional limitations in the Code, such distributions would be eligible for the preferential maximum rate applicable to individual stockholders with respect to Qualifying Dividends. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholders tax basis, and any remaining distributions would be treated as a capital gain. Moreover, if we fail to qualify as a RIC in any tax year, to qualify again to be subject to tax as a RIC in a subsequent tax year, we would be required to distribute our earnings and profits attributable to any of our non-RIC tax years as dividends to our stockholders. In addition, if we fail to qualify as a RIC for a period greater than two consecutive tax years, to qualify as a RIC in a subsequent year we may be subject to regular corporate tax on any net built-in gains with respect to certain of our assets (that is, the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had sold the property at fair market value at the end of the tax year) that we elect to recognize on requalification or when recognized over the next ten tax years.
State and Local Taxes
We may be subject to state or local taxes in jurisdictions in which we are deemed to be doing business. In those states or localities, our entity-level tax treatment and the treatment of distributions made to stockholders under those jurisdictions tax laws may differ from the treatment under the Code. Accordingly, an investment in our shares may have tax consequences for stockholder that are different from those of a direct investment in our portfolio investments. Stockholders are urged to consult their own tax advisers concerning state and local tax matters.
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We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act requires that a majority of our directors be persons other than interested persons, as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities.
The 1940 Act defines a majority of the outstanding voting securities as the lesser of (i) 67% or more of the voting securities present at a meeting if the holders of more than 50% of our outstanding voting securities are present or represented by proxy or (ii) 50% of our voting securities.
We will generally not be able to issue and sell our common stock at a price per share, after deducting underwriting commissions and discounts, that is below our net asset value per share. See Risk FactorsRisks Related to Business Development CompaniesRegulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve such sale. In addition, we may generally issue new shares of our common stock at a price below net asset value per share in rights offerings to existing stockholders, in payment of dividends and in certain other limited circumstances.
As a BDC, we are subject to certain regulatory restrictions in making our investments. For example, we generally will not be permitted to co-invest with certain entities affiliated with FB Advisor or GDFM in transactions originated by FB Advisor or GDFM or their respective affiliates unless we obtain an exemptive order from the SEC or co-invest alongside FB Advisor or GDFM or their respective affiliates in accordance with existing regulatory guidance and the allocation policies of FB Advisor, GDFM and their respective affiliates, as applicable. However, we will be permitted to, and may, co-invest in syndicated deals and secondary loan market transactions where price is the only negotiated point. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. We believe this relief may not only enhance our ability to further our investment objectives and strategy, but may also increase favorable investment opportunities for us, in part by allowing us to participate in larger investments, together with our co-investment affiliates, than would be available to us if we had not obtained such relief. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. The principal categories of qualifying assets relevant to our business are any of the following:
1. | Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: |
a. | is organized under the laws of, and has its principal place of business in, the United States; |
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b. | is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and |
c. | satisfies any of the following: |
i. does not have any class of securities that is traded on a national securities exchange;
ii. has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;
iii. is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company; or
iv. is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.
2. | Securities of any eligible portfolio company that we control. |
3. | Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. |
4. | Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. |
5. | Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities. |
6. | Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. |
In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above.
Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where we purchase such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.
Temporary Investments
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A
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repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the Diversification Tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. FB Advisor will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Senior Securities
We are permitted, under specified conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to asset coverage. For a discussion of the risks associated with leverage, See Risk FactorsRisks Related to Debt Financing and Risk FactorsRisks Related to Business Development Companies.
Code of Ethics
We and FB Advisor have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that, among other things, establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the codes requirements. These codes of ethics are attached as exhibits to the registration statement of which this prospectus is a part. You may also read and copy these codes of ethics at the SECs Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, our code of ethics is available on our website at www.fsinvestmentcorp.com and on the EDGAR Database on the SECs Internet site at www.sec.gov.
You may also obtain a copy of each code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549.
Compliance Policies and Procedures
We and FB Advisor have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our chief compliance officer and the chief compliance officer of FB Advisor are responsible for administering these policies and procedures.
Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to FB Advisor. The proxy voting policies and procedures of FB Advisor are set forth below. The guidelines are reviewed periodically by FB Advisor and our non-interested directors, and, accordingly, are subject to change.
As an investment adviser registered under the Advisers Act, FB Advisor has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, it recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.
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These policies and procedures for voting proxies for the investment advisory clients of FB Advisor are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
FB Advisor will vote proxies relating to our securities in the best interest of its clients stockholders. It will review on a case-by-case basis each proposal submitted for a stockholder vote to determine its impact on the portfolio securities held by its clients. Although FB Advisor will generally vote against proposals that may have a negative impact on its clients portfolio securities, it may vote for such a proposal if there exists compelling long-term reasons to do so.
The proxy voting decisions of FB Advisor are made by the senior officers who are responsible for monitoring each of its clients investments. To ensure that its vote is not the product of a conflict of interest, it will require that: (a) anyone involved in the decision-making process disclose to its chief compliance officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (b) employees involved in the decision making process or vote administration are prohibited from revealing how FB Advisor intends to vote on a proposal in order to reduce any attempted influence from interested parties.
You may obtain information, without charge, regarding how FB Advisor voted proxies with respect to our portfolio securities by making a written request for proxy voting information to: Chief Compliance Officer, FS Investment Corporation, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104 or by calling us collect at (215) 495-1150.
Other
We will be periodically examined by the SEC for compliance with the 1940 Act.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office.
Securities Exchange Act and Sarbanes-Oxley Act Compliance
We are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly, annual and current reports, proxy statements and other required items. In addition, we are subject to the Sarbanes-Oxley Act, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:
| pursuant to Rule 13a-14 promulgated under the Exchange Act, our chief executive officer and chief financial officer are required to certify the accuracy of the financial statements contained in our periodic reports; |
| pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure controls and procedures; and |
| pursuant to Rule 13a-15 promulgated under the Exchange Act, our management will be required to prepare a report regarding its assessment of our internal control over financial reporting. |
The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and take actions necessary to ensure that we are in compliance therewith. In addition, we intend to voluntarily comply with Section 404(b) of the Sarbanes-Oxley Act, and will engage our independent registered public accounting firm to audit our internal control over financial reporting.
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We may offer, from time to time, in one or more offerings or series, up to $1,500,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities in one or more underwritten public offerings, at-the-market offerings, negotiated transactions, block trades, best efforts or a combination of these methods. We may sell the securities through underwriters or dealers, directly to one or more purchasers, including existing stockholders in a rights offering, through agents or through a combination of any such methods of sale. Any underwriter or agent involved in the offer and sale of the securities will be named in the applicable prospectus supplement. A prospectus supplement or supplements will also describe the terms of the offering of the securities, including: the purchase price of the securities and the proceeds, if any, we will receive from the sale; any over-allotment options under which underwriters may purchase additional securities from us; any agency fees or underwriting discounts and other items constituting agents or underwriters compensation; the public offering price; any discounts or concessions allowed or re-allowed or paid to dealers; and any securities exchange or market on which the securities may be listed. Only underwriters named in the prospectus supplement will be underwriters of the securities offered by the prospectus supplement.
The distribution of the securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices, provided, however, that the offering price per share of our common stock, less any underwriting commissions or discounts, must equal or exceed the net asset value per share of our common stock at the time of the offering except (1) in connection with a rights offering to our existing stockholders, (2) offerings completed within one year of the receipt of consent of the majority of our common stockholders or (3) under such circumstances as the SEC may permit. The price at which securities may be distributed may represent a discount from prevailing market prices.
In connection with the sale of the securities, underwriters or agents may receive compensation from us or from purchasers of the securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Our common stockholders will indirectly bear such fees and expenses as well as any other fees and expenses incurred by us in connection with any sale of securities. Underwriters may sell the securities to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of the securities may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of the securities may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable prospectus supplement. The maximum aggregate commission or discount to be received by any member of the Financial Industry Regulatory Authority or independent broker-dealer will not be greater than 8% of the gross proceeds of the sale of securities offered pursuant to this prospectus and any applicable prospectus supplement. We may also reimburse the underwriter or agent for certain fees and legal expenses incurred by it.
Any underwriter may engage in over-allotment, stabilizing transactions, short-covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves sales in excess of the offering size, which create a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum price. Syndicate-covering or other short-covering transactions involve purchases of the securities, either through exercise of the over-allotment option or in the open market after the distribution is completed, to cover short positions. Penalty bids permit the underwriters to reclaim a selling concession from a dealer when the securities originally sold by the dealer are purchased in a stabilizing or covering transaction to cover short positions. Those activities may cause the price of the securities to be higher than it would otherwise be. If commenced, the underwriters may discontinue any of the activities at any time.
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Any underwriters that are qualified market makers on the NYSE may engage in passive market making transactions in our common stock on the NYSE in accordance with Regulation M under the Exchange Act, during the business day prior to the pricing of the offering, before the commencement of offers or sales of our common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as passive market makers. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market makers bid, however, the passive market makers bid must then be lowered when certain purchase limits are exceeded. Passive market making may stabilize the market price of the securities at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.
We may sell securities directly or through agents we designate from time to time. We will name any agent involved in the offering and sale of securities and we will describe any commissions we will pay the agent in the prospectus supplement. Unless the prospectus supplement states otherwise, our agent will act on a best-efforts basis for the period of its appointment.
Unless otherwise specified in the applicable prospectus supplement, each class or series of securities will be a new issue with no trading market, other than our common stock, which is traded on the NYSE. We may elect to list any other class or series of securities on any exchanges, but we are not obligated to do so. We cannot guarantee the liquidity of the trading markets for any securities.
Under agreements that we may enter, underwriters, dealers and agents who participate in the distribution of shares of our securities may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act, or contribution with respect to payments that the agents or underwriters may make with respect to these liabilities. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase our securities from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of our securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for solicitation of such contracts.
We may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from us in settlement of those derivatives to close out any related open borrowings of stock. The third parties in such sale transactions will be underwriters and, if not identified in this prospectus, will be identified in the applicable prospectus supplement.
In order to comply with the securities laws of certain states, if applicable, our securities offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.
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CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR
Our securities are held under a custody agreement by State Street Bank and Trust Company. The address of the custodian is: One Lincoln Street, Boston, Massachusetts 02111. DST Systems, Inc. acts as our transfer agent, distribution paying agent and registrar for our common stock. The principal business address of DST Systems, Inc. is 430 W. 7th Street, Kansas City, Missouri 64105-1594, telephone number: (877) 628-8575.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since we intend to generally acquire and dispose of our investments in privately negotiated transactions, we expect to use brokers in the normal course of our business infrequently. Subject to policies established by our board of directors, FB Advisor is primarily responsible for the execution of the publicly-traded securities portion of our portfolio transactions and the allocation of brokerage commissions. FB Advisor does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm and the firms risk and skill in positioning blocks of securities. While FB Advisor will generally seek reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, FB Advisor may select a broker based partly upon brokerage or research services provided to it and us and any other clients. In return for such services, we may pay a higher commission than other brokers would charge if FB Advisor determines in good faith that such commission is reasonable in relation to the services provided.
Certain legal matters regarding the securities offered hereby have been passed upon for us by Dechert LLP, Philadelphia, Pennsylvania, and certain matters with respect to Maryland law have been passed upon by Miles & Stockbridge P.C., Baltimore, Maryland.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
McGladrey LLP, an independent registered public accounting firm located at 751 Arbor Way, Suite 200, Blue Bell, Pennsylvania 19422, has audited our financial statements has audited our financial statements as of December 31, 2013, 2012, 2011, 2010, 2009, 2008 and 2007.
We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to the securities offered by this prospectus. The registration statement contains additional information about us and our securities being offered by this prospectus.
We are required to file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC, which are available on the SECs website at www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
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Financial Statements for the three months ended March 31, 2014 and 2013 |
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Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013 |
F-2 | |||
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 |
F-3 | |||
F-4 | ||||
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 |
F-5 | |||
F-6 | ||||
F-23 | ||||
Financial Statements for the fiscal years ended December 31, 2013, 2012 and 2011 |
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Managements Report on Internal Control over Financial Reporting |
F-51 | |||
F-52 | ||||
F-53 | ||||
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule |
F-54 | |||
Consolidated Balance Sheets as of December 31, 2013 and 2012 |
F-55 | |||
Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 |
F-56 | |||
F-57 | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 |
F-58 | |||
Consolidated Schedules of Investments as of December 31, 2013 and 2012 |
F-59 | |||
F-76 |
F-1
Item 1. | Financial Statements. |
FS Investment Corporation
(in thousands, except share and per share amounts)
March 31, 2014 (Unaudited) |
December 31, 2013 |
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Assets |
||||||||
Investments, at fair value (amortized cost$3,983,796 and $4,054,085, respectively) |
$ | 4,077,627 | $ | 4,137,581 | ||||
Cash |
297,685 | 227,328 | ||||||
Receivable for investments sold and repaid |
67,779 | 26,722 | ||||||
Interest receivable |
55,327 | 47,622 | ||||||
Deferred financing costs |
4,845 | 5,168 | ||||||
Prepaid expenses and other assets |
404 | 156 | ||||||
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|
|
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Total assets |
$ | 4,503,667 | $ | 4,444,577 | ||||
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|
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Liabilities |
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Payable for investments purchased |
$ | 24,321 | $ | 23,423 | ||||
Credit facilities payable |
738,482 | 723,682 | ||||||
Repurchase agreement payable(1) |
950,000 | 950,000 | ||||||
Stockholder distributions payable |
18,814 | 18,671 | ||||||
Management fees payable |
22,375 | 22,700 | ||||||
Accrued capital gains incentive fees(2) |
35,379 | 32,133 | ||||||
Subordinated income incentive fees payable(2) |
15,178 | 14,303 | ||||||
Administrative services expense payable |
1,820 | 1,153 | ||||||
Interest payable |
10,302 | 10,563 | ||||||
Directors fees payable |
254 | 254 | ||||||
Other accrued expenses and liabilities |
1,573 | 6,703 | ||||||
Commitments and contingencies(3) |
| | ||||||
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|
|
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Total liabilities |
1,818,498 | 1,803,585 | ||||||
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|
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Stockholders equity |
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Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding |
| | ||||||
Common stock, $0.001 par value, 450,000,000 shares authorized, 261,301,955 and 259,320,161 shares issued and outstanding, respectively |
261 | 259 | ||||||
Capital in excess of par value |
2,487,105 | 2,466,753 | ||||||
Accumulated undistributed net realized gains on investments and gain/loss on foreign currency(4) |
69,147 | 55,344 | ||||||
Accumulated undistributed (distributions in excess of) net investment income(4) |
34,962 | 35,322 | ||||||
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency |
93,694 | 83,314 | ||||||
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|
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Total stockholders equity |
2,685,169 | 2,640,992 | ||||||
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|
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Total liabilities and stockholders equity |
$ | 4,503,667 | $ | 4,444,577 | ||||
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Net asset value per share of common stock at period end |
$ | 10.28 | $ | 10.18 |
(1) | See Note 8 for a discussion of the Companys repurchase transaction. |
(2) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees. |
(3) | See Note 9 for a discussion of the Companys commitments and contingencies. |
(4) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
See notes to unaudited consolidated financial statements.
F-2
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Investment income |
||||||||
Interest income |
$ | 104,711 | $ | 102,214 | ||||
Fee income |
10,085 | 7,764 | ||||||
Dividend income |
| 66 | ||||||
|
|
|
|
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Total investment income |
114,796 | 110,044 | ||||||
|
|
|
|
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Operating expenses |
||||||||
Management fees |
22,371 | 22,206 | ||||||
Capital gains incentive fees(1) |
4,836 | 6,350 | ||||||
Subordinated income incentive fees(1) |
15,178 | 14,228 | ||||||
Administrative services expenses |
1,200 | 1,436 | ||||||
Stock transfer agent fees |
451 | 890 | ||||||
Accounting and administrative fees |
332 | 365 | ||||||
Interest expense |
12,700 | 12,136 | ||||||
Directors fees |
265 | 225 | ||||||
Other general and administrative expenses |
1,586 | 1,479 | ||||||
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|
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Total operating expenses |
58,919 | 59,315 | ||||||
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|
|
|
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Net investment income |
55,877 | 50,729 | ||||||
|
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|
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Realized and unrealized gain/loss |
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Net realized gain (loss) on investments |
13,822 | 14,171 | ||||||
Net realized gain (loss) on foreign currency |
(19 | ) | (63 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments |
10,335 | 17,518 | ||||||
Net change in unrealized gain (loss) on foreign currency |
45 | 121 | ||||||
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|
|
|
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Total net realized and unrealized gain (loss) on investments |
24,183 | 31,747 | ||||||
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|
|||||
Net increase (decrease) in net assets resulting from operations |
$ | 80,060 | $ | 82,476 | ||||
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|
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Per share informationbasic and diluted |
||||||||
Net increase (decrease) in net assets resulting from operations (Earnings per Share) |
$ | 0.32 | $ | 0.33 | ||||
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|
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Weighted average shares outstanding |
260,185,661 | 252,606,873 | ||||||
|
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(1) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees. |
See notes to unaudited consolidated financial statements.
F-3
Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)
Three Months Ended March 31, |
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2014 | 2013 | |||||||
Operations |
||||||||
Net investment income |
$ | 55,877 | $ | 50,729 | ||||
Net realized gain (loss) on investments and foreign currency |
13,803 | 14,108 | ||||||
Net change in unrealized appreciation (depreciation) on investments |
10,335 | 17,518 | ||||||
Net change in unrealized gain (loss) on foreign currency |
45 | 121 | ||||||
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|
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Net increase (decrease) in net assets resulting from operations |
80,060 | 82,476 | ||||||
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Stockholder distributions(1) |
||||||||
Distributions from net investment income |
(56,237 | ) | (39,543 | ) | ||||
Distributions from net realized gain on investments |
| (11,641 | ) | |||||
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|
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|
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Net decrease in net assets resulting from stockholder distributions |
(56,237 | ) | (51,184 | ) | ||||
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Capital share transactions |
||||||||
Issuance of common stock |
| | ||||||
Reinvestment of stockholder distributions |
29,257 | 26,476 | ||||||
Repurchases of common stock |
(8,903 | ) | (8,830 | ) | ||||
Offering costs |
| | ||||||
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|
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Net increase in net assets resulting from capital share transactions |
20,354 | 17,646 | ||||||
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|
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|
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Total increase in net assets |
44,177 | 48,938 | ||||||
Net assets at beginning of period |
2,640,992 | 2,511,738 | ||||||
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Net assets at end of period |
$ | 2,685,169 | $ | 2,560,676 | ||||
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Accumulated undistributed (distributions in excess of) net investment income(1) |
$ | 34,962 | $ | 15,493 | ||||
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(1) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
See notes to unaudited consolidated financial statements.
F-4
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31, |
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2014 | 2013 | |||||||
Cash flows from operating activities |
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Net increase (decrease) in net assets resulting from operations |
$ | 80,060 | $ | 82,476 | ||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities: |
||||||||
Purchases of investments |
(471,491 | ) | (649,916 | ) | ||||
Paid-in-kind interest |
(2,439 | ) | (1,413 | ) | ||||
Proceeds from sales and repayments of investments |
566,115 | 543,817 | ||||||
Net realized (gain) loss on investments |
(13,822 | ) | (14,171 | ) | ||||
Net change in unrealized (appreciation) depreciation on investments |
(10,335 | ) | (17,518 | ) | ||||
Accretion of discount |
(8,074 | ) | (10,106 | ) | ||||
Amortization of deferred financing costs |
582 | 805 | ||||||
(Increase) decrease in receivable for investments sold and repaid |
(41,057 | ) | (974 | ) | ||||
(Increase) decrease in interest receivable |
(7,705 | ) | (7,749 | ) | ||||
(Increase) decrease in prepaid expenses and other assets |
(248 | ) | 119 | |||||
Increase (decrease) in payable for investments purchased |
898 | 103,188 | ||||||
Increase (decrease) in management fees payable |
(325 | ) | 2,835 | |||||
Increase (decrease) in accrued capital gains incentive fees |
3,246 | (4,583 | ) | |||||
Increase (decrease) in subordinated income incentive fees payable |
875 | 2,208 | ||||||
Increase (decrease) in administrative services expense payable |
667 | 598 | ||||||
Increase (decrease) in interest payable |
(261 | ) | (753 | ) | ||||
Increase (decrease) in directors fees payable |
| 225 | ||||||
Increase (decrease) in other accrued expenses and liabilities |
(5,130 | ) | (600 | ) | ||||
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Net cash provided by operating activities |
91,556 | 28,488 | ||||||
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Cash flows from financing activities |
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Issuance of common stock |
| | ||||||
Reinvestment of stockholder distributions |
29,257 | 26,476 | ||||||
Repurchases of common stock |
(8,903 | ) | (8,830 | ) | ||||
Offering costs |
| | ||||||
Stockholder distributions |
(56,094 | ) | (51,066 | ) | ||||
Borrowings under credit facilities(1) |
14,800 | 5,600 | ||||||
Borrowings under repurchase agreement(2) |
| 23,333 | ||||||
Deferred financing costs paid |
(259 | ) | | |||||
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Net cash used in financing activities |
(21,199 | ) | (4,487 | ) | ||||
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Total increase (decrease) in cash |
70,357 | 24,001 | ||||||
Cash at beginning of period |
227,328 | 338,895 | ||||||
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Cash at end of period |
$ | 297,685 | $ | 362,896 | ||||
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Supplemental disclosure |
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Local and excise taxes paid |
$ | 5,100 | $ | 821 | ||||
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(1) | See Note 8 for a discussion of the Companys credit facilities. During the three months ended March 31, 2014 and 2013, the Company paid $4,488 and $6,934, respectively, in interest expense on the credit facilities. |
(2) | See Note 8 for a discussion of the Companys repurchase transaction. During the three months ended March 31, 2014 and 2013, the Company paid $7,891 and $5,150, respectively, in interest expense pursuant to the repurchase agreement. |
See notes to unaudited consolidated financial statements.
F-5
Unaudited Consolidated Schedule of Investments
As of March 31, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) |
Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Senior Secured LoansFirst Lien76.4% |
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A.P. Plasman Inc. |
(g)(i)(k) | Capital Goods | L+850 | 1.5% | 12/29/16 | $ | 49,254 | $ | 48,650 | $ | 50,362 | |||||||||||
AccentCare, Inc. |
(e) | Health Care Equipment & Services | L+500 | 1.5% | 12/22/16 | 2,017 | 1,880 | 1,261 | ||||||||||||||
American Pacific Corp. |
(e)(j) | Materials | L+600 | 1.0% | 2/1/19 | 5,000 | 4,963 | 5,075 | ||||||||||||||
American Racing and Entertainment, LLC |
(g) | Consumer Services | L+700 | 6/30/14 | 13,250 | 13,250 | 13,283 | |||||||||||||||
American Racing and Entertainment, LLC |
(g) | Consumer Services | 9.0% | 6/30/14 | 7,750 | 7,750 | 7,847 | |||||||||||||||
AP Exhaust Acquisition, LLC |
(i) | Automobiles & Components | L+775 | 1.5% | 1/16/21 | 15,000 | 15,000 | 15,000 | ||||||||||||||
Aspect Software, Inc. |
(e) | Software & Services | L+550 | 1.8% | 5/7/16 | 6,353 | 6,238 | 6,449 | ||||||||||||||
Attachmate Corp. |
(e) | Software & Services | L+575 | 1.5% | 11/22/17 | 5,381 | 5,304 | 5,428 | ||||||||||||||
Avaya Inc. |
(e) | Technology Hardware & Equipment | L+450 | 10/26/17 | 4,401 | 4,150 | 4,305 | |||||||||||||||
Azure Midstream Energy LLC |
(e) | Energy | L+550 | 1.0% | 11/15/18 | 4,444 | 4,381 | 4,494 | ||||||||||||||
BlackBrush TexStar L.P. |
(e)(g) | Energy | L+650 | 1.3% | 6/4/19 | 14,143 | 14,020 | 14,306 | ||||||||||||||
Boomerang Tube, LLC |
(e)(i) | Energy | L+950 | 1.5% | 10/11/17 | 18,619 | 18,185 | 18,153 | ||||||||||||||
Cadillac Jack, Inc. |
(g)(i)(k) | Consumer Services | L+700 | 1.0% | 12/20/17 | 34,913 | 34,587 | 35,174 | ||||||||||||||
Caesars Entertainment Operating Co. |
(f)(g)(k) | Consumer Services | L+425 | 1/26/18 | 13,351 | 12,334 | 12,441 | |||||||||||||||
Caesars Entertainment Operating Co. |
(g)(k) | Consumer Services | L+525 | 1/28/18 | 2,500 | 2,375 | 2,360 | |||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(e)(f)(g) | Consumer Services | L+600 | 1.0% | 10/11/20 | 72,725 | 68,570 | 73,783 | ||||||||||||||
Capital Vision Services, LLC |
(g)(i) | Health Care Equipment & Services | L+725 | 1.3% | 12/3/17 | 22,575 | 22,575 | 22,575 | ||||||||||||||
Capital Vision Services, LLC |
(g)(p) | Health Care Equipment & Services | L+725 | 1.3% | 12/3/17 | 1,869 | 1,869 | 1,869 | ||||||||||||||
Cengage Learning, Inc. |
(e)(f)(j) | Media | L+600 | 1.0% | 3/6/20 | 6,757 | 6,723 | 6,843 | ||||||||||||||
Citgo Petroleum Corp. |
Energy | L+600 | 2.0% | 6/24/15 | 2,411 | 2,423 | 2,432 | |||||||||||||||
Citgo Petroleum Corp. |
(g) | Energy | L+700 | 2.0% | 6/23/17 | 7,549 | 7,536 | 7,668 | ||||||||||||||
Clear Channel Communications, Inc. |
(e)(g) | Media | L+365 | 1/29/16 | 16,079 | 14,002 | 15,915 | |||||||||||||||
Clover Technologies Group, LLC |
(e) | Commercial & Professional Services | L+550 | 1.3% | 5/7/18 | 6,196 | 6,170 | 6,209 | ||||||||||||||
Corel Corp. |
(e)(g)(i)(k) | Software & Services | L+825 | 6/7/19 | 108,833 | 108,833 | 110,466 | |||||||||||||||
Corel Corp. |
(k) | Software & Services | PRIME+725 | 6/7/18 | 10,000 | 10,000 | 10,000 | |||||||||||||||
Corner Investment PropCo, LLC |
(e)(g) | Consumer Services | L+975 | 1.3% | 11/2/19 | 44,750 | 44,937 | 46,093 | ||||||||||||||
CoSentry.Net, LLC |
(e)(i) | Software & Services | L+800 | 1.3% | 12/31/19 | 54,364 | 54,364 | 54,907 | ||||||||||||||
Crestwood Holdings LLC |
(e) | Energy | L+600 | 1.0% | 6/19/19 | 5,665 | 5,640 | 5,774 | ||||||||||||||
Dent Wizard International Corp. |
(e)(g)(i) | Commercial & Professional Services | L+800 | 4/25/19 | 135,542 | 134,372 | 136,896 | |||||||||||||||
Dent Wizard International Corp. |
(p) | Commercial & Professional Services | PRIME+325 | 4/25/19 | 14,500 | 14,500 | 14,500 | |||||||||||||||
Dent Wizard International Corp. |
Commercial & Professional Services | PRIME+325 | 4/25/19 | 500 | 500 | 500 | ||||||||||||||||
Eastman Kodak Co. |
(e) | Consumer Durables & Apparel | L+625 | 1.0% | 9/3/19 | 10,827 | 10,627 | 10,996 | ||||||||||||||
Education Management LLC |
(g)(k) | Consumer Services | L+400 | 6/1/16 | 3,924 | 3,435 | 3,456 | |||||||||||||||
Education Management LLC |
(k) | Consumer Services | L+700 | 1.3% | 3/30/18 | 15,653 | 15,599 | 14,812 | ||||||||||||||
ERC Ireland Holdings Ltd. |
(h)(j)(k) | Telecommunication Services | EURIBOR+450 | 9/30/19 | | 15,327 | 15,200 | 20,431 | ||||||||||||||
Extreme Reach, Inc. |
(e) | Media | L+575 | 1.0% | 1/24/20 | $ | 4,138 | 4,077 | 4,241 | |||||||||||||
FairPoint Communications, Inc. |
(e)(k) | Telecommunication Services | L+625 | 1.3% | 2/14/19 | 12,994 | 12,882 | 13,427 | ||||||||||||||
Flanders Corp. |
(g)(i) | Capital Goods | L+950 | 1.5% | 5/14/18 | 37,493 | 36,813 | 38,149 |
See notes to unaudited consolidated financial statements.
F-6
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) |
Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Florida Gaming Centers, Inc. |
(g) | Consumer Services | 16.5% | 4/25/16 | $ | 13,144 | $ | 13,030 | $ | 13,406 | ||||||||||||
FR Utility Services LLC |
(e) | Energy | L+575 | 1.0% | 10/18/19 | 6,465 | 6,405 | 6,506 | ||||||||||||||
Fram Group Holdings Inc. |
(e) | Automobiles & Components | L+500 | 1.5% | 7/29/17 | 1,341 | 1,323 | 1,346 | ||||||||||||||
Harlan Sprague Dawley, Inc. |
(e) | Pharmaceuticals, Biotechnology & Life Sciences | L+550 | 7/11/14 | 1,275 | 1,192 | 916 | |||||||||||||||
HBC Solutions, Inc. |
(e)(g)(i) | Media | L+875 | 1.5% | 2/4/18 | 81,371 | 81,371 | 81,778 | ||||||||||||||
ILC Industries, LLC |
(e)(i) | Capital Goods | L+650 | 1.5% | 7/11/18 | 9,436 | 9,293 | 9,448 | ||||||||||||||
Infiltrator Systems, Inc. |
(g)(h)(i) | Capital Goods | L+825 | 1.3% | 6/27/18 | 200,000 | 200,000 | 201,000 | ||||||||||||||
Infogroup Inc. |
(e) | Software & Services | L+650 | 1.5% | 5/25/18 | 675 | 610 | 590 | ||||||||||||||
Insight Equity A.P. X, L.P. |
(g)(h)(i) | Household & Personal Products | L+850 | 1.0% | 10/26/18 | 65,000 | 63,984 | 66,300 | ||||||||||||||
Intralinks, Inc. |
(e)(g)(i)(k) | Software & Services | L+525 | 2.0% | 2/24/19 | 15,000 | 14,853 | 14,850 | ||||||||||||||
inVentiv Health, Inc. |
Health Care Equipment & Services | L+625 | 1.5% | 5/15/18 | 2,725 | 2,709 | 2,721 | |||||||||||||||
Lantiq Deutschland GmbH |
(g)(k) | Software & Services | L+900 | 2.0% | 11/16/15 | 12,105 | 11,592 | 12,045 | ||||||||||||||
Larchmont Resources, LLC |
(e) | Energy | L+725 | 1.0% | 8/7/19 | 11,059 | 10,958 | 11,280 | ||||||||||||||
Leading Edge Aviation Services, Inc. |
(e)(i) | Capital Goods | L+850 | 1.5% | 4/5/18 | 37,682 | 37,130 | 38,059 | ||||||||||||||
Leading Edge Aviation Services, Inc. |
(g)(h)(p) | Capital Goods | L+850 | 1.5% | 4/5/18 | 6,250 | 6,250 | 6,313 | ||||||||||||||
Leedsworld Inc. |
(e) | Retailing | L+475 | 1.3% | 6/28/19 | 9,725 | 9,640 | 9,725 | ||||||||||||||
Maritime Telecommunications Network, Inc. |
(g) | Telecommunication Services | L+600 | 1.5% | 3/4/16 | 4,053 | 4,029 | 3,526 | ||||||||||||||
MB Precision Holdings LLC |
(i) | Capital Goods | L+725 | 1.3% | 1/23/20 | 13,466 | 13,467 | 13,466 | ||||||||||||||
MetoKote Corp. |
(i) | Materials | L+800 | 1.3% | 9/30/19 | 19,950 | 19,950 | 20,349 | ||||||||||||||
MetoKote Corp. |
(p) | Materials | L+800 | 1.3% | 9/30/19 | 3,810 | 3,810 | 3,886 | ||||||||||||||
Micronics, Inc. |
(e)(i) | Capital Goods | L+800 | 1.3% | 3/28/19 | 22,422 | 22,034 | 22,422 | ||||||||||||||
MMI International Ltd. |
(e)(k) | Technology Hardware & Equipment | L+600 | 1.3% | 11/20/18 | 10,332 | 10,065 | 10,307 | ||||||||||||||
MMM Holdings, Inc. |
(i) | Health Care Equipment & Services | L+825 | 1.5% | 12/12/17 | 9,769 | 9,619 | 9,843 | ||||||||||||||
MModal Inc. |
(e)(m) | Health Care Equipment & Services | PRIME+575 | 8/16/19 | 6,740 | 6,641 | 5,357 | |||||||||||||||
Mood Media Corp. |
(e)(k) | Media | L+550 | 1.5% | 5/7/18 | 3,007 | 2,983 | 3,041 | ||||||||||||||
MSO of Puerto Rico, Inc. |
(i) | Health Care Equipment & Services | L+825 | 1.5% | 12/12/17 | 7,103 | 6,994 | 7,156 | ||||||||||||||
New HB Acquisition, LLC |
(e) | Food, Beverage & Tobacco | L+550 | 1.3% | 4/9/20 | 3,896 | 3,862 | 4,057 | ||||||||||||||
New Star Metals Inc. |
(e)(g) | Capital Goods | L+800 | 1.3% | 3/20/20 | 40,000 | 40,000 | 40,000 | ||||||||||||||
Nova Wildcat Amerock, LLC |
(i) | Consumer Durables & Apparel | L+825 | 1.3% | 9/10/19 | 20,000 | 20,000 | 20,000 | ||||||||||||||
Panda Sherman Power, LLC |
(e)(g) | Energy | L+750 | 1.5% | 9/14/18 | 9,273 | 9,206 | 9,551 | ||||||||||||||
Panda Temple Power, LLC (TLA) |
(g) | Energy | L+700 | 1.5% | 7/17/18 | 3,000 | 3,000 | 3,081 | ||||||||||||||
Princeton Review, Inc. |
Consumer Services | L+550 | 1.5% | 12/7/14 | 1,000 | 967 | 825 | |||||||||||||||
PRV Aerospace, LLC |
(e) | Capital Goods | L+525 | 1.3% | 5/9/18 | 4,856 | 4,847 | 4,871 | ||||||||||||||
RBS Holding Co. LLC |
(e) | Commercial & Professional Services | L+800 | 1.5% | 3/23/17 | 9,819 | 6,229 | 5,008 | ||||||||||||||
Reddy Ice Holdings, Inc. |
(e) | Food & Staples Retailing | L+550 | 1.3% | 5/1/19 | 1,179 | 1,168 | 1,173 | ||||||||||||||
Safariland, LLC |
(e)(g)(i) | Capital Goods | L+800 | 1.3% | 9/20/19 | 155,200 | 155,200 | 158,304 | ||||||||||||||
Shell Topco L.P. |
(e)(i) | Energy | L+750 | 1.5% | 9/28/18 | 33,000 | 32,612 | 33,825 | ||||||||||||||
Sirius Computer Solutions, Inc. |
(e) | Software & Services | L+575 | 1.3% | 12/7/18 | 7,519 | 7,458 | 7,651 |
See notes to unaudited consolidated financial statements.
F-7
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) |
Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Smile Brands Group Inc. |
(e)(f)(i) | Health Care Equipment & Services | L+625 | 1.3% | 8/15/19 | $ | 30,397 | $ | 29,777 | $ | 30,542 | |||||||||||
Sorenson Communication, Inc. |
(e)(f)(g)(i) | Telecommunication Services | L+1025 | 1.3% | 10/31/14 | 65,711 | 65,711 | 66,122 | ||||||||||||||
Sports Authority, Inc. |
(e)(g) | Consumer Durables & Apparel | L+600 | 1.5% | 11/16/17 | 22,133 | 21,993 | 22,188 | ||||||||||||||
Stallion Oilfield Holdings, Inc. |
(e) | Energy | L+675 | 1.3% | 6/19/18 | 4,848 | 4,806 | 4,966 | ||||||||||||||
Swiss Watch International, Inc. |
(e)(g)(i) | Consumer Durables & Apparel | L+725 | 1.3% | 11/8/18 | 48,125 | 47,359 | 48,606 | ||||||||||||||
Technicolor SA |
(e)(k) | Media | L+600 | 1.3% | 7/10/20 | 33,456 | 32,537 | 34,035 | ||||||||||||||
Tervita Corp. |
(e)(k) | Commercial & Professional Services | L+500 | 1.3% | 5/15/18 | 8,014 | 7,948 | 7,962 | ||||||||||||||
Therakos, Inc. |
(e)(g) | Pharmaceuticals, Biotechnology & Life Sciences | L+625 | 1.3% | 12/27/17 | 26,992 | 26,460 | 27,239 | ||||||||||||||
ThermaSys Corp. |
(e) | Capital Goods | L+400 | 1.3% | 5/3/19 | 9,813 | 9,727 | 9,813 | ||||||||||||||
Totes Isotoner Corp. |
(e) | Consumer Durables & Apparel | L+575 | 1.5% | 7/7/17 | 6,596 | 6,524 | 6,634 | ||||||||||||||
Tri-Northern Acquisition, Inc. |
(g)(i) | Retailing | L+800 | 1.3% | 7/1/19 | 54,588 | 54,589 | 54,588 | ||||||||||||||
Tri-Northern Acquisition, Inc. |
(p) | Retailing | L+800 | 1.3% | 7/1/19 | 11,379 | 11,379 | 11,379 | ||||||||||||||
Virtual Radiologic Corp. |
Health Care Equipment & Services | L+550 | 1.8% | 12/22/16 | 3,483 | 3,440 | 2,146 | |||||||||||||||
VPG Group Holdings LLC |
(e)(g)(i) | Materials | L+900 | 1.0% | 10/4/16 | 63,195 | 62,590 | 64,143 | ||||||||||||||
Willbros Group, Inc. |
(i)(k) | Energy | L+975 | 1.3% | 8/7/19 | 15,774 | 15,259 | 15,977 | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansFirst Lien |
2,049,294 | 2,088,202 | ||||||||||||||||||||
Unfunded Loan Commitments |
(37,808 | ) | (37,808 | ) | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Net Senior Secured LoansFirst Lien |
2,011,486 | 2,050,394 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Senior Secured LoansSecond Lien33.9% |
||||||||||||||||||||||
Advance Pierre Foods, Inc. |
(f)(g)(h) | Food & Staples Retailing | L+825 | 1.3% | 10/10/17 | 22,556 | 22,266 | 22,048 | ||||||||||||||
Advantage Sales & Marketing Inc. |
(f) | Commercial & Professional Services | L+725 | 1.0% | 6/12/18 | 14,844 | 14,844 | 15,127 | ||||||||||||||
Affordable Care, Inc. |
(e)(g)(h) | Health Care Equipment & Services | L+925 | 1.3% | 12/26/19 | 40,000 | 39,514 | 40,200 | ||||||||||||||
Alliance Laundry Systems LLC |
(h) | Capital Goods | L+825 | 1.3% | 12/10/19 | 2,012 | 1,995 | 2,042 | ||||||||||||||
American EnergyUtica, LLC |
(g) | Energy | L+400, 5.5% PIK (5.5% Max PIK) | 1.5% | 9/30/18 | 76,741 | 76,741 | 76,741 | ||||||||||||||
American EnergyUtica, LLC |
(h)(p) | Energy | L+400, 5.5% PIK (5.5% Max PIK) | 1.5% | 9/30/18 | 52,833 | 52,833 | 52,833 | ||||||||||||||
American Racing and Entertainment, LLC |
(h) | Consumer Services | 12.0% | 7/1/18 | 16,800 | 16,319 | 16,842 | |||||||||||||||
Asurion, LLC |
(f)(j) | Insurance | L+750 | 1.0% | 3/3/21 | 3,191 | 3,144 | 3,305 | ||||||||||||||
Attachmate Corp. |
(f)(g) | Software & Services | L+950 | 1.5% | 11/22/18 | 31,218 | 30,494 | 31,238 | ||||||||||||||
Brasa (Holdings) Inc. |
(g) | Consumer Services | L+950 | 1.5% | 1/20/20 | 11,180 | 10,823 | 11,320 | ||||||||||||||
Brock Holdings III, Inc. |
(f)(h) | Energy | L+825 | 1.8% | 3/16/18 | 7,756 | 7,682 | 7,878 | ||||||||||||||
Camp International Holding Co. |
(e) | Capital Goods | L+725 | 1.0% | 11/29/19 | 6,207 | 6,297 | 6,343 | ||||||||||||||
CHG Buyer Corp. |
(e) | Health Care Equipment & Services | L+775 | 1.3% | 11/19/20 | 5,158 | 5,067 | 5,248 | ||||||||||||||
Consolidated Precision Products Corp. |
(g) | Capital Goods | L+775 | 1.0% | 4/30/21 | 16,750 | 16,670 | 17,022 | ||||||||||||||
DAE Aviation Holdings, Inc. |
(e)(f)(h)(k) | Capital Goods | L+675 | 1.0% | 7/30/19 | 5,750 | 5,693 | 5,861 | ||||||||||||||
DEI Sales, Inc. |
(g)(h) | Commercial & Professional Services | L+900 | 1.5% | 1/15/18 | 57,500 | 56,881 | 57,284 |
See notes to unaudited consolidated financial statements.
F-8
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) |
Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Eastman Kodak Co. |
(g)(h) | Consumer Durables & Apparel | L+950 | 1.3% | 9/3/20 | $ | 50,000 | $ | 48,821 | $ | 50,406 | |||||||||||
EZE Software Group LLC |
(f) | Software & Services | L+725 | 1.3% | 4/5/21 | 2,381 | 2,360 | 2,419 | ||||||||||||||
Fram Group Holdings Inc. |
Automobiles & Components | L+900 | 1.5% | 1/29/18 | 2,000 | 1,994 | 1,890 | |||||||||||||||
Ikaria Acquisition Inc. |
(f) | Pharmaceuticals, Biotechnology & Life Sciences | L+775 | 1.0% | 2/14/22 | 5,000 | 4,963 | 5,088 | ||||||||||||||
ILC Industries, LLC |
(g)(h) | Capital Goods | L+1000 | 1.5% | 7/11/19 | 27,976 | 27,114 | 27,696 | ||||||||||||||
Kronos Inc. |
(f)(g) | Software & Services | L+850 | 1.3% | 4/30/20 | 27,239 | 26,998 | 28,396 | ||||||||||||||
LM U.S. Member LLC |
(h) | Transportation | L+825 | 1.3% | 10/26/20 | 9,375 | 9,252 | 9,539 | ||||||||||||||
OSP Group, Inc. |
(e)(g)(h) | Consumer Durables & Apparel | L+800 | 1.3% | 7/31/20 | 145,000 | 145,000 | 147,175 | ||||||||||||||
P2 Upstream Acquisition Co. |
(h) | Energy | L+800 | 1.0% | 4/30/21 | 4,091 | 4,052 | 4,175 | ||||||||||||||
Paw Luxco II Sarl |
(h)(k) | Consumer Durables & Apparel | EURIBOR+950 | 1/29/19 | | 16,364 | 19,933 | 20,830 | ||||||||||||||
Pelican Products, Inc. |
(e) | Capital Goods | L+1000 | 1.5% | 6/14/19 | $ | 6,667 | 6,558 | 6,700 | |||||||||||||
Pregis Corp. |
(g)(h) | Capital Goods | L+1000 | 1.5% | 3/23/18 | 50,000 | 49,320 | 50,250 | ||||||||||||||
PSAV Acquisition Corp. |
(g) | Technology Hardware & Equipment | L+825 | 1.0% | 1/24/22 | 80,000 | 78,822 | 81,600 | ||||||||||||||
Ranpak Corp. |
(h) | Commercial & Professional Services | L+725 | 1.3% | 4/23/20 | 3,324 | 3,294 | 3,402 | ||||||||||||||
Sensus USA Inc. |
(e)(f) | Capital Goods | L+725 | 1.3% | 5/9/18 | 8,571 | 8,576 | 8,632 | ||||||||||||||
SESAC Holdings Inc. |
(g) | Media | L+875 | 1.3% | 7/12/19 | 3,000 | 2,962 | 3,064 | ||||||||||||||
Stadium Management Corp. |
(g) | Consumer Services | L+825 | 1.0% | 2/15/22 | 57,500 | 57,500 | 58,794 | ||||||||||||||
TravelCLICK, Inc. |
(g)(h) | Consumer Services | L+850 | 1.3% | 3/26/18 | 34,925 | 34,635 | 35,711 | ||||||||||||||
Travelport LLC |
(h) | Consumer Services | 4.0%, 4.4% PIK (4.4% Max PIK) | 12/1/16 | 24,036 | 20,426 | 24,717 | |||||||||||||||
Vertafore, Inc. |
Software & Services | L+825 | 1.5% | 10/27/17 | 14,750 | 14,713 | 15,026 | |||||||||||||||
Wall Street Systems Holdings, Inc. |
(e) | Software & Services | L+800 | 1.3% | 10/25/20 | $ | 7,000 | $ | 6,881 | $ | 7,074 | |||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansSecond Lien |
941,437 | 963,916 | ||||||||||||||||||||
Unfunded Loan Commitments |
(52,833 | ) | (52,833 | ) | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Net Senior Secured LoansSecond Lien |
888,604 | 911,083 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Senior Secured Bonds15.0% |
||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(g)(h) | Materials | 10.5% | 6/1/19 | 78,500 | 76,958 | 58,483 | |||||||||||||||
Allen Systems Group, Inc. |
(g)(h) | Software & Services | 10.5% | 11/15/16 | 38,448 | 30,907 | 21,723 | |||||||||||||||
Aspect Software, Inc. |
(f) | Software & Services | 10.6% | 5/15/17 | 4,000 | 4,000 | 4,230 | |||||||||||||||
Avaya Inc. |
(g) | Technology Hardware & Equipment | 7.0% | 4/1/19 | 15,000 | 14,022 | 15,000 | |||||||||||||||
Avaya Inc. |
(f) | Technology Hardware & Equipment | 9.0% | 4/1/19 | 5,000 | 5,000 | 5,225 | |||||||||||||||
Caesars Entertainment Operating Co. |
(g)(k) | Consumer Services | 9.0% | 2/15/20 | 20,000 | 19,094 | 18,031 | |||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(f)(g) | Consumer Services | 11.0% | 10/1/21 | 54,598 | 54,301 | 57,540 | |||||||||||||||
FairPoint Communications, Inc. |
(f)(g)(k) | Telecommunication Services | 8.8% | 8/15/19 | 16,750 | 16,750 | 17,943 | |||||||||||||||
FourPoint Energy, LLC |
(h) | Energy | 8.5% | 12/31/20 | 15,750 | 12,878 | 12,915 | |||||||||||||||
Global A&T Electronics Ltd. |
(k) | Technology Hardware & Equipment | 10.0% | 2/1/19 | 9,000 | 9,000 | 7,470 | |||||||||||||||
HOA Restaurant Group, LLC |
(g) | Consumer Services | 11.3% | 4/1/17 | 14,100 | 14,110 | 14,876 |
See notes to unaudited consolidated financial statements.
F-9
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) |
Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
JW Aluminum Co. |
(f)(g)(h) | Materials | 11.5% | 11/15/17 | $ | 63,297 | $ | 62,735 | $ | 63,376 | ||||||||||||
Kinetic Concepts, Inc. |
(g) | Health Care Equipment & Services | 10.5% | 11/1/18 | 11,660 | 11,168 | 13,422 | |||||||||||||||
Logans Roadhouse Inc. |
(h) | Consumer Services | 10.8% | 10/15/17 | 38,494 | 30,769 | 29,737 | |||||||||||||||
Neff Rental LLC |
(g) | Capital Goods | 9.6% | 5/15/16 | 7,352 | 7,573 | 7,710 | |||||||||||||||
Ryerson Inc. |
(f) | Capital Goods | 9.0% | 10/15/17 | 3,100 | 3,100 | 3,360 | |||||||||||||||
SFX Entertainment, Inc. |
(h)(k) | Consumer Services | 9.6% | 2/1/19 | 10,500 | 10,500 | 11,064 | |||||||||||||||
Sorenson Communication, Inc. |
(h)(m) | Telecommunication Services | 10.5% | 2/1/15 | 39,000 | 36,624 | 35,112 | |||||||||||||||
Speedy Cash Intermediate Holdings Corp. |
(g) | Diversified Financials | 10.8% | 5/15/18 | 5,000 | 5,077 | 5,215 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured Bonds |
424,566 | 402,432 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Subordinated Debt14.2% |
||||||||||||||||||||||
Alta Mesa Holdings, L.P. |
(f) | Energy | 9.6% | 10/15/18 | 11,700 | 11,605 | 12,623 | |||||||||||||||
Aurora Diagnostics, LLC |
(g)(h) | Pharmaceuticals, Biotechnology & Life Sciences | 10.8% | 1/15/18 | 18,065 | 18,104 | 14,362 | |||||||||||||||
Avaya Inc. |
(f)(h) | Technology Hardware & Equipment | 10.5% | 3/1/21 | 20,400 | 19,228 | 19,023 | |||||||||||||||
Comstock Resources, Inc. |
(g)(k) | Energy | 9.5% | 6/15/20 | 7,500 | 7,204 | 8,582 | |||||||||||||||
Flanders Corp. |
(g)(h) | Capital Goods | 10.0%, 3.8% PIK (3.8% Max PIK) | 5/14/18 | 20,794 | 20,646 | 20,794 | |||||||||||||||
Ipreo Holdings LLC |
(g) | Software & Services | 11.8% | 8/15/18 | 10,000 | 9,967 | 10,238 | |||||||||||||||
Kinetic Concepts, Inc. |
(f)(g)(h) | Health Care Equipment & Services | 12.5% | 11/1/19 | 24,700 | 23,622 | 28,752 | |||||||||||||||
KODA Distribution Group, Inc. |
(g) | Materials | 11.3% | 9/30/19 | 35,000 | 34,355 | 35,700 | |||||||||||||||
Monitronics International, Inc. |
(f)(k) | Consumer Services | 9.1% | 4/1/20 | 2,250 | 2,250 | 2,416 | |||||||||||||||
Mood Media Corp. |
(f)(g)(h)(k) | Media | 9.3% | 10/15/20 | 43,135 | 42,039 | 41,410 | |||||||||||||||
QR Energy, L.P. |
(f)(k) | Energy | 9.3% | 8/1/20 | 3,250 | 3,211 | 3,512 | |||||||||||||||
RKI Exploration & Production, LLC |
(f) | Energy | 8.5% | 8/1/21 | 10,900 | 10,900 | 11,827 | |||||||||||||||
Samson Investment Co. |
(g) | Energy | 9.8% | 2/15/20 | 10,000 | 10,000 | 10,926 | |||||||||||||||
Sequel Industrial Products Holdings, LLC |
(h) | Energy | 12.0%, 2.5% PIK (2.5% Max PIK) | 5/10/18 | 15,792 | 15,563 | 16,187 | |||||||||||||||
Sidewinder Drilling Inc. |
(g)(h) | Capital Goods | 9.8% | 11/15/19 | 8,000 | 8,000 | 7,927 | |||||||||||||||
ThermaSys Corp. |
(g)(h) | Capital Goods | 9.0%, 1.8% PIK (5.0% Max PIK) | 5/3/20 | 131,542 | 131,542 | 132,857 | |||||||||||||||
VPG Group Holdings LLC |
(g) | Materials | 11.0%, 2.0% PIK (2.0% Max PIK) | 7/15/19 | 5,056 | 5,056 | 5,258 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Subordinated Debt |
373,292 | 382,394 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Collateralized Securities5.0% |
||||||||||||||||||||||
ACASC 2013-2A B |
(h)(k) | Diversified Financials | 12.6% | 10/15/23 | 30,500 | 29,573 | 31,002 | |||||||||||||||
Apidos CDO IV Class E |
(h)(k) | Diversified Financials | L+360 | 10/27/18 | 2,000 | 1,327 | 1,949 | |||||||||||||||
Ares 2007 CLO 11A Class E |
(h)(k) | Diversified Financials | L+600 | 10/11/21 | 4,775 | 3,359 | 4,767 |
See notes to unaudited consolidated financial statements.
F-10
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) |
Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Carlyle Azure CLO Class Income |
(k) | Diversified Financials | 14.8% | 5/27/20 | $ | 28,000 | $ | 11,253 | $ | 13,967 | ||||||||||||
Dryden CDO 23A Class Subord. |
(k) | Diversified Financials | 17.8% | 7/17/23 | 10,000 | 6,252 | 7,472 | |||||||||||||||
JPMorgan Chase Bank, N.A. Credit-Linked Notes |
(h)(k) | Diversified Financials | 11.2% | 12/20/21 | 16,740 | 16,633 | 16,740 | |||||||||||||||
Lightpoint CLO 2006 V Class D |
(h)(k) | Diversified Financials | L+365 | 8/5/19 | 6,500 | 3,836 | 6,218 | |||||||||||||||
Rampart CLO 2007 1A Class Subord. |
(k) | Diversified Financials | 34.9% | 10/25/21 | 10,000 | 3,413 | 7,348 | |||||||||||||||
Stone Tower CLO VI Class Subord. |
(h)(k) | Diversified Financials | 39.8% | 4/17/21 | 5,000 | 2,772 | 4,824 | |||||||||||||||
Wind River CLO Ltd. 2012 1A Class Sub B |
(k) | Diversified Financials | 14.2% | 1/15/24 | 42,504 | 37,277 | 40,845 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
115,695 | 135,132 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Equity/Other7.3%(l) |
||||||||||||||||||||||
American Energy Ohio Holdings, LLC, Common Equity |
(m)(n) | Energy | 7,387,008 | 7,387 | 7,387 | |||||||||||||||||
AP Exhaust Holdings, LLC, Common Equity |
(m)(o) | Automobiles & Components | 811 | 811 | 811 | |||||||||||||||||
Aquilex Corp., Common Equity, Class A Shares |
(g) | Energy | 15,128 | 1,087 | 3,493 | |||||||||||||||||
Aquilex Corp., Common Equity, Class B Shares |
(g)(h) | Energy | 32,637 | 1,690 | 7,536 | |||||||||||||||||
Burleigh Point, Ltd., Warrants |
(k)(m) | Retailing | 17,256,081 | 1,898 | 5,004 | |||||||||||||||||
CoSentry.Net, LLC, Preferred Equity |
(h)(m) | Software & Services | 2,632 | 2,500 | 2,478 | |||||||||||||||||
Eastman Kodak Co., Common Equity |
(g)(m) | Consumer Durables & Apparel | 61,859 | 1,202 | 2,060 | |||||||||||||||||
ERC Ireland Holdings Ltd., Common Equity |
(h)(j)(k)(m) | Telecommunication Services | 35,111 | 4,731 | 7,002 | |||||||||||||||||
ERC Ireland Holdings Ltd., Warrants |
(j)(k)(m) | Telecommunication Services | 15,809 | 2,288 | 3,153 | |||||||||||||||||
Flanders Corp., Common Equity |
(h)(m) | Capital Goods | 5,000,000 | 5,000 | 8,500 | |||||||||||||||||
Florida Gaming Centers, Inc., Warrants |
(h)(m) | Consumer Services | 71 | | 3,015 | |||||||||||||||||
Florida Gaming Corp., Warrants |
(h)(m) | Consumer Services | 226,635 | | | |||||||||||||||||
FourPoint Energy, LLC, Common Equity |
(m)(o) | Energy | 3,937 | 2,601 | 3,937 | |||||||||||||||||
HBC Solutions, Inc., Common Equity, Class A Units |
(m) | Media | 26,984 | 3,051 | 3,314 | |||||||||||||||||
Ipreo Holdings LLC, Common Equity |
(h)(m) | Software & Services | 1,000,000 | 1,000 | 2,450 | |||||||||||||||||
JW Aluminum Co., Common Equity |
(h)(m) | Materials | 37,500 | 3,225 | | |||||||||||||||||
Leading Edge Aviation Services, Inc., Common Equity |
(h)(m) | Capital Goods | 4,401 | 464 | 787 | |||||||||||||||||
Leading Edge Aviation Services, Inc., Preferred Equity |
(h)(m) | Capital Goods | 1,303 | 1,303 | 1,303 | |||||||||||||||||
MB Precision Holdings LLC, Common Equity |
(h)(m) | Capital Goods | 450,000 | 450 | 450 | |||||||||||||||||
Micronics, Inc., Common Equity |
(m) | Capital Goods | 50,000 | 500 | 475 | |||||||||||||||||
Micronics, Inc., Preferred Equity |
(m) | Capital Goods | 50 | 500 | 500 | |||||||||||||||||
Milagro Holdings, LLC, Common Equity |
(h)(m) | Energy | 12,057 | 50 | | |||||||||||||||||
Milagro Holdings, LLC, Preferred Equity |
(m) | Energy | 283,947 | 11,180 | 1,579 | |||||||||||||||||
New Star Metals Inc., Common Equity |
(m) | Capital Goods | 750,000 | 750 | 750 | |||||||||||||||||
Plains Offshore Operations Inc., Preferred Equity |
(g)(h) | Energy | 50,000 | 58,931 | 63,983 | |||||||||||||||||
Plains Offshore Operations Inc., Warrants |
(g)(h)(m) | Energy | 1,013,444 | 1,722 | 2,989 |
See notes to unaudited consolidated financial statements.
F-11
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2014
(in thousands, except share amounts)
-Portfolio Company(a) |
Footnotes | Industry |
Rate(b) |
Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
PSAV Holdings LLC, Common Equity |
(h)(m) | Technology Hardware & Equipment | 10,000,000 | $ | 10,000 | $ | 10,000 | |||||||||||||||
Safariland, LLC, Common Equity |
(h)(m) | Capital Goods | 25,000 | 2,500 | 6,128 | |||||||||||||||||
Safariland, LLC, Preferred Equity |
(h) | Capital Goods | 2,042 | 21,228 | 21,379 | |||||||||||||||||
Safariland, LLC, Warrants |
(h)(m) | Capital Goods | 4,536 | 473 | 1,112 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Common Equity |
(h)(m) | Energy | 3,330,600 | 3,400 | 6,994 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Preferred Equity |
(h)(m) | Energy | 8,000,000 | 9,398 | 9,408 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Warrants |
(h)(m) | Energy | 20,681 | 13 | 43 | |||||||||||||||||
ThermaSys Corp., Common Equity |
(h)(m) | Capital Goods | 51,813 | 1 | | |||||||||||||||||
ThermaSys Corp., Preferred Equity |
(h) | Capital Goods | 51,813 | 5,181 | 4,171 | |||||||||||||||||
VPG Group Holdings LLC, Class A-2 Units |
(h)(m) | Materials | 2,500,000 | 3,638 | 4,001 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Equity/Other |
170,153 | 196,192 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
TOTAL INVESTMENTS151.8% |
$ | 3,983,796 | 4,077,627 | |||||||||||||||||||
|
|
|||||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(51.8%) |
(1,392,458 | ) | ||||||||||||||||||||
|
|
|||||||||||||||||||||
NET ASSETS100% |
$ | 2,685,169 | ||||||||||||||||||||
|
|
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Certain variable rate securities in the Companys portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of March 31, 2014, the three-month London Interbank Offered Rate, or LIBOR, was 0.23%, the Euro Interbank Offered Rate, or EURIBOR, was 0.31% and the U.S. Prime Lending Rate, or Prime, was 3.25%. |
(c) | Denominated in U.S. dollars unless otherwise noted. |
(d) | Fair value determined by the Companys board of directors (see Note 7). |
(e) | Security or portion thereof held within Arch Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8). |
(f) | Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8). |
(g) | Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(h) | Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
(i) | Security or portion thereof held within Walnut Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8). |
(j) | Position or portion thereof unsettled as of March 31, 2014. |
See notes to unaudited consolidated financial statements.
F-12
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2014
(in thousands, except share amounts)
(k) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. As of March 31, 2014, 85.4% of the Companys total assets represented qualifying assets. |
(l) | Listed investments may be treated as debt for GAAP or tax purposes. |
(m) | Security is non-income producing. |
(n) | Security held within IC American Energy Investments, Inc., a wholly-owned subsidiary of the Company. |
(o) | Security held within FSIC Investments, Inc., a wholly-owned subsidiary of the Company. |
(p) | Security is an unfunded loan commitment. |
See notes to unaudited consolidated financial statements.
F-13
FS Investment Corporation
Consolidated Schedule of Investments
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Senior Secured LoansFirst Lien80.4% |
||||||||||||||||||||||||
A.P. Plasman Inc. |
(f)(h)(j) | Capital Goods | L+850 | 1.5 | % | 12/29/16 | $ | 49,941 | $ | 49,282 | $ | 51,502 | ||||||||||||
AccentCare, Inc. |
(d) | Health Care Equipment & Services | L+500 | 1.5 | % | 12/22/16 | 2,017 | 1,869 | 1,052 | |||||||||||||||
Alcatel-Lucent USA Inc. |
(d)(j) | Technology Hardware & Equipment | L+475 | 1.0 | % | 1/30/19 | 4,069 | 4,051 | 4,094 | |||||||||||||||
American Racing and Entertainment, LLC |
(f) | Consumer Services | L+700 | 6/30/14 | 13,500 | 13,500 | 13,500 | |||||||||||||||||
American Racing and Entertainment, LLC |
(f) | Consumer Services | 9.0% | 6/30/14 | 7,750 | 7,750 | 7,789 | |||||||||||||||||
Aspect Software, Inc. |
(d) | Software & Services | L+525 | 1.8 | % | 5/6/16 | 6,436 | 6,307 | 6,470 | |||||||||||||||
Attachmate Corp. |
(d)(e) | Software & Services | L+575 | 1.5 | % | 11/22/17 | 10,311 | 10,157 | 10,523 | |||||||||||||||
Audio Visual Services Group, Inc. |
(d) | Technology Hardware & Equipment | L+550 | 1.3 | % | 11/9/18 | 3,948 | 3,959 | 3,977 | |||||||||||||||
Avaya Inc. |
(d)(e)(i) | Technology Hardware & Equipment | L+450 | 10/26/17 | 9,905 | 9,184 | 9,717 | |||||||||||||||||
Avaya Inc. |
(d) | Technology Hardware & Equipment | L+675 | 1.3 | % | 3/31/18 | 14,827 | 14,891 | 15,072 | |||||||||||||||
Azure Midstream Energy LLC |
(d) | Energy | L+550 | 1.0 | % | 11/15/18 | 4,500 | 4,434 | 4,534 | |||||||||||||||
BlackBrush TexStar L.P. |
(d)(f) | Energy | L+650 | 1.3 | % | 6/4/19 | 14,179 | 14,049 | 14,311 | |||||||||||||||
Boomerang Tube, LLC |
(d)(h) | Energy | L+950 | 1.5 | % | 10/11/17 | 18,870 | 18,408 | 18,210 | |||||||||||||||
Cadillac Jack, Inc. |
(f)(h)(j) | Consumer Services | L+700 | 1.0 | % | 12/20/17 | 35,000 | 34,655 | 34,650 | |||||||||||||||
Caesars Entertainment Operating Co. |
(e)(f)(j) | Consumer Services | L+425 | 1/26/18 | 16,351 | 15,017 | 15,513 | |||||||||||||||||
Caesars Entertainment Operating Co. |
(f)(j) | Consumer Services | L+525 | 1/28/18 | 2,500 | 2,369 | 2,394 | |||||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(d)(e)(f) | Consumer Services | L+600 | 1.0 | % | 10/1/20 | 72,907 | 68,627 | 72,679 | |||||||||||||||
Capital Vision Services, LLC |
(f)(h) | Health Care Equipment & Services | L+725 | 1.3 | % | 12/3/17 | 19,828 | 19,828 | 19,977 | |||||||||||||||
Cenveo Corp. |
(d) | Commercial & Professional Services | L+500 | 1.3 | % | 2/13/17 | 3,628 | 3,613 | 3,658 | |||||||||||||||
Citgo Petroleum Corp. |
(e) | Energy | L+600 | 2.0 | % | 6/24/15 | 2,536 | 2,551 | 2,561 | |||||||||||||||
Citgo Petroleum Corp. |
(e)(f) | Energy | L+700 | 2.0 | % | 6/23/17 | 7,571 | 7,557 | 7,666 | |||||||||||||||
Clear Channel Communications, Inc. |
(d)(f) | Media | L+365 | 1/29/16 | 16,079 | 13,772 | 15,604 | |||||||||||||||||
Clover Technologies Group, LLC |
(d) | Commercial & Professional Services | L+550 | 1.3 | % | 5/7/18 | 6,277 | 6,249 | 6,277 | |||||||||||||||
Collective Brands, Inc. |
(d)(f) | Consumer Durables & Apparel | L+600 | 1.3 | % | 10/9/19 | 12,782 | 12,721 | 12,845 | |||||||||||||||
Corel Corp. |
(d)(f)(h)(j) | Software & Services | L+825 | 6/7/19 | 117,000 | 117,000 | 117,878 | |||||||||||||||||
Corel Corp. |
(j) | Software & Services | L+825 | 6/7/18 | 10,000 | 10,000 | 10,000 | |||||||||||||||||
Corner Investment PropCo, LLC |
(d)(f)(i) | Consumer Services | L+975 | 1.3 | % | 11/2/19 | 25,750 | 25,363 | 26,265 | |||||||||||||||
CoSentry.Net, LLC |
(d)(g)(h) | Software & Services | L+800 | 1.3 | % | 12/31/19 | 54,500 | 54,500 | 54,500 | |||||||||||||||
Crestwood Holdings LLC |
(d) | Energy | L+600 | 1.0 | % | 6/19/19 | 5,735 | 5,709 | 5,907 | |||||||||||||||
Dent Wizard International Corp. |
(d)(f)(g)(h) | Commercial & Professional Services | L+800 | 4/25/19 | 136,354 | 135,127 | 139,081 | |||||||||||||||||
Dent Wizard International Corp. |
Commercial & Professional Services | L+425 | 4/25/19 | 15,000 | 15,000 | 15,000 | ||||||||||||||||||
Eastman Kodak Co. |
(d) | Consumer Durables & Apparel | L+625 | 1.0 | % | 9/3/19 | 10,855 | 10,647 | 10,844 | |||||||||||||||
Education Management LLC |
(f)(j) | Consumer Services | L+400 | 6/1/16 | 3,935 | 3,393 | 3,788 | |||||||||||||||||
Education Management LLC |
(e)(j) | Consumer Services | L+700 | 1.3 | % | 3/30/18 | 15,697 | 15,638 | 15,771 |
See notes to unaudited consolidated financial statements.
F-14
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
ERC Ireland Holdings Ltd. |
(g)(i)(j) | Telecommunication Services | EURIBOR+300, 1.0% PIK | 9/30/17 | | 22,006 | $ | 27,607 | $ | 36,063 | ||||||||||||||
FairPoint Communications, Inc. |
(d)(e)(j) | Telecommunication Services | L+625 | 1.3 | % | 2/14/19 | $ | 21,711 | 21,517 | 22,487 | ||||||||||||||
Flanders Corp. |
(f)(h) | Capital Goods | L+950 | 1.5 | % | 5/14/18 | 37,793 | 37,069 | 38,548 | |||||||||||||||
Florida Gaming Centers, Inc. |
(f)(l) | Consumer Services | 16.5% | 4/25/16 | 13,144 | 13,017 | 13,407 | |||||||||||||||||
FR Utility Services LLC |
(d) | Energy | L+575 | 1.0 | % | 10/18/19 | 6,481 | 6,418 | 6,481 | |||||||||||||||
Fram Group Holdings Inc. |
(d) | Automobiles & Components | L+500 | 1.5 | % | 7/29/17 | 1,344 | 1,325 | 1,335 | |||||||||||||||
Harlan Sprague Dawley, Inc. |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | L+550 | 7/11/14 | 1,276 | 1,154 | 1,148 | |||||||||||||||||
HBC Solutions, Inc. |
(d)(f)(g)(h) | Media | L+875 | 1.5 | % | 2/4/18 | 81,371 | 81,371 | 81,371 | |||||||||||||||
Ikaria Acquisition Inc. |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | L+600 | 1.3 | % | 7/3/18 | 5,798 | 5,718 | 5,841 | |||||||||||||||
ILC Industries, LLC |
(d)(h) | Capital Goods | L+650 | 1.5 | % | 7/11/18 | 9,746 | 9,592 | 9,770 | |||||||||||||||
Infiltrator Systems, Inc. |
(f) | Capital Goods | L+825 | 1.3 | % | 6/27/18 | 30,000 | 30,000 | 30,150 | |||||||||||||||
Infiltrator Systems, Inc. |
(f)(g)(h) | Capital Goods | L+825 | 1.3 | % | 6/27/18 | 170,000 | 170,000 | 170,850 | |||||||||||||||
Infogroup Inc. |
(d) | Software & Services | L+650 | 1.5 | % | 5/25/18 | 3,004 | 2,699 | 2,456 | |||||||||||||||
Insight Equity A.P. X, L.P. |
(f)(g)(h) | Household & Personal Products | L+850 | 1.0 | % | 10/26/18 | 65,000 | 63,934 | 66,300 | |||||||||||||||
Intralinks, Inc. |
(f)(j) | Software & Services | L+450 | 1.5 | % | 6/15/14 | 1,022 | 989 | 1,022 | |||||||||||||||
inVentiv Health, Inc. |
(e) | Health Care Equipment & Services | L+625 | 1.5 | % | 5/15/18 | 2,725 | 2,708 | 2,702 | |||||||||||||||
Lantiq Deutschland GmbH |
(f)(j) | Software & Services | L+900 | 2.0 | % | 11/16/15 | 12,105 | 11,519 | 11,742 | |||||||||||||||
Larchmont Resources, LLC |
(d) | Energy | L+725 | 1.0 | % | 8/7/19 | 11,087 | 10,982 | 11,294 | |||||||||||||||
Leading Edge Aviation Services, Inc. |
(d)(f)(g)(h) | Capital Goods | L+850 | 1.5 | % | 4/5/18 | 35,787 | 35,206 | 35,787 | |||||||||||||||
Leading Edge Aviation Services, Inc. |
(f)(g) | Capital Goods | L+850 | 1.5 | % | 4/5/18 | 8,250 | 8,250 | 8,250 | |||||||||||||||
Leedsworld Inc. |
(d) | Retailing | L+475 | 1.3 | % | 6/28/19 | 9,750 | 9,661 | 9,787 | |||||||||||||||
Maritime Telecommunications Network, Inc. |
(f) | Telecommunication Services | L+600 | 1.5 | % | 3/4/16 | 4,109 | 4,080 | 3,575 | |||||||||||||||
McGraw-Hill Global Education Holdings, LLC |
(d)(e) | Media | L+775 | 1.3 | % | 3/22/19 | 18,594 | 18,089 | 18,969 | |||||||||||||||
MetoKote Corp. |
(h) | Materials | L+800 | 1.3 | % | 9/30/19 | 20,000 | 20,000 | 20,200 | |||||||||||||||
MetoKote Corp. |
Materials | L+800 | 1.3 | % | 9/30/19 | 3,810 | 3,810 | 3,848 | ||||||||||||||||
Micronics, Inc. |
(d)(h) | Capital Goods | L+800 | 1.3 | % | 3/28/19 | 22,529 | 22,124 | 22,529 | |||||||||||||||
MMI International Ltd. |
(d)(j) | Technology Hardware & Equipment | L+600 | 1.3 | % | 11/20/18 | 10,612 | 10,323 | 10,340 | |||||||||||||||
MMM Holdings, Inc. |
(h) | Health Care Equipment & Services | L+825 | 1.5 | % | 12/12/17 | 10,040 | 9,877 | 10,120 | |||||||||||||||
MModal Inc. |
(d) | Health Care Equipment & Services | L+650 | 1.3 | % | 8/16/19 | 7,182 | 7,070 | 6,190 | |||||||||||||||
Mood Media Corp. |
(d)(j) | Media | L+550 | 1.5 | % | 5/7/18 | 3,014 | 2,990 | 3,028 | |||||||||||||||
MSO of Puerto Rico, Inc. |
(h) | Health Care Equipment & Services | L+825 | 1.5 | % | 12/12/17 | 7,302 | 7,184 | 7,360 | |||||||||||||||
National Mentor Holdings, Inc. |
(d) | Health Care Equipment & Services | L+525 | 1.3 | % | 2/9/17 | 4,929 | 4,929 | 4,970 | |||||||||||||||
National Vision, Inc. |
(d) | Health Care Equipment & Services | L+575 | 1.3 | % | 8/2/18 | 4,672 | 4,680 | 4,686 |
See notes to unaudited consolidated financial statements.
F-15
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
New HB Acquisition, LLC |
(d) | Food, Beverage & Tobacco | L+550 | 1.3 | % | 4/9/20 | $ | 3,896 | $ | 3,860 | $ | 4,042 | ||||||||||||
Nova Wildcat Amerock, LLC |
(h) | Consumer Durables & Apparel | L+825 | 1.3 | % | 9/10/19 | 20,000 | 20,000 | 20,000 | |||||||||||||||
Panda Sherman Power, LLC |
(d)(f) | Energy | L+750 | 1.5 | % | 9/14/18 | 9,273 | 9,203 | 9,551 | |||||||||||||||
Panda Temple Power, LLC (TLA) |
(f) | Energy | L+700 | 1.5 | % | 7/17/18 | 3,000 | 3,000 | 3,081 | |||||||||||||||
Patheon Inc. |
(d)(j) | Pharmaceuticals, Biotechnology & Life Sciences | L+600 | 1.3 | % | 12/14/18 | 10,156 | 9,892 | 10,275 | |||||||||||||||
Princeton Review, Inc. |
(g) | Consumer Services | L+550 | 1.5 | % | 12/7/14 | 1,041 | 996 | 859 | |||||||||||||||
PRV Aerospace, LLC |
(d) | Capital Goods | L+525 | 1.3 | % | 5/9/18 | 4,939 | 4,929 | 4,961 | |||||||||||||||
RBS Holding Co. LLC |
(d) | Commercial & Professional Services | L+800 | 1.5 | % | 3/23/17 | 9,788 | 6,198 | 4,943 | |||||||||||||||
Reddy Ice Holdings, Inc. |
(d) | Food & Staples Retailing | L+550 | 1.3 | % | 5/1/19 | 1,182 | 1,170 | 1,181 | |||||||||||||||
Safariland, LLC |
(d)(f)(h) | Capital Goods | L+800 | 1.3 | % | 9/20/19 | 156,800 | 156,800 | 158,368 | |||||||||||||||
Shell Topco L.P. |
(d)(h) | Energy | L+750 | 1.5 | % | 9/28/18 | 33,000 | 32,594 | 33,908 | |||||||||||||||
Sirius Computer Solutions, Inc. |
(d) | Software & Services | L+575 | 1.3 | % | 12/7/18 | 8,096 | 8,027 | 8,228 | |||||||||||||||
Smarte Carte, Inc. |
(d)(f)(h) | Commercial & Professional Services | L+650 | 1.3 | % | 11/30/17 | 57,950 | 57,403 | 58,819 | |||||||||||||||
Smile Brands Group Inc. |
(d)(e)(h) | Health Care Equipment & Services | L+625 | 1.3 | % | 8/15/19 | 30,474 | 29,825 | 30,131 | |||||||||||||||
Sorenson Communication, Inc. |
(d)(e)(f)(h) | Telecommunication Services | L+825 | 1.3 | % | 10/31/14 | 65,711 | 65,711 | 66,697 | |||||||||||||||
Sports Authority, Inc. |
(d)(f) | Consumer Durables & Apparel | L+600 | 1.5 | % | 11/16/17 | 22,190 | 22,041 | 22,162 | |||||||||||||||
Stallion Oilfield Holdings, Inc. |
(d) | Energy | L+675 | 1.3 | % | 6/19/18 | 4,975 | 4,929 | 5,087 | |||||||||||||||
Swiss Watch International, Inc. |
(d)(f)(h) | Consumer Durables & Apparel | L+725 | 1.3 | % | 11/8/18 | 48,500 | 47,692 | 48,985 | |||||||||||||||
Technicolor SA |
(d)(e)(j) | Media | L+600 | 1.3 | % | 7/10/20 | 33,885 | 32,921 | 34,254 | |||||||||||||||
Tervita Corp. |
(d)(j) | Commercial & Professional Services | L+500 | 1.3 | % | 5/15/18 | 8,035 | 7,965 | 8,083 | |||||||||||||||
Therakos, Inc. |
(d)(f) | Pharmaceuticals, Biotechnology & Life Sciences | L+625 | 1.3 | % | 12/27/17 | 27,060 | 26,494 | 27,162 | |||||||||||||||
ThermaSys Corp. |
(d) | Capital Goods | L+400 | 1.3 | % | 5/3/19 | 9,875 | 9,785 | 9,768 | |||||||||||||||
Totes Isotoner Corp. |
(d) | Consumer Durables & Apparel | L+575 | 1.5 | % | 7/7/17 | 6,622 | 6,546 | 6,660 | |||||||||||||||
Toys R Us-Delaware, Inc. |
(e) | Consumer Durables & Apparel | L+450 | 1.5 | % | 9/1/16 | 1,520 | 1,524 | 1,379 | |||||||||||||||
TravelCLICK, Inc. |
(d) | Consumer Services | L+450 | 1.3 | % | 3/16/16 | 7,776 | 7,712 | 7,854 | |||||||||||||||
Tri-Northern Acquisition, Inc. |
(f)(h) | Retailing | L+800 | 1.3 | % | 7/1/19 | 54,725 | 54,725 | 54,725 | |||||||||||||||
Tri-Northern Acquisition, Inc. |
(f) | Retailing | L+800 | 1.3 | % | 7/1/19 | 11,379 | 11,379 | 11,379 | |||||||||||||||
Virtual Radiologic Corp. |
(g) | Health Care Equipment & Services | L+550 | 1.8 | % | 12/22/16 | 3,492 | 3,446 | 2,060 | |||||||||||||||
VPG Group Holdings LLC |
(d)(f)(h) | Materials | L+900 | 1.0 | % | 10/4/16 | 64,070 | 63,409 | 65,031 |
See notes to unaudited consolidated financial statements.
F-16
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Willbros Group, Inc. |
(h)(j) | Energy | L+975 | 1.3 | % | 8/5/19 | $ | 15,960 | $ | 15,422 | $ | 16,199 | ||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansFirst Lien |
2,128,667 | 2,172,047 | ||||||||||||||||||||||
Unfunded Loan Commitments |
(48,439 | ) | (48,439 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Senior Secured LoansFirst Lien |
2,080,228 | 2,123,608 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Senior Secured LoansSecond Lien34.0% |
||||||||||||||||||||||||
Advance Pierre Foods, Inc. |
(e)(f)(g) | Food & Staples Retailing | L+825 | 1.3 | % | 10/10/17 | 22,556 | 22,250 | 21,879 | |||||||||||||||
Advantage Sales & Marketing Inc. |
(e) | Commercial & Professional Services | L+725 | 1.0 | % | 6/12/18 | 14,844 | 14,844 | 15,081 | |||||||||||||||
Affordable Care, Inc. |
(d)(f)(g)(h) | Health Care Equipment & Services | L+925 | 1.3 | % | 12/26/19 | 40,000 | 39,493 | 40,200 | |||||||||||||||
Alliance Laundry Systems LLC |
Capital Goods | L+825 | 1.3 | % | 12/10/19 | 2,012 | 1,994 | 2,041 | ||||||||||||||||
American EnergyUtica, LLC |
(f) | Energy | L+475, 4.75% PIK | 1.5 | % | 9/30/18 | 75,689 | 75,689 | 75,689 | |||||||||||||||
American Racing and Entertainment, LLC |
(g) | Consumer Services | 12.0% | 7/1/18 | 16,800 | 16,299 | 16,821 | |||||||||||||||||
Attachmate Corp. |
(e)(f)(i) | Software & Services | L+950 | 1.5 | % | 11/22/18 | 31,218 | 30,464 | 30,646 | |||||||||||||||
Audio Visual Services Group, Inc. |
(d)(f)(g) | Technology Hardware & Equipment | L+950 | 1.3 | % | 5/9/18 | 52,885 | 51,962 | 54,603 | |||||||||||||||
Brasa (Holdings) Inc. |
(f) | Consumer Services | L+950 | 1.5 | % | 1/20/20 | 11,180 | 10,813 | 11,292 | |||||||||||||||
Brock Holdings III, Inc. |
(e)(g) | Energy | L+825 | 1.8 | % | 3/16/18 | 7,756 | 7,678 | 7,902 | |||||||||||||||
Camp International Holding Co. |
(d) | Capital Goods | L+725 | 1.0 | % | 11/29/19 | 6,207 | 6,301 | 6,343 | |||||||||||||||
CHG Buyer Corp. |
(d) | Health Care Equipment & Services | L+775 | 1.3 | % | 11/19/20 | 5,158 | 5,065 | 5,248 | |||||||||||||||
Consolidated Precision Products Corp. |
(f) | Capital Goods | L+775 | 1.0 | % | 4/30/21 | 16,750 | 16,669 | 17,085 | |||||||||||||||
Crossmark Holdings, Inc. |
Commercial & Professional Services | L+750 | 1.3 | % | 12/21/20 | 7,778 | 7,707 | 7,749 | ||||||||||||||||
DEI Sales, Inc. |
(f)(g) | Commercial & Professional Services | L+900 | 1.5 | % | 1/15/18 | 57,500 | 56,850 | 57,284 | |||||||||||||||
Eastman Kodak Co. |
(f) | Consumer Durables & Apparel | L+950 | 1.3 | % | 9/3/20 | 50,000 | 48,791 | 50,438 | |||||||||||||||
EZE Software Group LLC |
(e) | Software & Services | L+725 | 1.3 | % | 4/5/21 | 2,381 | 2,359 | 2,427 | |||||||||||||||
Fram Group Holdings Inc. |
(e) | Automobiles & Components | L+900 | 1.5 | % | 1/29/18 | 2,000 | 1,993 | 1,907 | |||||||||||||||
ILC Industries, LLC |
(f)(g) | Capital Goods | L+1000 | 1.5 | % | 7/11/19 | 27,976 | 27,085 | 26,857 | |||||||||||||||
Keystone Automotive Operations, Inc. |
(f) | Automobiles & Components | L+950 | 1.3 | % | 8/15/20 | 44,500 | 43,644 | 46,169 | |||||||||||||||
Kronos Inc. |
(e)(f) | Software & Services | L+850 | 1.3 | % | 4/30/20 | 27,290 | 27,042 | 28,297 | |||||||||||||||
LM U.S. Member LLC |
(g) | Transportation | L+825 | 1.3 | % | 10/26/20 | 9,375 | 9,248 | 9,510 | |||||||||||||||
Mitchell International, Inc. |
(g) | Software & Services | L+750 | 1.0 | % | 10/11/21 | 15,000 | 14,854 | 15,258 | |||||||||||||||
OSP Group, Inc. |
(d)(f)(g)(h) | Consumer Durables & Apparel | L+850 | 1.3 | % | 7/31/20 | 105,000 | 105,000 | 106,575 | |||||||||||||||
P2 Upstream Acquisition Co. |
(g) | Energy | L+800 | 1.0 | % | 5/1/20 | 4,091 | 4,051 | 4,173 | |||||||||||||||
Paw Luxco II Sarl |
(j) | Consumer Durables & Apparel | EURIBOR+950 | 1/29/19 | | 20,000 | 24,230 | 24,882 | ||||||||||||||||
Pelican Products, Inc. |
(d) | Capital Goods | L+1000 | 1.5 | % | 6/14/19 | $ | 6,667 | 6,555 | 6,700 | ||||||||||||||
Pregis Corp. |
(f)(g) | Capital Goods | L+1000 | 1.5 | % | 3/23/18 | 50,000 | 49,283 | 50,250 | |||||||||||||||
Ranpak Corp. |
(g) | Commercial & Professional Services | L+725 | 1.3 | % | 4/23/20 | 11,324 | 11,218 | 11,663 |
See notes to unaudited consolidated financial statements.
F-17
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Sensus USA Inc. |
(d)(e) | Capital Goods | L+725 | 1.3 | % | 5/9/18 | $ | 8,571 | $ | 8,576 | $ | 8,571 | ||||||||||||
SESAC Holdings Inc. |
(f) | Media | L+875 | 1.3 | % | 7/12/19 | 3,000 | 2,961 | 3,075 | |||||||||||||||
Stadium Management Corp. |
(f) | Consumer Services | L+950 | 1.3 | % | 12/7/18 | 23,529 | 23,163 | 23,647 | |||||||||||||||
TNT Crane & Rigging, Inc. |
Energy | L+900 | 1.0 | % | 11/27/21 | 1,500 | 1,381 | 1,448 | ||||||||||||||||
TravelCLICK, Inc. |
(f)(g) | Consumer Services | L+850 | 1.3 | % | 3/26/18 | 34,925 | 34,620 | 35,973 | |||||||||||||||
Travelport LLC |
(g) | Consumer Services | 4.0%, 4.4% PIK | 12/1/16 | 24,036 | 20,167 | 24,546 | |||||||||||||||||
TriZetto Group, Inc. |
(g) | Software & Services | L+725 | 1.3 | % | 3/28/19 | 8,372 | 8,265 | 8,037 | |||||||||||||||
Vertafore, Inc. |
(e) | Software & Services | L+825 | 1.5 | % | 10/27/17 | 14,750 | 14,711 | 15,027 | |||||||||||||||
Wall Street Systems Holdings, Inc. |
(d) | Software & Services | L+800 | 1.3 | % | 10/25/20 | 7,000 | 6,878 | 7,068 | |||||||||||||||
WildHorse Resources, LLC |
(f) | Energy | L+625 | 1.3 | % | 12/13/18 | 15,407 | 15,123 | 15,484 | |||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansSecond Lien |
875,276 | 897,845 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Senior Secured Bonds14.6% |
||||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(f)(g) | Materials | 10.5% | 6/1/19 | 78,500 | 76,913 | 56,520 | |||||||||||||||||
Allen Systems Group, Inc. |
(f)(g) | Software & Services | 10.5% | 11/15/16 | 38,448 | 30,409 | 21,723 | |||||||||||||||||
Aspect Software, Inc. |
(e) | Software & Services | 10.6% | 5/15/17 | 4,000 | 4,000 | 4,075 | |||||||||||||||||
Avaya Inc. |
(e)(f)(g) | Technology Hardware & Equipment | 7.0% | 4/1/19 | 23,500 | 22,008 | 23,148 | |||||||||||||||||
Avaya Inc. |
(e) | Technology Hardware & Equipment | 9.0% | 4/1/19 | 5,000 | 5,000 | 5,250 | |||||||||||||||||
Blackboard Inc. |
Software & Services | 7.8% | 11/15/19 | 6,500 | 6,500 | 6,486 | ||||||||||||||||||
Caesars Entertainment Operating Co. |
(f)(i)(j) | Consumer Services | 9.0% | 2/15/20 | 20,000 | 19,066 | 19,481 | |||||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(e)(f) | Consumer Services | 11.0% | 10/1/21 | 54,598 | 54,288 | 56,398 | |||||||||||||||||
Chassix, Inc. |
Automobiles & Components | 9.3% | 8/1/18 | 2,000 | 2,067 | 2,140 | ||||||||||||||||||
Clear Channel Communications, Inc. |
(d)(e) | Media | 9.0% | 12/15/19 | 1,152 | 989 | 1,182 | |||||||||||||||||
Dole Food Co., Inc. |
(g) | Food & Staples Retailing | 7.3% | 5/1/19 | 6,400 | 6,400 | 6,424 | |||||||||||||||||
FairPoint Communications, Inc. |
(f)(j) | Telecommunication Services | 8.8% | 8/15/19 | 19,750 | 19,750 | 20,984 | |||||||||||||||||
Global A&T Electronics Ltd. |
(j) | Technology Hardware & Equipment | 10.0% | 2/1/19 | 9,000 | 9,000 | 7,920 | |||||||||||||||||
HOA Restaurant Group, LLC |
(f) | Consumer Services | 11.3% | 4/1/17 | 14,100 | 14,109 | 14,805 | |||||||||||||||||
JW Aluminum Co. |
(f)(g) | Materials | 11.5% | 11/15/17 | 47,980 | 47,336 | 47,920 | |||||||||||||||||
Kinetic Concepts, Inc. |
(f) | Health Care Equipment & Services | 10.5% | 11/1/18 | 11,660 | 11,146 | 13,465 | |||||||||||||||||
Logans Roadhouse Inc. |
(e)(g) | Consumer Services | 10.8% | 10/15/17 | 18,494 | 16,084 | 13,843 | |||||||||||||||||
Neff Rental LLC |
(f) | Capital Goods | 9.6% | 5/15/16 | 7,352 | 7,597 | 7,793 | |||||||||||||||||
Ryerson Inc. |
(e) | Capital Goods | 9.0% | 10/15/17 | 3,100 | 3,100 | 3,294 | |||||||||||||||||
Sorenson Communication, Inc. |
(g) | Telecommunication Services | 10.5% | 2/1/15 | 39,000 | 35,991 | 29,171 | |||||||||||||||||
Speedy Cash Intermediate Holdings Corp. |
(f) | Diversified Financials | 10.8% | 5/15/18 | 19,000 | 19,294 | 20,170 |
See notes to unaudited consolidated financial statements.
F-18
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Tervita Corp. |
(e)(j) | Commercial & Professional Services | 8.0% | 11/15/18 | $ | 3,250 | $ | 3,250 | $ | 3,356 | ||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured Bonds |
414,297 | 385,548 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Subordinated Debt16.2% |
||||||||||||||||||||||||
Alta Mesa Holdings, L.P. |
(e) | Energy | 9.6% | 10/15/18 | 11,700 | 11,598 | 12,572 | |||||||||||||||||
Asurion, LLC |
(f) | Insurance | L+950 | 1.5 | % | 8/16/19 | 15,000 | 14,629 | 15,488 | |||||||||||||||
Aurora Diagnostics, LLC |
(f)(g) | Pharmaceuticals, Biotechnology & Life Sciences | 10.8% | 1/15/18 | 18,065 | 18,109 | 13,368 | |||||||||||||||||
Brand Energy & Infrastructure Services, Inc. |
(g) | Energy | 8.5% | 12/1/21 | 25,000 | 25,000 | 25,500 | |||||||||||||||||
Comstock Resources, Inc. |
(f)(j) | Energy | 9.5% | 6/15/20 | 10,500 | 10,075 | 11,780 | |||||||||||||||||
CrownRock, L.P. |
(e)(f) | Energy | 7.1% | 4/15/21 | 25,000 | 25,000 | 24,856 | |||||||||||||||||
Cumulus Media Inc. |
(f)(j) | Media | 7.8% | 5/1/19 | 5,000 | 4,518 | 5,313 | |||||||||||||||||
Exopack Holdings S.A. |
(g)(j) | Materials | 7.9% | 11/1/19 | 2,500 | 2,500 | 2,500 | |||||||||||||||||
Flanders Corp. |
(f)(g) | Capital Goods | 10.0%, 3.8% PIK | 5/14/18 | 15,818 | 15,661 | 16,193 | |||||||||||||||||
Harland Clarke Holdings Corp. |
(g) | Commercial & Professional Services | 9.5% | 5/15/15 | 2,193 | 2,060 | 2,202 | |||||||||||||||||
Hub International Ltd. |
(e) | Insurance | 7.9% | 10/1/21 | 2,250 | 2,250 | 2,326 | |||||||||||||||||
Ipreo Holdings LLC |
(f) | Software & Services | 11.8% | 8/15/18 | 10,000 | 9,966 | 10,513 | |||||||||||||||||
Kinetic Concepts, Inc. |
(e)(f)(g) | Health Care Equipment & Services | 12.5% | 11/1/19 | 24,700 | 23,586 | 27,849 | |||||||||||||||||
KODA Distribution Group, Inc. |
(f) | Materials | 11.3% | 9/30/19 | 32,500 | 31,877 | 32,825 | |||||||||||||||||
Monitronics International, Inc. |
(e)(j) | Consumer Services | 9.1% | 4/1/20 | 2,250 | 2,250 | 2,396 | |||||||||||||||||
Mood Media Corp. |
(e)(f)(g)(j) | Media | 9.3% | 10/15/20 | 31,400 | 30,632 | 27,632 | |||||||||||||||||
QR Energy, L.P. |
(e)(j) | Energy | 9.3% | 8/1/20 | 3,250 | 3,210 | 3,385 | |||||||||||||||||
Resolute Energy Corp. |
(e)(j) | Energy | 8.5% | 5/1/20 | 8,500 | 8,589 | 8,948 | |||||||||||||||||
RKI Exploration & Production, LLC |
(e) | Energy | 8.5% | 8/1/21 | 10,900 | 10,900 | 11,538 | |||||||||||||||||
Samson Investment Co. |
(f) | Energy | 9.8% | 2/15/20 | 10,000 | 10,000 | 10,929 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC |
(g) | Energy | 12.0%, 2.5% PIK | 5/10/18 | 15,792 | 15,551 | 16,187 | |||||||||||||||||
Sidewinder Drilling Inc. |
(f)(g) | Capital Goods | 9.8% | 11/15/19 | 8,000 | 8,000 | 7,080 | |||||||||||||||||
ThermaSys Corp. |
(f)(g) | Capital Goods | 9.0%, 1.8% PIK | 5/3/20 | 130,956 | 130,956 | 130,301 | |||||||||||||||||
VPG Group Holdings LLC |
(f) | Materials | 11.0%, 2.0% PIK | 7/15/19 | 5,047 | 5,047 | 5,047 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Subordinated Debt |
421,964 | 426,728 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Collateralized Securities5.3% |
||||||||||||||||||||||||
ACASC 2013-2A B |
(g)(j) | Diversified Financials | 12.6% | 10/15/23 | 30,500 | 30,019 | 30,896 | |||||||||||||||||
Apidos CDO IV Class E |
(g)(j) | Diversified Financials | L+360 | 10/27/18 | 2,000 | 1,301 | 1,908 | |||||||||||||||||
Ares 2007 CLO 11A Class E |
(g)(j) | Diversified Financials | L+600 | 10/11/21 | 4,775 | 3,327 | 4,760 | |||||||||||||||||
Ares 2007 CLO 12X Class E |
(g)(j) | Diversified Financials | L+575 | 11/25/20 | 2,252 | 1,863 | 2,219 |
See notes to unaudited consolidated financial statements.
F-19
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Carlyle Azure CLO Class Income |
(j) | Diversified Financials | 18.9% | 5/27/20 | $ | 28,000 | $ | 11,436 | $ | 14,276 | ||||||||||||
Dryden CDO 23A Class Subord. |
(j) | Diversified Financials | 17.5% | 7/17/23 | 10,000 | 6,428 | 8,066 | |||||||||||||||
JP Morgan Chase Bank, N.A. Credit-Linked Notes |
(g)(j) | Diversified Financials | 11.2% | 12/20/21 | 16,740 | 16,710 | 16,740 | |||||||||||||||
Lightpoint CLO 2006 V Class D |
(g)(j) | Diversified Financials | L+365 | 8/5/19 | 6,500 | 3,758 | 6,054 | |||||||||||||||
Rampart CLO 2007 1A Class Subord. |
(j) | Diversified Financials | 40.3% | 10/25/21 | 10,000 | 3,676 | 7,404 | |||||||||||||||
Stone Tower CLO VI Class Subord. |
(g)(j) | Diversified Financials | 39.8% | 4/17/21 | 5,000 | 3,030 | 5,230 | |||||||||||||||
Wind River CLO Ltd. 2012 1A Class Sub B |
(j) | Diversified Financials | 13.5% | 1/15/24 | 42,504 | 38,658 | 42,955 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
120,206 | 140,508 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Equity/Other6.2%(k) |
||||||||||||||||||||||
American Energy Ohio Holdings, LLC, Common Equity |
(l)(m) | Energy | 5,070,590 | 5,071 | 5,071 | |||||||||||||||||
Aquilex Corp., Common Equity, Class A Shares |
(f) | Energy | 15,128 | 1,087 | 3,333 | |||||||||||||||||
Aquilex Corp., Common Equity, Class B Shares |
(f)(g) | Energy | 32,637 | 1,690 | 7,190 | |||||||||||||||||
Burleigh Point, Ltd., Warrants |
(j)(l) | Retailing | 17,256,081 | 1,898 | 4,659 | |||||||||||||||||
CoSentry.Net, LLC, Preferred Equity |
(g)(l) | Software & Services | 2,632 | 2,500 | 2,500 | |||||||||||||||||
Eastman Kodak Co., Common Equity |
(f)(l) | Consumer Durables & Apparel | 61,859 | 1,202 | 2,147 | |||||||||||||||||
ERC Ireland Holdings Ltd., Common Equity |
(g)(j)(l) | Telecommunication Services | 21,099 | | | |||||||||||||||||
ERC Ireland Holdings Ltd., Warrants |
(g)(j)(l) | Telecommunication Services | 4,943 | | | |||||||||||||||||
Flanders Corp., Common Equity |
(g)(l) | Capital Goods | 5,000,000 | 5,000 | 9,500 | |||||||||||||||||
Florida Gaming Centers, Inc., Warrants |
(g)(l) | Consumer Services | 71 | | 2,979 | |||||||||||||||||
Florida Gaming Corp., Warrants |
(g)(l) | Consumer Services | 226,635 | | | |||||||||||||||||
HBC Solutions, Inc., Common Equity, Class A Units |
(l) | Media | 26,984 | 3,051 | 2,855 | |||||||||||||||||
Ipreo Holdings LLC, Common Equity |
(g)(l) | Software & Services | 1,000,000 | 1,000 | 2,100 | |||||||||||||||||
JW Aluminum Co., Common Equity |
(g)(l) | Materials | 37,500 | 3,225 | | |||||||||||||||||
Leading Edge Aviation Services, Inc., Common Equity |
(g)(l) | Capital Goods | 4,401 | 464 | 924 | |||||||||||||||||
Leading Edge Aviation Services, Inc., Preferred Equity |
(g)(l) | Capital Goods | 1,303 | 1,303 | 1,303 | |||||||||||||||||
Micronics, Inc., Common Equity |
(l) | Capital Goods | 50,000 | 500 | 520 | |||||||||||||||||
Micronics, Inc., Preferred Equity |
(l) | Capital Goods | 50 | 500 | 500 | |||||||||||||||||
Milagro Holdings, LLC, Common Equity |
(g)(l) | Energy | 12,057 | 50 | | |||||||||||||||||
Milagro Holdings, LLC, Preferred Equity |
(l) | Energy | 283,947 | 11,180 | 2,104 |
See notes to unaudited consolidated financial statements.
F-20
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Plains Offshore Operations Inc., Preferred Equity |
(f)(g) | Energy | $ | 50,000 | $ | 55,404 | $ | 62,630 | ||||||||||||||
Plains Offshore Operations Inc., Warrants |
(f)(g)(l) | Energy | 1,013,444 | 1,722 | 2,635 | |||||||||||||||||
Safariland, LLC, Common Equity |
(g)(l) | Capital Goods | 25,000 | 2,500 | 5,303 | |||||||||||||||||
Safariland, LLC, Preferred Equity |
(g) | Capital Goods | 1,021 | 20,881 | 20,843 | |||||||||||||||||
Safariland, LLC, Warrants |
(g)(l) | Capital Goods | 2,263 | 473 | 962 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Common Equity |
(g)(l) | Energy | 3,330,600 | 3,400 | 6,661 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Preferred Equity |
(g)(l) | Energy | 8,000,000 | 9,180 | 9,190 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Warrants |
(g)(l) | Energy | 20,681 | 13 | 41 | |||||||||||||||||
ThermaSys Corp., Common Equity |
(g)(l) | Capital Goods | 51,813 | 1 | | |||||||||||||||||
ThermaSys Corp., Preferred Equity |
(g) | Capital Goods | 51,813 | 5,181 | 3,756 | |||||||||||||||||
VPG Group Holdings LLC, Class A-2 Units |
(g)(l) | Materials | 2,500,000 | 3,638 | 3,638 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Equity/Other |
142,114 | 163,344 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
TOTAL INVESTMENTS156.7% |
$ | 4,054,085 | 4,137,581 | |||||||||||||||||||
|
|
|||||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(56.7%) |
(1,496,589 | ) | ||||||||||||||||||||
|
|
|||||||||||||||||||||
NET ASSETS100.0% |
$ | 2,640,992 | ||||||||||||||||||||
|
|
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Fair value determined by the Companys board of directors (see Note 7). |
(d) | Security or portion thereof held within Arch Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8). |
(e) | Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8). |
(f) | Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(g) | Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
See notes to unaudited consolidated financial statements.
F-21
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
(h) | Security or portion thereof held within Walnut Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8). |
(i) | Position or portion thereof unsettled as of December 31, 2013. |
(j) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. As of December 31, 2013, 84.4% of the Companys total assets represented qualifying assets. |
(k) | Listed investments may be treated as debt for GAAP or tax purposes. |
(l) | Security is non-income producing. |
(m) | Security held within IC American Energy Investments, Inc., a wholly-owned subsidiary of the Company. |
See notes to unaudited consolidated financial statements.
F-22
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Investment Corporation, or the Company, was incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and formally commenced operations on January 2, 2009. The Company 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. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of March 31, 2014, the Company had five wholly-owned financing subsidiaries and two wholly-owned subsidiaries through which it holds equity interests in non-controlled and non-affiliated portfolio companies. The consolidated financial statements include both the Companys accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2014. All significant intercompany transactions have been eliminated in consolidation.
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 through secondary market transactions in the over-the-counter market for institutional loans or directly from its target companies as primary market 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, 2013 included in the Companys annual report on Form 10-K for the year ended December 31, 2013. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The December 31, 2013 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, 2013. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the 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.
F-23
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)
Capital Gains Incentive Fee: At the Companys 2013 annual meeting of stockholders, the Company received stockholder approval to amend and restate the investment advisory and administrative services agreement, dated February 12, 2008 (as amended on August 5, 2008), or the investment advisory and administrative services agreement, by and between the Company and FB Income Advisor, LLC, or FB Advisor, effective upon a listing of the Companys shares of common stock on a national securities exchange. The Companys shares of common stock were listed and commenced trading on the New York Stock Exchange LLC, or the NYSE, on April 16, 2014. On April 16, 2014, the Company entered into an amended and restated investment advisory agreement, or the amended investment advisory agreement, with FB Advisor. Also 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 that had previously been addressed in the investment advisory and administrative services agreement. Because the amended investment advisory agreement and the administration agreement did not become effective until April 16, 2014, the investment advisory and administrative services agreement was the operative agreement between the Company and FB Advisor during the three months ended March 31, 2014.
Pursuant to the terms of both the investment advisory and administrative services agreement and the amended investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 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 and administrative services agreement and the amended investment advisory agreement neither include nor contemplate 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, commencing during the quarter ended December 31, 2010, the Company changed its methodology for accruing for this incentive fee to include 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 both the investment advisory and administrative services agreement and the amended 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 and administrative services agreement, which was calculated and payable quarterly in arrears, equaled 20.0% of pre-incentive fee net investment income for the immediately preceding quarter and was subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor would 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 2.0%. Once the Companys pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor would be entitled to a catch-up fee equal to the amount of the pre-incentive
F-24
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)
fee net investment income in excess of the hurdle rate, until the Companys pre-incentive fee net investment income for such quarter equals 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor would receive 20.0% of pre-incentive fee net investment income. Under the amended investment advisory agreement, the subordinated incentive fee on income is calculated in the same manner, except that the hurdle rate used to compute the subordinated incentive fee on income is based on the net asset value of the Companys assets rather than adjusted capital.
Under the amended investment advisory agreement, 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 2.0% hurdle, 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 quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.
FB Advisor has recommended that the amended investment advisory agreement be further amended to reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on the Companys net assets, from 8.0% to 7.5%. The Companys board of directors has approved this amendment, and the Company plans to call a special meeting of stockholders of the Company scheduled for June 23, 2014, at which stockholders will be asked to vote on the proposal to amend the amended investment advisory agreement to, among other things, so reduce the annualized hurdle rate.
Reclassifications: Certain amounts in the unaudited consolidated financial statements for the three months ended March 31, 2013 have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three months ended March 31, 2014. These reclassifications had no material impact on the Companys consolidated financial position, results of operations or cash flows as previously reported.
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Companys common stock during the three months ended March 31, 2014 and 2013:
Three Months Ended March 31, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Reinvestment of Distributions |
2,854,659 | $ | 29,257 | 2,638,800 | $ | 26,476 | ||||||||||
Share Repurchase Program |
(872,865 | ) | (8,903 | ) | (883,047 | ) | (8,830 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Proceeds from Share Transactions |
1,981,794 | $ | 20,354 | 1,755,753 | $ | 17,646 | ||||||||||
|
|
|
|
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|
F-25
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
During the three months ended March 31, 2014 and 2013, the Company issued 2,854,659 and 2,638,800 shares of common stock pursuant to its distribution reinvestment plan for gross proceeds of $29,257 and $26,476 at an average price per share of $10.25 and $10.03, respectively. During the period from April 1, 2014 to May 14, 2014, the Company issued 949,685 shares of common stock pursuant to its distribution reinvestment plan for gross proceeds of $9,783 at a price per share of $10.30.
In connection with the listing of its shares of common stock on the NYSE on April 16, 2014, the Company terminated its distribution reinvestment plan.
Listing and Fractional Shares
The Companys shares of common stock were listed and commenced trading on the NYSE on April 16, 2014. The Company eliminated any outstanding fractional shares of its common stock in connection with the listing, as permitted by the Maryland General Corporation Law. The Company eliminated all outstanding fractional shares by rounding up the number of fractional shares held by each of the Companys stockholders to the nearest whole number of shares as of April 4, 2014. As a result of the fractional share round up, the number of outstanding shares was increased by 30,533 shares.
Share Repurchase Program
Historically, the Company conducted quarterly tender offers pursuant to its share repurchase program to provide limited liquidity to its stockholders. In anticipation of the listing of the Companys shares of common stock on the NYSE, the Companys board of directors terminated its share repurchase program effective March 21, 2014. The listing has provided liquidity to the Companys stockholders, and therefore the Company does not expect to implement a new share repurchase program in the future.
The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program during the three months ended March 31, 2014 and 2013:
For the Three Months Ended |
Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares |
|||||||||||||
Fiscal 2013 |
||||||||||||||||||
December 31, 2012 |
January 2, 2013 | 883,047 | 100 | % | $ | 10.00 | $ | 8,830 | ||||||||||
Fiscal 2014 |
||||||||||||||||||
December 31, 2013 |
January 2, 2014 | 872,865 | 100 | % | $ | 10.20 | $ | 8,903 |
Listing Tender Offer
On April 16, 2014, the Company commenced a modified Dutch auction tender offer, or the tender offer, to purchase for cash up to $250,000 in value of its shares of common stock from its stockholders. In accordance with the terms of the tender offer, the Company intends to select the lowest price, not greater than $11.00 per share or less than $10.35 per share, net to the tendering stockholder in cash, less any applicable withholding taxes
F-26
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
and without interest, that will enable the Company to purchase the maximum number of shares of common stock properly tendered in the tender offer and not properly withdrawn having an aggregate purchase price of up to $250,000 or such lesser number if less than $250,000 in value of its shares of common stock are properly tendered in the tender offer after giving effect to any shares of common stock properly withdrawn. The Company expects to use available cash and/or borrowings under its senior secured revolving credit facility with ING Capital LLC, or ING, as administrative agent, and the lenders party thereto, or the ING credit facility, to fund any purchases of its shares of common stock in the tender offer and to pay for all related fees and expenses.
Note 4. Related Party Transactions
Compensation of the Investment Adviser
Pursuant to the investment advisory and administrative services agreement and the amended investment advisory agreement, FB Advisor is entitled to an annual base management fee of 2.0% of the average value of the Companys gross assets and an incentive fee based on the Companys performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on January 2, 2009, upon commencement of the Companys operations. Management fees are paid on a quarterly basis in arrears.
The incentive fee, which had consisted of three parts under the investment advisory and administrative services agreement, now consists of two parts. The first part, which is referred to as the subordinated incentive fee on income is calculated and payable quarterly in arrears, equals 20.0% of pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. 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 2.0%. 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 2.5%, or 10.0% annually. This catch-up feature allows FB Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.
Under the investment advisory and administrative services agreement, the hurdle rate used to compute the subordinated incentive fee on income was based on adjusted capital. Under the amended investment advisory agreement, the hurdle rate used to compute the subordinated incentive fee on income is based on the net asset value of the Companys assets rather than adjusted capital. In addition, under the amended investment advisory agreement, 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. In other words, 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 2.0% hurdle, 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
F-27
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
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 quarterly hurdle rate and there will be no delay of payment if prior quarters are below the 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 amended 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 gain 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, under the terms of the amended investment advisory agreement, 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. The methodology for calculating the capital gains incentive fee under the investment advisory and administrative services agreement was identical to the methodology used to calculate such fee under the amended investment advisory agreement.
The third part of the incentive fee under the investment advisory and administrative services agreement was referred to as the subordinated liquidation incentive fee, which equaled 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation. The amended investment advisory agreement does not include the subordinated liquidation incentive fee.
In anticipation of the listing of the Companys shares of common stock on the NYSE, FB Advisor recommended that the amended investment advisory agreement be further amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on the Companys net assets, from 8% to 7.5% and (ii) assuming the reduction to the hurdle rate is approved, reduce the base management fee from 2.0% to 1.75% of the average value of the Companys gross assets. The Companys board of directors has approved this amendment, and the Company plans to call a special meeting of stockholders of the Company scheduled for June 23, 2014, at which stockholders will be asked to vote on the proposal. Pending stockholder approval of the proposal, FB Advisor has agreed, effective April 1, 2014, to waive a portion of the base management fee to which it is entitled under the amended investment advisory agreement so that the fee received equals 1.75% of the average value of the Companys gross assets. There can be no assurance this waiver will continue in the future.
Pursuant to the investment advisory and administrative services agreement, the Company reimbursed FB Advisor for expenses necessary to perform services related to the Companys administration and operations. The amount of this reimbursement was set at the lesser of (1) FB Advisors actual costs incurred in providing such services and (2) the amount that the Company estimated it would be required to pay alternative service providers for comparable services in the same geographic location. FB Advisor was required to allocate 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 then assessed the reasonableness of such reimbursements 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 providers known to be available. In addition, the Companys board of directors considered 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 compared 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.
F-28
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Pursuant to the administration agreement, FB Advisor will provide administrative services necessary for the operation of the Company, including general ledger accounting, fund accounting, legal services, investor relations and other administrative services. There will be no separate fee paid by the Company to FB Advisor in connection with the services provided under the administration agreement; provided, however, that the Company will reimburse FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities thereunder. FB Advisor will allocate the cost of such services to the Company based on factors such as total assets, revenues, time allocations and/or other reasonable metrics.
The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement during the three months ended March 31, 2014 and 2013:
Three Months Ended March 31, | ||||||||||||
Related Party |
Source Agreement |
Description |
2014 | 2013 | ||||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Base Management Fee(1) |
$ | 22,371 | $ | 22,206 | ||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Capital Gains Incentive Fee(2) |
$ | 4,836 | $ | 6,350 | ||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Subordinated Incentive Fee on Income(3) |
$ | 15,178 | $ | 14,228 | ||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Administrative Services Expenses(4) |
$ | 1,200 | $ | 1,436 |
(1) | During the three months ended March 31, 2014 and 2013, $22,696 and $19,371, respectively, in base management fees were paid to FB Advisor. As of March 31, 2014, $22,375 in base management fees were payable to FB Advisor. |
(2) | During the three months ended March 31, 2014 and 2013, the Company accrued capital gains incentive fees of $4,836 and $6,350, respectively, based on the performance of its portfolio. As of March 31, 2014 and December 31, 2013, the Company had accrued $35,379 and $32,133, respectively, in capital gains incentive fees of which $30,344 and $30,543, respectively, was based on unrealized gains and $5,035 and $1,590, respectively, was based on realized gains. No such fees are actually payable by the Company with respect to such unrealized gains unless and until those gains are actually realized. The Company paid FB Advisor $1,590 in capital gains incentive fees during the three months ended March 31, 2014. |
(3) | During the three months ended March 31, 2014 and 2013, $14,303 and $12,020, respectively, of subordinated incentive fees on income were paid to FB Advisor. As of March 31, 2014, a subordinated incentive fee on income of $15,178 was payable to FB Advisor. |
(4) | During the three months ended March 31, 2014 and 2013, $873 and $1,315, 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 $533 and $838, respectively, in administrative services expenses to FB Advisor during the three months ended March 31, 2014 and 2013. |
F-29
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Potential Conflicts of Interest
FB Advisors senior management team is comprised of the same personnel as the senior management teams of FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings other affiliated BDCs and affiliated closed-end management investment company. As a result, such personnel provide investment advisory services to the Company and each of FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund. While none of FB Advisor, FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC or FS Global Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FB Advisor 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. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and/or FS Global Credit Opportunities Fund rather than to the Company.
Exemptive Relief
In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to 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 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 may not only enhance its ability to further its investment objectives and strategies, but may also increase favorable investment opportunities for the Company, in part by allowing it to participate in larger investments, together with the Companys co-investment affiliates, than would be available to it if it had not obtained such relief. Because the Company did not seek exemptive relief to engage in co-investment transactions with its investment sub-adviser, GSO / Blackstone Debt Funds Management LLC, or GDFM, and its affiliates, it will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Expense Reimbursement
Beginning on February 26, 2009, Franklin Square Holdings agreed to reimburse the Company for expenses in an amount that was sufficient to ensure that, for tax purposes, the Companys net investment income and net capital gains were equal to or greater than the cumulative distributions paid to its stockholders in each quarter. This arrangement was designed to ensure that no portion of the Companys distributions would represent a return of capital for its stockholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of the Companys expenses.
Pursuant to an expense support and conditional reimbursement agreement, dated as of March 13, 2012, and amended and restated as of May 16, 2013, or, as amended and restated, the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to
F-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)
ensure that no portion of the Companys distributions to stockholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Companys distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Companys cumulative distributions paid to its stockholders in each quarter, less the sum of the Companys net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, the Company has a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Companys net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders; provided, however, that (i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense support payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Companys average net assets attributable to its shares of common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Companys average net assets attributable to its shares of common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means the Companys total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
F-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 Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Companys conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
Franklin Square Holdings is controlled by the Companys chairman and chief executive officer, Michael C. Forman, and its vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Companys expenses in future quarters. During the three months ended March 31, 2014 and 2013, no such reimbursements were required from Franklin Square Holdings.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company has declared and paid on its common stock during the three months ended March 31, 2014 and 2013:
Distribution | ||||||||
For the Three Months Ended |
Per Share | Amount | ||||||
Fiscal 2013 |
||||||||
March 31, 2013 |
$ | 0.2025 | $ | 51,184 | ||||
Fiscal 2014 |
||||||||
March 31, 2014 |
$ | 0.2160 | $ | 56,237 |
On March 31, 2014, the Companys board of directors determined to increase the amount of the regular monthly cash distribution payable to stockholders of record from $0.0720 per share to $0.07425 per share in order to increase the Companys annual distribution rate from 8.41% to 8.68% (based on the Companys last publicly reported net asset value per share of $10.27 as of February 28, 2014). The increase in the regular monthly cash distribution to $0.07425 per share commenced with the regular monthly cash distribution payable on April 30, 2014 to stockholders of record as of April 29, 2014. On May 5, 2014, the Companys board of directors declared a regular monthly cash distribution of $0.07425 per share. The regular monthly cash distribution will be paid on or about May 30, 2014 to stockholders of record on May 29, 2014.
The board of directors of the Company intends to declare two special cash distributions, each in the amount of $0.10 per share, that will be paid on or about August 15, 2014 and November 14, 2014 to stockholders of record as of July 31, 2014 and October 31, 2014, respectively. The payment of the two special cash distributions, like all future distributions, is subject to applicable legal restrictions and the sole discretion of the Companys board of directors.
Historically, the Company had an opt in distribution reinvestment plan for its stockholders, which terminated upon the listing of the Companys shares of common stock on the NYSE. Under that plan, if the Company made a cash distribution, its stockholders received distributions in cash unless they specifically opted in to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Companys common stock. The Companys board of directors has approved the implementation of a new distribution reinvestment plan, the terms of which have not yet been finalized. The Company expects the new
F-32
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
distribution reinvestment plan to be implemented in connection with the regular monthly cash distribution in June; however, there can be no assurance as to whether or when a new distribution reinvestment plan will be implemented. Pending the adoption of a new distribution reinvestment plan, stockholders that had elected to participate in the earlier distribution reinvestment plan will receive cash rather than shares of common stock in respect of any cash distribution the Company declares.
The Company may fund its cash distributions to stockholders from any sources of funds 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, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. 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 will represent a return of capital. A return of capital generally is a return of a stockholders investment rather than a return of earnings 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 paid-in capital surplus, 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 three months ended March 31, 2014 and 2013:
Three Months Ended March 31, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Source of Distribution |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||
Offering proceeds |
$ | | | $ | | | ||||||||||
Borrowings |
| | | | ||||||||||||
Net investment income(1) |
56,237 | 100 | % | 39,543 | 77 | % | ||||||||||
Capital gains proceeds from the sale of assets |
| | 11,641 | 23 | % | |||||||||||
Non-capital gains proceeds from the sale of assets |
| | | | ||||||||||||
Distributions on account of preferred and common equity |
| | | | ||||||||||||
Expense reimbursement from sponsor |
| | | | ||||||||||||
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|
|
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|
|
|
|||||||||
Total |
$ | 56,237 | 100 | % | $ | 51,184 | 100 | % | ||||||||
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|
|
(1) | During the three months ended March 31, 2014 and 2013, 90.9% and 89.5%, respectively, of the Companys gross investment income was attributable to cash interest earned, 7.0% and 9.2%, respectively, was attributable to non-cash accretion of discount and 2.1% and 1.3%, respectively, was attributable to paid-in-kind, or PIK, interest. |
The Companys net investment income on a tax basis for the three months ended March 31, 2014 and 2013 was $51,851 and $57,068, respectively. As of March 31, 2014 and December 31, 2013, the Company had $151,267 and $137,867, respectively, of undistributed net investment income and realized gains on a tax basis.
F-33
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The difference between the Companys GAAP-basis net investment income and its tax-basis net investment income is primarily due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company and the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes.
The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2014 and 2013:
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
GAAP-basis net investment income |
$ | 55,877 | $ | 50,729 | ||||
Reversal of incentive fee accrual on unrealized gains |
(199 | ) | 6,350 | |||||
Reclassification of unamortized original issue discount |
(3,964 | ) | | |||||
Other miscellaneous differences |
137 | (11 | ) | |||||
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|
|
|
|||||
Tax-basis net investment income |
$ | 51,851 | $ | 57,068 | ||||
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|
|
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 March 31, 2014 and December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
March 31, 2014 (Unaudited) |
December 31, 2013 | |||||||
Distributable ordinary income |
$ | 78,137 | $ | 82,523 | ||||
Distributable realized gains |
73,130 | 55,344 | ||||||
Incentive fee accrual on unrealized gains |
(30,344 | ) | (30,543 | ) | ||||
Unamortized organization costs |
(418 | ) | (429 | ) | ||||
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(1) |
77,465 | 67,085 | ||||||
|
|
|
|
|||||
$ | 197,970 | $ | 173,980 | |||||
|
|
|
|
(1) | As of March 31, 2014 and December 31, 2013, the gross unrealized appreciation on the Companys investments and gain on foreign currency was $135,516 and $136,679, respectively. As of March 31, 2014 and December 31, 2013, the gross unrealized depreciation on the Companys investments and loss on foreign currency was $58,051 and $69,594 respectively. |
The aggregate cost of the Companys investments for federal income tax purposes totaled $4,000,025 and $4,070,314 as of March 31, 2014 and December 31, 2013, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $77,465 and $67,085 as of March 31, 2014 and December 31, 2013, respectively.
F-34
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio
The following table summarizes the composition of the Companys investment portfolio at cost and fair value as of March 31, 2014 and December 31, 2013:
March 31,
2014 (Unaudited) |
December 31, 2013 | |||||||||||||||||||||||
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||||||||
Senior Secured LoansFirst Lien |
$ | 2,011,486 | $ | 2,050,394 | 50 | % | $ | 2,080,228 | $ | 2,123,608 | 51 | % | ||||||||||||
Senior Secured LoansSecond Lien |
888,604 | 911,083 | 22 | % | 875,276 | 897,845 | 22 | % | ||||||||||||||||
Senior Secured Bonds |
424,566 | 402,432 | 10 | % | 414,297 | 385,548 | 9 | % | ||||||||||||||||
Subordinated Debt |
373,292 | 382,394 | 10 | % | 421,964 | 426,728 | 10 | % | ||||||||||||||||
Collateralized Securities |
115,695 | 135,132 | 3 | % | 120,206 | 140,508 | 4 | % | ||||||||||||||||
Equity/Other |
170,153 | 196,192 | 5 | % | 142,114 | 163,344 | 4 | % | ||||||||||||||||
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|
|||||||||||||
$ | 3,983,796 | $ | 4,077,627 | 100 | % | $ | 4,054,085 | $ | 4,137,581 | 100 | % | |||||||||||||
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|
|
(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
As of March 31, 2014, the Company did not control and was not an affiliate of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to control a portfolio company if it owned 25% or more of its voting securities and would be an affiliate of a portfolio company if it owned 5% or more of its voting securities.
The Companys investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2014, the Company had six such investments with aggregate unfunded commitments of $90,641 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $2,313. As of December 31, 2013, the Company had five such investments with aggregate unfunded commitments of $48,439 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $4,629. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.
F-35
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2014 and December 31, 2013:
March 31,
2014 (Unaudited) |
December 31, 2013 | |||||||||||||||
Industry Classification |
Fair Value |
Percentage of Portfolio |
Fair Value |
Percentage of Portfolio |
||||||||||||
Automobiles & Components |
$ | 19,047 | 0 | % | $ | 51,551 | 1 | % | ||||||||
Capital Goods |
928,706 | 23 | % | 858,352 | 21 | % | ||||||||||
Commercial & Professional Services |
232,388 | 6 | % | 318,196 | 8 | % | ||||||||||
Consumer Durables & Apparel |
328,895 | 8 | % | 306,917 | 7 | % | ||||||||||
Consumer Services |
507,543 | 12 | % | 436,650 | 11 | % | ||||||||||
Diversified Financials |
140,347 | 3 | % | 160,678 | 4 | % | ||||||||||
Energy |
410,728 | 10 | % | 468,036 | 11 | % | ||||||||||
Food & Staples Retailing |
23,221 | 1 | % | 29,484 | 1 | % | ||||||||||
Food, Beverage & Tobacco |
4,057 | 0 | % | 4,042 | 0 | % | ||||||||||
Health Care Equipment & Services |
169,223 | 4 | % | 176,010 | 4 | % | ||||||||||
Household & Personal Products |
66,300 | 2 | % | 66,300 | 2 | % | ||||||||||
Insurance |
3,305 | 0 | % | 17,814 | 0 | % | ||||||||||
Materials |
256,461 | 6 | % | 233,719 | 6 | % | ||||||||||
Media |
193,641 | 5 | % | 193,283 | 5 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences |
47,605 | 1 | % | 57,794 | 1 | % | ||||||||||
Retailing |
69,317 | 2 | % | 69,171 | 2 | % | ||||||||||
Software & Services |
347,658 | 9 | % | 366,976 | 9 | % | ||||||||||
Technology Hardware & Equipment |
152,930 | 4 | % | 134,121 | 3 | % | ||||||||||
Telecommunication Services |
166,716 | 4 | % | 178,977 | 4 | % | ||||||||||
Transportation |
9,539 | 0 | % | 9,510 | 0 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,077,627 | 100 | % | $ | 4,137,581 | 100 | % | ||||||||
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|
|
Note 7. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market 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.
F-36
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)
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 March 31, 2014 and December 31, 2013, the Companys investments were categorized as follows in the fair value hierarchy:
Valuation Inputs |
March 31, 2014 (Unaudited) |
December 31, 2013 | ||||||
Level 1Price quotations in active markets |
$ | 2,060 | $ | 2,147 | ||||
Level 2Significant other observable inputs |
| | ||||||
Level 3Significant unobservable inputs |
4,075,567 | 4,135,434 | ||||||
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|
|
|||||
$ | 4,077,627 | $ | 4,137,581 | |||||
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|
The Companys investments as of March 31, 2014 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its 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. Thirty-one senior secured loan investments, one senior secured bond investment, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, 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 valued by the same independent valuation firm, 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. One senior secured loan investment and one equity investment, each of which was newly-issued and purchased near March 31, 2014, were valued at cost, as the Companys board of directors determined that the cost of each such investment was the best indication of its fair value. Also, one equity investment which is traded on an active public market was valued at its closing price on March 31, 2014 and two equity/other investments were valued by an independent third-party pricing service in the manner described above.
The Companys investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its 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. Twenty-seven senior secured loan investments, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, 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 valued by the same independent valuation firm, which determined the fair value of such investments by
F-37
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)
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. Also, one equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services 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 to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. The Company periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which the Company purchases and sells its investments. The Companys valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Companys valuation process.
The following is a reconciliation for the three months ended March 31, 2014 and 2013 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
For the Three Months Ended March 31, 2014 | ||||||||||||||||||||||||||||
Senior Secured Loans - First Lien |
Senior Secured Loans - Second Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/Other | Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | 2,123,608 | $ | 897,845 | $ | 385,548 | $ | 426,728 | $ | 140,508 | $ | 161,197 | $ | 4,135,434 | ||||||||||||||
Accretion of discount (amortization of premium) |
2,995 | 2,844 | 1,545 | 527 | 142 | 21 | 8,074 | |||||||||||||||||||||
Net realized gain (loss) |
4,530 | 2,665 | 1,537 | 4,354 | 384 | 352 | 13,822 | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
(4,472 | ) | (90 | ) | 6,615 | 4,338 | (865 | ) | 4,896 | 10,422 | ||||||||||||||||||
Purchases |
168,040 | 176,818 | 53,180 | 46,101 | | 27,352 | 471,491 | |||||||||||||||||||||
Paid-in-kind interest |
81 | 1,052 | | 760 | | 546 | 2,439 | |||||||||||||||||||||
Sales and redemptions |
(244,388 | ) | (170,051 | ) | (45,993 | ) | (100,414 | ) | (5,037 | ) | (232 | ) | (566,115 | ) | ||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
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|||||||||||||||
Fair value at end of period |
$ | 2,050,394 | $ | 911,083 | $ | 402,432 | $ | 382,394 | $ | 135,132 | $ | 194,132 | $ | 4,075,567 | ||||||||||||||
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|||||||||||||||
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 |
$ | 319 | $ | 1,908 | $ | 6,033 | $ | 8,281 | $ | (508 | ) | $ | 3,083 | $ | 19,116 | |||||||||||||
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F-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)
For the Three Months Ended March 31, 2013 | ||||||||||||||||||||||||||||
Senior Secured Loans - First Lien |
Senior Secured Loans - Second Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/Other | Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | 1,945,159 | $ | 764,356 | $ | 466,299 | $ | 511,971 | $ | 118,994 | $ | 127,943 | $ | 3,934,722 | ||||||||||||||
Accretion of discount (amortization of premium) |
7,085 | 1,060 | 1,272 | 499 | 178 | 12 | 10,106 | |||||||||||||||||||||
Net realized gain (loss) |
5,233 | 396 | 1,698 | 1,825 | 5,019 | | 14,171 | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
9,792 | 9,812 | 5,215 | 3,175 | (8,235 | ) | (2,241 | ) | 17,518 | |||||||||||||||||||
Purchases |
411,848 | 132,245 | 60,632 | 39,900 | | 5,291 | 649,916 | |||||||||||||||||||||
Paid-in-kind interest |
| | | 1,054 | | 359 | 1,413 | |||||||||||||||||||||
Sales and redemptions |
(391,179 | ) | (56,348 | ) | (36,206 | ) | (46,254 | ) | (13,830 | ) | | (543,817 | ) | |||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
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|||||||||||||||
Fair value at end of period |
$ | 1,987,938 | $ | 851,521 | $ | 498,910 | $ | 512,170 | $ | 102,126 | $ | 131,364 | $ | 4,084,029 | ||||||||||||||
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|
|||||||||||||||
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 |
$ | 16,767 | $ | 11,950 | $ | 6,388 | $ | 4,543 | $ | (1,949 | ) | $ | (2,241 | ) | $ | 35,458 | ||||||||||||
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The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets valued by an independent valuation firm as of March 31, 2014 and December 31, 2013 were as follows:
Type of Investment |
Fair Value at March 31, 2014(1) (Unaudited) |
Valuation Technique(2) |
Unobservable Input |
Range | Weighted Average | |||||||
Senior Secured Loans |
$ | 1,370,657 | Market Comparables | Market Yield (%) | 6.3% - 10.3% | 8.7% | ||||||
Senior Secured Loans |
253,950 | Market Comparables | Market Yield (%) | 10.0% - 11.8% | 10.7% | |||||||
Senior Secured Bonds |
12,915 | Market Comparables | Market Yield (%) | 12.3% - 12.8% | 12.5% | |||||||
Subordinated Debt |
221,034 | Market Comparables | Market Yield (%) | 7.5% - 14.3% | 11.0% | |||||||
Collateralized Securities |
16,740 | Market Comparables | Market Yield (%) | 11.5% - 12.5% | 12.0% | |||||||
Equity/Other |
183,227 | Market Comparables | Market Yield (%) | 13.3% - 15.8% | 15.0% | |||||||
EBITDA Multiples (x) | 5.5x - 13.5x | 7.4x | ||||||||||
Production Multiples (Mmb/d) | $35,000.0 - $42,500.0 | $38,215.6 | ||||||||||
Proved Reserves Multiples (Mmboe) | $7.5 - $9.0 | $8.0 | ||||||||||
PV-10 Multiples (x) | 0.6x - 1.4x | 1.2x | ||||||||||
Discounted Cash Flow | Discount Rate (%) | 17.3% - 29.4% | 18.2% | |||||||||
Option Valuation Model | Volatility (%) | 52.5% - 61.5% | 53.1% |
(1) | Except as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers as of March 31, 2014, which were provided by independent third-party pricing services and screened for validity by such services. One senior secured loan investment ($40,000) and one equity investment ($750), each of which was newly-issued and purchased near March 31, 2014, were valued at cost, as the Companys board of directors determined that the cost of |
F-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)
each such investment was the best indication of its fair value. As of March 31, 2014, $37,808 of the senior secured loans-first lien investments and $52,833 of the senior secured loans-second lien investments valued by the independent valuation firm consisted of unfunded loan commitments. |
(2) | For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement. |
Type of Investment |
Fair Value at December 31, 2013(1) |
Valuation |
Unobservable Input |
Range | Weighted Average | |||||||
Senior Secured Loans |
$ | 1,406,294 | Market Comparables | Market Yield (%) | 6.5% - 16.0% | 8.8% | ||||||
Senior Secured LoansSecond Lien |
200,044 | Market Comparables | Market Yield (%) | 10.3% - 11.8% | 10.9% | |||||||
Subordinated Debt |
211,066 | Market Comparables | Market Yield (%) | 7.8% - 13.8% | 11.1% | |||||||
Collateralized Securities |
16,740 | Market Comparables | Market Yield (%) | 11.5% - 12.5% | 12.0% | |||||||
Equity/Other |
161,197 | Market Comparables | Market Yield (%) | 13.5% - 15.8% | 15.1% | |||||||
EBITDA Multiples (x) |
5.0x - 13.3x | 7.3x | ||||||||||
Production Multiples (Mmb/d) | $37,500.0 - $42,500.0 | $40,000.0 | ||||||||||
Proved Reserves Multiples (Mmboe) | $8.0 - $9.0 | $8.5 | ||||||||||
PV-10 Multiples (x) | 0.6x - 0.7x | 0.6x | ||||||||||
Discounted Cash Flow | Discount Rate (%) | 17.3% - 24.3% | 17.6% | |||||||||
Option Valuation Model | Volatility (%) | 52.5% - 61.5% | 53.0% |
(1) | Except as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers as of December 31, 2013, which were provided by independent third-party pricing services and screened for validity by such services. As of December 31, 2013, $48,439 of the senior secured loans-first lien investments consisted of unfunded loan commitments. |
(2) | For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement. |
F-40
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements
The following table presents summary information with respect to the Companys outstanding financing arrangements as of March 31, 2014. For additional information regarding these financing facilities, please 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, 2013 and the additional disclosure set forth in this Note 8.
Facility |
Type of Facility | Rate |
Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
Arch Street Credit Facility |
Revolving | L + 2.05% | $ | 373,682 | (1) | $ | | August 29, 2016 | ||||||
Broad Street Credit Facility |
Revolving | L + 1.50% | $ | 125,000 | $ | | December 20, 2014 | |||||||
JPM Facility |
Repurchase | 3.25% | $ | 950,000 | $ | | April 15, 2017 | |||||||
Walnut Street Credit Facility |
Revolving | L + 1.50% to 2.50% | $ | 239,800 | $ | 60,200 | May 17, 2017 |
(1) | On March 31, 2014, Arch Street and Citibank amended the Arch Street credit facility (as each such term is defined below) to, among other things, reduce the maximum commitments thereunder to $350,000. On April 2, 2014, Arch Street repaid $23,682 on the Arch Street credit facility in accordance with the amendment. |
Arch Street Credit Facility
On August 29, 2012, Arch Street Funding LLC, or Arch Street, the Companys wholly-owned, special-purpose financing subsidiary, terminated its total return swap financing arrangement, or TRS, with Citibank, N.A., or Citibank, and entered into a revolving credit facility, or the Arch Street credit facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto.
On March 31, 2014, Arch Street and Citibank amended the Arch Street credit facility to, among other things, (a) increase the interest rate applicable to loans outstanding thereunder (i) during the drawdown period to three-month LIBOR plus 2.05%, and (ii) thereafter, to three-month LIBOR plus 2.30%, (b) extend the final maturity date to August 29, 2016, (c) reduce the maximum commitments thereunder to $350,000, (d) add a financial covenant requiring that the Company maintain its net asset value at more than $200,000 and (e) modify the calculation of advance rates and certain eligibility and valuation criteria, in each case, applicable to Arch Streets portfolio of debt securities that are pledged as collateral for the Arch Street credit facility. The Company paid certain fees to Citibank in connection with this amendment.
The Arch Street credit facility provides for borrowings in an aggregate principal amount up to $350,000 on a committed basis. The Company may contribute cash or debt securities to Arch Street from time to time, subject to certain restrictions set forth in the Arch Street credit facility, and will retain a residual interest in any assets contributed through its ownership of Arch Street or will receive fair market value for any debt securities sold to Arch Street. Arch Street may purchase additional debt securities from various sources. Arch Streets obligations to the lenders under the facility are secured by a first priority security interest in substantially all of the assets of Arch Street, including its portfolio of debt securities. The obligations of Arch Street under the facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of the Companys investment in Arch Street.
F-41
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
Borrowings under the Arch Street credit facility accrue interest at a rate equal to three-month LIBOR plus 2.05% per annum through August 29, 2014 and three-month LIBOR plus 2.30% per annum thereafter. Borrowings under the facility are subject to compliance with an equity coverage ratio with respect to the current value of Arch Streets portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Arch Streets portfolio. Beginning November 27, 2012, Arch Street became required to pay a non-usage fee to the extent the aggregate principal amount available under the Arch Street credit facility is not borrowed. Outstanding borrowings under the facility will be amortized beginning nine months prior to the scheduled maturity date. Any amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 29, 2016.
As of March 31, 2014 and December 31, 2013, $373,682 was outstanding under the Arch Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $4,446 in connection with obtaining the Arch Street credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2014, $2,093 of such deferred financing costs had yet to be amortized to interest expense.
For the three months ended March 31, 2014 and 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Arch Street credit facility were as follows:
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Direct interest expense |
$ | 1,862 | $ | 2,908 | ||||
Non-usage fees |
220 | 65 | ||||||
Amortization of deferred financing costs |
365 | 365 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 2,447 | $ | 3,338 | ||||
|
|
|
|
|||||
Cash paid for interest expense |
$ | 2,394 | $ | 4,250 | ||||
Average borrowings under the facility |
$ | 373,682 | $ | 497,682 | ||||
Effective interest rate on borrowings |
1.99 | % | 2.34 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
2.23 | % | 2.39 | % |
Borrowings of Arch Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Broad Street Credit Facility
On January 28, 2011, Broad Street Funding LLC, or Broad Street, the Companys wholly-owned, special-purpose financing subsidiary, Deutsche Bank AG, New York Branch, or Deutsche Bank, and the other lenders party thereto entered into an amended and restated multi-lender, syndicated revolving credit facility, or the Broad Street credit facility, which amended and restated the revolving credit facility that Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto. On March 23, 2012, Broad Street and Deutsche Bank entered into an amendment to the Broad Street credit facility which extended the maturity date of
F-42
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
the facility to March 23, 2013, increased the aggregate amount which could be borrowed under the facility to $380,000 and reduced the interest rate for all borrowings under the facility to a rate of LIBOR, for an interest period equal to the weighted average LIBOR interest period of debt securities owned by Broad Street, plus 1.50% per annum. On December 13, 2012, Broad Street repaid $140,000 of borrowings under the facility, thereby reducing the amount which could be borrowed under the facility to $240,000. On March 22, 2013, Broad Street and Deutsche Bank entered into an amendment to the facility to extend the maturity date of the facility to December 22, 2013. On December 20, 2013, Broad Street and Deutsche Bank entered into a further amendment to the facility which extended the maturity date to December 20, 2014 and reduced the maximum amount which could be borrowed under the facility to $125,000. The Broad Street credit facility provides for borrowings of up to $125,000 at a rate of LIBOR, for an interest period equal to the weighted average LIBOR interest period of debt securities owned by Broad Street, plus 1.50% per annum. Deutsche Bank is a lender and serves as administrative agent under the facility.
Under the Broad Street credit facility, the Company transfers debt securities to Broad Street from time to time as a contribution to capital and retains a residual interest in the contributed debt securities through its ownership of Broad Street. The obligations of Broad Street under the facility are non-recourse to the Company and its exposure under the facility is limited to the value of its investment in Broad Street.
As of March 31, 2014 and December 31, 2013, $125,000 was outstanding under the Broad Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $2,566 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2014, all of the deferred financing costs have been amortized to interest expense.
For the three months ended March 31, 2014 and 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Broad Street credit facility were as follows:
Three Months
Ended March 31, |
||||||||
2014 | 2013 | |||||||
Direct interest expense |
$ | 541 | $ | 1,071 | ||||
Non-usage fees |
| | ||||||
Amortization of deferred financing costs |
| 225 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 541 | $ | 1,296 | ||||
|
|
|
|
|||||
Cash paid for interest expense |
$ | 313 | $ | 1,101 | ||||
Average borrowings under the facility |
$ | 125,000 | $ | 240,000 | ||||
Effective interest rate on borrowings |
1.73 | % | 1.78 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
1.73 | % | 1.79 | % |
Borrowings of Broad Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
F-43
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
JPM Financing
On April 23, 2013, 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 an amendment, or the April 2013 amendment, to its debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which was originally entered into on July 21, 2011 (and previously amended on September 26, 2012). The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $700,000 to $950,000; and (ii) extended the final repurchase date under the financing arrangement from October 15, 2016 to April 15, 2017. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.
Pursuant to the financing arrangement, the assets held by Locust Street secure the obligations of Locust Street under certain Class A Floating Rate Notes, or the Class A Notes, to be issued from time to time by Locust Street to Race Street pursuant to the Amended and Restated Indenture, dated as of September 26, 2012 and as supplemented by Supplemental Indenture No. 1, dated April 23, 2013, with Citibank, as trustee, or the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Locust Street from time to time is $1,140,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of April 15, 2024. Race Street will purchase the Class A Notes to be issued by Locust Street from time to time at a purchase price equal to their par value.
Race Street, in turn, has entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of April 23, 2013, and subsequently amended as of October 24, 2013, or, collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $1,140,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility is $950,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than April 15, 2017. The repurchase price paid by Race Street to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing April 15, 2015, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.
Pursuant to the financing arrangement, the assets held by Race Street secure the obligations of Race Street under the JPM Facility.
As of March 31, 2014 and December 31, 2013, Class A Notes in the aggregate principal amount of $1,140,000 had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $950,000. The carrying amount outstanding under the JPM Facility approximates its fair
F-44
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
value. The Company funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of March 31, 2014 and December 31, 2013, Race Streets liability under the JPM Facility was $950,000, plus $6,518 and $6,690, respectively, of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on the Companys financial statements.
As of March 31, 2014 and December 31, 2013, the fair value of assets held by Locust Street was $1,884,205 and $1,870,351, respectively, which included assets purchased by Locust Street with proceeds from the issuance of Class A Notes. As of March 31, 2014 and December 31, 2013, the fair value of assets held by Race Street was $776,130 and $747,330, respectively.
The Company incurred costs of $425 in connection with obtaining the JPM 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 JPM Facility. As of March 31, 2014, $141 of such deferred financing costs had yet to be amortized to interest expense.
For the three months ended March 31, 2014 and 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM Facility were as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Direct interest expense |
$ | 7,719 | $ | 5,619 | ||||
Non-usage fees |
| | ||||||
Amortization of deferred financing costs |
32 | 33 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 7,751 | $ | 5,652 | ||||
|
|
|
|
|||||
Cash paid for interest expense |
$ | 7,891 | $ | 5,150 | ||||
Average borrowings under the facility |
$ | 950,000 | $ | 691,963 | ||||
Effective interest rate on borrowings |
3.25 | % | 3.25 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
3.25 | % | 3.25 | % |
Amounts outstanding under the JPM Facility will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Walnut Street Credit Facility
On March 11, 2014, Walnut Street Funding LLC, or Walnut Street, the Companys wholly-owned, special-purpose financing subsidiary, Wells Fargo Securities, LLC, and Wells Fargo Bank, National Association, or collectively with Wells Fargo Securities, LLC, Wells Fargo, entered into an amendment, or the Walnut Street amendment, to the revolving credit facility originally entered into by such parties on May 17, 2012, or the Walnut Street credit facility. Wells Fargo Securities, LLC serves as the administrative agent and Wells Fargo Bank, National Association is the sole lender, collateral agent, account bank and collateral custodian under the facility.
F-45
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The Walnut Street amendment increased the maximum commitments available under the Walnut Street credit facility from $250,000 to $300,000 and decreased, from 2.75% to 2.50%, the applicable spread above three-month LIBOR that is payable on the portion of outstanding advances under the Walnut Street credit facility attributable to Traditional Middle Market Loans, Fixed Rate Loans and Second Lien Loans, in each case as defined in the Walnut Street credit facility. The Company paid certain fees to Wells Fargo in connection with the Walnut Street amendment.
Under the Walnut Street credit facility, the Company contributes cash or debt securities to Walnut Street from time to time and retains a residual interest in any assets contributed through its ownership of Walnut Street or receives fair market value for any debt securities sold to Walnut Street. The obligations of Walnut Street under the Walnut Street credit facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of the Companys investment in Walnut Street.
Borrowings under the Walnut Street credit facility accrue interest at a rate equal to three-month LIBOR, plus a spread ranging between 1.50% and 2.50% per annum, depending on the composition of the portfolio of debt securities for the relevant period. Beginning on September 17, 2012, Walnut Street became subject to a non-usage fee to the extent the aggregate principal amount available under the Walnut Street credit facility is not borrowed. Any amounts borrowed under the Walnut Street credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 17, 2017.
As of March 31, 2014 and December 31, 2013, $239,800 and $225,000, respectively, was outstanding under the Walnut Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $4,020 in connection with obtaining and amending the Walnut Street credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2014, $2,611 of such deferred financing costs had yet to be amortized to interest expense.
For the three months ended March 31, 2014 and 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Walnut Street credit facility were as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Direct interest expense |
$ | 1,714 | $ | 1,654 | ||||
Non-usage fees |
62 | 14 | ||||||
Amortization of deferred financing costs |
185 | 182 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 1,961 | $ | 1,850 | ||||
|
|
|
|
|||||
Cash paid for interest expense |
$ | 1,781 | $ | 1,583 | ||||
Average borrowings under the facility |
$ | 236,471 | $ | 238,848 | ||||
Effective interest rate on borrowings |
2.88 | % | 2.76 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
2.99 | % | 2.79 | % |
F-46
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
Borrowings of Walnut Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
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 these 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.
F-47
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2014 and the year ended December 31, 2013:
Three Months Ended March 31, 2014 (Unaudited) |
Year Ended December 31, 2013 |
|||||||
Per Share Data: |
||||||||
Net asset value, beginning of period |
$ | 10.18 | $ | 9.97 | ||||
Results of operations(1) |
||||||||
Net investment income (loss) |
0.22 | 0.96 | ||||||
Net realized and unrealized appreciation (depreciation) on investments and gain/loss on foreign currency |
0.10 | 0.08 | ||||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from operations |
0.32 | 1.04 | ||||||
|
|
|
|
|||||
Stockholder distributions(2) |
||||||||
Distributions from net investment income |
(0.22 | ) | (0.83 | ) | ||||
Distributions from net realized gain on investments |
| | ||||||
|
|
|
|
|||||
Net decrease in net assets resulting from stockholder distributions |
(0.22 | ) | (0.83 | ) | ||||
|
|
|
|
|||||
Capital share transactions |
||||||||
Issuance of common stock(3) |
| | ||||||
Repurchases of common stock(4) |
| | ||||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from capital share transactions |
| | ||||||
|
|
|
|
|||||
Net asset value, end of period |
$ | 10.28 | $ | 10.18 | ||||
|
|
|
|
|||||
Shares outstanding, end of period |
261,301,955 | 259,320,161 | ||||||
|
|
|
|
|||||
Total return(5) |
3.14 | % | 10.43 | % | ||||
|
|
|
|
|||||
Ratio/Supplemental Data: |
||||||||
Net assets, end of period |
$ | 2,685,169 | $ | 2,640,992 | ||||
|
|
|
|
|||||
Ratio of net investment income to average net assets(6) |
2.09 | % | 9.50 | % | ||||
Ratio of total operating expenses to average net assets(6) |
2.20 | % | 8.90 | % | ||||
Portfolio turnover(7) |
11.30 | % | 61.18 | % |
(1) | The per share data was derived by using the weighted average shares outstanding during the applicable period. |
(2) | The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period. |
(3) | 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 distribution reinvestment plan. |
(4) | The per share impact of the Companys repurchases of common stock is a reduction to net asset value of less than $0.01 per share during the applicable period. |
(5) | The total return 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 which were declared during the period and |
F-48
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights (continued)
dividing the total by the net asset value per share as of the beginning of the applicable period. The historical calculation of total return in the table should not be considered a representation of the Companys future total return, 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 as calculated above represents the total return on the Companys investment portfolio during the applicable period and is calculated in accordance with GAAP. These return figures do not represent an actual return to stockholders. |
(6) | Weighted average net assets during the applicable period are used for this calculation. Ratios are not annualized. The following is a schedule of supplemental ratios for the three months ended March 31, 2014 and the year ended December 31, 2013: |
Three Months Ended March 31, 2014 (Unaudited) |
Year Ended December 31, 2013 |
|||||||
Ratio of accrued capital gains incentive fees to average net assets |
0.18 | % | 0.16 | % | ||||
Ratio of subordinated income incentive fees to average net assets |
0.57 | % | 2.41 | % | ||||
Ratio of interest expense to average net assets |
0.48 | % | 1.97 | % | ||||
Ratio of excise taxes to average net assets |
| 0.22 | % |
(7) | Portfolio turnover for the three months ended March 31, 2014 is not annualized. |
Note 11. Subsequent Events
ING Credit Facility
On April 3, 2014, the Company entered into the ING credit facility. The ING credit facility provides 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.
Borrowings under the ING credit facility are subject to compliance with a borrowing base. Interest under the ING credit facility for (i) loans for which the Company elects the base rate option is payable at a rate equal to 1.5% per annum plus the greatest of (x) the U.S. Prime Rate as published in The Wall Street Journal, (y) the federal funds effective rate plus 0.5% per annum and (z) three-month LIBOR plus 1% per annum and (ii) loans for which the Company elects the Eurocurrency option is payable at a rate equal to 2.50% per annum plus adjusted LIBOR. The ING credit facility will be subject to a non-usage fee of (a) 1% per annum on the unused
F-49
FS Investment Corporation
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 11. Subsequent Events (continued)
portion of the commitment under the ING credit facility for each day such unused portion exceeds 65% of the commitments and (b) 0.375% per annum on the unused portion of the commitments for each day the unused portion is 35% or less. The Company will pay letter of credit participation fees and a fronting fee on the average daily amount of any lenders exposure with respect to any letters of credit issued under the ING credit facility.
In connection with the ING credit facility, the Company has made certain representations and warranties and must comply with various covenants and reporting requirements customary for facilities of this type. In addition, the Company must comply with the following financial covenants: (a) the Companys minimum stockholders equity, measured as of each fiscal quarter-end, must be greater than or equal to the greater of (i) 40% of assets of the Company and its subsidiaries as of the last day of such fiscal quarter and (ii) $1,980,744 (less amounts paid to purchase common stock in the Companys current tender offer), plus 50% of the net proceeds of any post-closing equity offerings; (b) the Company must maintain at all times a 200% asset coverage ratio; (c) the sum of (x) the Company and the guarantors net worth (defined as stockholders equity minus the net asset value held by the Company in any special-purpose financing subsidiaries) plus (y) 30% of the equity value of any special-purpose financing subsidiaries, must at all times be at least equal to the sum of (A) any unsecured longer-term debt of the Company and (B) accrued but unpaid base management fees and incentive fees at the time of measurement; and (d) the aggregate value of eligible portfolio investments that can be converted to cash in fewer than 20 business days without more than a 5% change in price must not be less than 10% of the covered debt amount (defined as the aggregate amount of outstanding loans and issued letters of credit under the facility, plus, to the extent incurred after closing of the ING credit facility, certain other permitted debt of the Company) for more than 30 business days during any period during which the covered debt amount (less cash and cash equivalents included in the borrowing base) is greater than 90% of the borrowing base (less cash and cash equivalents included therein).
The ING credit facility contains events of default customary for facilities of this type. Upon the occurrence of an event of default, ING, at the instruction of the lenders, may terminate the commitments and declare the outstanding advances and all other obligations under the ING credit facility immediately due and payable. During the continuation of an event of default and subject, in certain cases, to the instructions of the lenders, the Company must pay interest at a default rate.
F-50
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. In connection with the preparation of our annual financial statements, management has conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992 (COSO). Managements assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this evaluation, we have concluded that, as of December 31, 2013, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
F-51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
FS Investment Corporation
Philadelphia, Pennsylvania
We have audited FS Investment Corporations internal control over financial reporting as of December 31, 2013, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. FS Investment Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, FS Investment Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets, including the consolidated schedules of investments, of FS Investment Corporation as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 28, 2014 expressed an unqualified opinion.
/s/ McGladrey LLP
Blue Bell, Pennsylvania
February 28, 2014
F-52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
FS Investment Corporation
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets, including the consolidated schedules of investments, of FS Investment Corporation (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2013 and 2012 by correspondence with the custodians and brokers, or by other appropriate auditing procedures where replies from custodians and brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FS Investment Corporation as of December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FS Investment Corporations internal control over financial reporting as of December 31, 2013, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report dated February 28, 2014 expressed an unqualified opinion on the effectiveness of FS Investment Corporations internal control over financial reporting.
As explained in Note 7 to the consolidated financial statements, the accompanying consolidated financial statements include investments valued at approximately $4,137,581,000 (156.7% of net assets) and approximately $3,934,722,000 (156.7% of net assets) as of December 31, 2013 and 2012, respectively, whose fair values have been determined by the Company in the absence of readily ascertainable fair values.
/s/ McGladrey LLP
Blue Bell, Pennsylvania
February 28, 2014
F-53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL
STATEMENT SCHEDULE
To the Board of Directors and Stockholders
FS Investment Corporation
Philadelphia, Pennsylvania
On February 28, 2014, we reported on the consolidated balance sheets, including the consolidated schedules of investments, of FS Investment Corporation (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2013, which are included in this Form N-2 (the registration statement). In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the registration statement, under the caption Senior Securities. This financial statement schedule is the responsibility of the Companys management. Our responsibility is to express an opinion on their financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ McGladrey LLP
Blue Bell, Pennsylvania
May 8, 2014
F-54
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31, | ||||||||
2013 | 2012 | |||||||
Assets |
||||||||
Investments, at fair value (amortized cost$4,054,085 and $3,825,244, respectively) |
$ | 4,137,581 | $ | 3,934,722 | ||||
Cash |
227,328 | 338,895 | ||||||
Receivable for investments sold and repaid |
26,722 | 20,160 | ||||||
Interest receivable |
47,622 | 44,711 | ||||||
Deferred financing costs |
5,168 | 7,735 | ||||||
Prepaid expenses and other assets |
156 | 530 | ||||||
|
|
|
|
|||||
Total assets |
$ | 4,444,577 | $ | 4,346,753 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Payable for investments purchased |
$ | 23,423 | $ | 79,420 | ||||
Credit facilities payable |
723,682 | 973,046 | ||||||
Repurchase agreement payable(1) |
950,000 | 676,667 | ||||||
Stockholder distributions payable |
18,671 | 17,003 | ||||||
Management fees payable |
22,700 | 21,507 | ||||||
Accrued capital gains incentive fees(2) |
32,133 | 39,751 | ||||||
Subordinated income incentive fees payable(2) |
14,303 | 13,393 | ||||||
Administrative services expense payable |
1,153 | 947 | ||||||
Interest payable |
10,563 | 10,242 | ||||||
Directors fees payable |
254 | | ||||||
Other accrued expenses and liabilities |
6,703 | 3,039 | ||||||
|
|
|
|
|||||
Total liabilities |
1,803,585 | 1,835,015 | ||||||
|
|
|
|
|||||
Stockholders equity |
||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding |
| | ||||||
Common stock, $0.001 par value, 450,000,000 shares authorized, 259,320,161 and 251,890,821 shares issued and outstanding, respectively |
259 | 252 | ||||||
Capital in excess of par value |
2,466,753 | 2,397,826 | ||||||
Accumulated undistributed net realized gains on investments and gain/loss on foreign currency(3) |
55,344 | | ||||||
Accumulated undistributed (distributions in excess of) net investment income(3) |
35,322 | 4,307 | ||||||
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency |
83,314 | 109,353 | ||||||
|
|
|
|
|||||
Total stockholders equity |
2,640,992 | 2,511,738 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 4,444,577 | $ | 4,346,753 | ||||
|
|
|
|
|||||
Net asset value per share of common stock at year end |
$ | 10.18 | $ | 9.97 | ||||
|
|
|
|
(1) | See Note 8 for a discussion of the Companys repurchase transaction. |
(2) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees. |
(3) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
See notes to consolidated financial statements.
F-55
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Investment income |
||||||||||||
Interest income |
$ | 427,510 | $ | 287,875 | $ | 108,770 | ||||||
Fee income |
37,084 | 15,291 | 6,714 | |||||||||
Dividend income |
9,972 | 56 | | |||||||||
|
|
|
|
|
|
|||||||
Total investment income |
474,566 | 303,222 | 115,484 | |||||||||
|
|
|
|
|
|
|||||||
Operating expenses |
||||||||||||
Management fees |
90,247 | 68,059 | 27,791 | |||||||||
Capitals gains incentive fees(1) |
4,173 | 39,751 | (4,063 | ) | ||||||||
Subordinated income incentive fees(1) |
62,253 | 13,393 | | |||||||||
Administrative services expenses |
5,165 | 5,297 | 2,625 | |||||||||
Stock transfer agent fees |
2,820 | 3,641 | 2,028 | |||||||||
Accounting and administrative fees |
1,390 | 1,495 | 878 | |||||||||
Interest expense |
50,763 | 30,227 | 11,334 | |||||||||
Directors fees |
943 | 933 | 694 | |||||||||
Other general and administrative expenses |
6,094 | 6,019 | 2,833 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
223,848 | 168,815 | 44,120 | |||||||||
|
|
|
|
|
|
|||||||
Net investment income before taxes |
250,718 | 134,407 | 71,364 | |||||||||
Excise taxes |
5,742 | 500 | | |||||||||
|
|
|
|
|
|
|||||||
Net investment income |
244,976 | 133,907 | 71,364 | |||||||||
|
|
|
|
|
|
|||||||
Realized and unrealized gain/loss |
||||||||||||
Net realized gain (loss) on investments |
47,014 | 47,008 | 14,920 | |||||||||
Net realized gain (loss) on total return swap(2) |
| 19,607 | 5,169 | |||||||||
Net realized gain (loss) on foreign currency |
(111 | ) | 407 | | ||||||||
Net change in unrealized appreciation (depreciation) on investments |
(25,982 | ) | 127,399 | (35,987 | ) | |||||||
Net change in unrealized appreciation (depreciation) on total return swap(2) |
| 1,996 | (1,996 | ) | ||||||||
Net change in unrealized gain (loss) on foreign currency |
(57 | ) | (125 | ) | | |||||||
|
|
|
|
|
|
|||||||
Total net realized and unrealized gain (loss) on investments |
20,864 | 196,292 | (17,894 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in net assets resulting from operations |
$ | 265,840 | $ | 330,199 | $ | 53,470 | ||||||
|
|
|
|
|
|
|||||||
Per share informationbasic and diluted |
||||||||||||
Net increase (decrease) in net assets resulting from operations (Earnings per Share) |
$ | 1.04 | $ | 1.45 | $ | 0.57 | ||||||
|
|
|
|
|
|
|||||||
Weighted average shares outstanding |
255,315,516 | 227,578,967 | 93,372,289 | |||||||||
|
|
|
|
|
|
(1) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees. |
(2) | On August 29, 2012, the Company terminated its total return swap agreement with Citibank, N.A. |
See notes to consolidated financial statements.
F-56
Consolidated Statements of Changes in Net Assets
(in thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operations |
||||||||||||
Net investment income |
$ | 244,976 | $ | 133,907 | $ | 71,364 | ||||||
Net realized gain (loss) on investments, total return swap and foreign currency(1) |
46,903 | 67,022 | 20,089 | |||||||||
Net change in unrealized appreciation (depreciation) on investments |
(25,982 | ) | 127,399 | (35,987 | ) | |||||||
Net change in unrealized appreciation (depreciation) on total return swap(1) |
| 1,996 | (1,996 | ) | ||||||||
Net change in unrealized gain (loss) on foreign currency |
(57 | ) | (125 | ) | | |||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in net assets resulting from operations |
265,840 | 330,199 | 53,470 | |||||||||
|
|
|
|
|
|
|||||||
Stockholder distributions(2) |
||||||||||||
Distributions from net investment income |
(212,153 | ) | (144,364 | ) | (74,663 | ) | ||||||
Distributions from net realized gain on investments |
| (53,542 | ) | (11,994 | ) | |||||||
|
|
|
|
|
|
|||||||
Net decrease in net assets resulting from stockholder distributions |
(212,153 | ) | (197,906 | ) | (86,657 | ) | ||||||
|
|
|
|
|
|
|||||||
Capital share transactions |
||||||||||||
Issuance of common stock |
| 803,348 | 1,116,691 | |||||||||
Reinvestment of stockholder distributions |
109,373 | 98,763 | 37,241 | |||||||||
Repurchases of common stock |
(33,806 | ) | (18,324 | ) | (4,416 | ) | ||||||
Offering costs |
| (3,234 | ) | (6,669 | ) | |||||||
|
|
|
|
|
|
|||||||
Net increase in net assets resulting from capital share transactions |
75,567 | 880,553 | 1,142,847 | |||||||||
|
|
|
|
|
|
|||||||
Total increase in net assets |
129,254 | 1,012,846 | 1,109,660 | |||||||||
Net assets at beginning of year |
2,511,738 | 1,498,892 | 389,232 | |||||||||
|
|
|
|
|
|
|||||||
Net assets at end of year |
$ | 2,640,992 | $ | 2,511,738 | $ | 1,498,892 | ||||||
|
|
|
|
|
|
|||||||
Accumulated undistributed (distributions in excess of) net investment income(2) |
$ | 35,322 | $ | 4,307 | $ | 1,284 | ||||||
|
|
|
|
|
|
(1) | On August 29, 2012, the Company terminated its total return swap agreement with Citibank, N.A. |
(2) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
See notes to consolidated financial statements.
F-57
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 265,840 | $ | 330,199 | $ | 53,470 | ||||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: |
||||||||||||
Purchases of investments |
(2,641,733 | ) | (3,863,334 | ) | (1,978,499 | ) | ||||||
Paid-in-kind interest |
(7,715 | ) | (3,252 | ) | (1,330 | ) | ||||||
Proceeds from sales and repayments of investments |
2,510,887 | 1,971,447 | 858,661 | |||||||||
Net realized (gain) loss on investments |
(47,014 | ) | (47,008 | ) | (14,920 | ) | ||||||
Net change in unrealized (appreciation) depreciation on investments |
25,982 | (127,399 | ) | 35,987 | ||||||||
Net change in unrealized (appreciation) depreciation on total return swap(1) |
| (1,996 | ) | 1,996 | ||||||||
Accretion of discount |
(43,266 | ) | (20,818 | ) | (10,677 | ) | ||||||
Amortization of deferred financing costs |
2,567 | 2,035 | 922 | |||||||||
(Increase) decrease in due from counterparty |
| 69,684 | (69,684 | ) | ||||||||
(Increase) decrease in receivable for investments sold and repaid |
(6,562 | ) | (18,756 | ) | 3,758 | |||||||
(Increase) decrease in interest receivable |
(2,911 | ) | (28,176 | ) | (12,903 | ) | ||||||
(Increase) decrease in receivable due on total return swap(1) |
| 548 | (548 | ) | ||||||||
(Increase) decrease in prepaid expenses and other assets |
374 | (99 | ) | (425 | ) | |||||||
Increase (decrease) in payable for investments purchased |
(55,997 | ) | 15,053 | (17,433 | ) | |||||||
Increase (decrease) in management fees payable |
1,193 | 11,935 | 6,274 | |||||||||
Increase (decrease) in accrued capital gains incentive fees |
(7,618 | ) | 39,751 | (5,459 | ) | |||||||
Increase (decrease) in subordinated income incentive fees payable |
910 | 13,393 | | |||||||||
Increase (decrease) in administrative services expense payable |
206 | 793 | (156 | ) | ||||||||
Increase (decrease) in interest payable |
321 | 7,717 | 1,642 | |||||||||
Increase (decrease) in directors fees payable |
254 | (202 | ) | 202 | ||||||||
Increase (decrease) in other accrued expenses and liabilities |
3,664 | 1,351 | 1,063 | |||||||||
|
|
|
|
|
|
|||||||
Net cash used in operating activities |
(618 | ) | (1,647,134 | ) | (1,148,059 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash flows from financing activities |
||||||||||||
Issuance of common stock |
| 803,348 | 1,116,691 | |||||||||
Reinvestment of stockholder distributions |
109,373 | 98,763 | 37,241 | |||||||||
Repurchases of common stock |
(33,806 | ) | (18,324 | ) | (4,416 | ) | ||||||
Offering costs |
| (3,234 | ) | (6,669 | ) | |||||||
Payments to investment adviser for offering and organization costs(2) |
| | (641 | ) | ||||||||
Stockholder distributions |
(210,485 | ) | (191,446 | ) | (78,670 | ) | ||||||
Borrowings under credit facilities(3) |
17,050 | 773,046 | 42,799 | |||||||||
Repayments of credit facilities(3) |
(266,414 | ) | (140,000 | ) | | |||||||
Borrowings under repurchase agreement(4) |
273,333 | 462,381 | 214,286 | |||||||||
Deferred financing costs paid |
| (9,219 | ) | (638 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
(110,949 | ) | 1,775,315 | 1,319,983 | ||||||||
|
|
|
|
|
|
|||||||
Total increase (decrease) in cash |
(111,567 | ) | 128,181 | 171,924 | ||||||||
Cash at beginning of year |
338,895 | 210,714 | 38,790 | |||||||||
|
|
|
|
|
|
|||||||
Cash at end of year |
$ | 227,328 | $ | 338,895 | $ | 210,714 | ||||||
|
|
|
|
|
|
|||||||
Supplemental disclosure |
||||||||||||
Local and excise taxes paid |
$ | 1,347 | $ | 761 | $ | | ||||||
|
|
|
|
|
|
(1) | On August 29, 2012, the Company terminated its total return swap agreement with Citibank, N.A. |
(2) | See Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates. |
(3) | See Note 8 for a discussion of the Companys credit facilities. During the years ended December 31, 2013, 2012 and 2011, the Company paid $23,815, $8,827 and $7,930, respectively, in interest expense on the credit facilities. |
(4) | See Note 8 for a discussion of the Companys repurchase transaction. During the years ended December 31, 2013, 2012 and 2011, the Company paid $24,060, $11,648 and $840, respectively, in interest expense pursuant to the repurchase agreement. |
See notes to consolidated financial statements.
F-58
FS Investment Corporation
Consolidated Schedule of Investments
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Senior Secured LoansFirst Lien80.4% |
||||||||||||||||||||||
A.P. Plasman Inc. |
(f)(h)(j) |
Capital Goods |
L+850 |
1.5% | 12/29/16 | $ | 49,941 | $ | 49,282 | $ | 51,502 | |||||||||||
AccentCare, Inc. |
(d) |
Health Care Equipment & Services |
L+500 |
1.5% | 12/22/16 | 2,017 | 1,869 | 1,052 | ||||||||||||||
Alcatel-Lucent USA Inc. |
(d)(j) |
Technology Hardware & Equipment |
L+475 |
1.0% | 1/30/19 | 4,069 | 4,051 | 4,094 | ||||||||||||||
American Racing and Entertainment, LLC |
(f) |
Consumer Services |
L+700 |
6/30/14 | 13,500 | 13,500 | 13,500 | |||||||||||||||
American Racing and Entertainment, LLC |
(f) |
Consumer Services |
9.0% |
6/30/14 | 7,750 | 7,750 | 7,789 | |||||||||||||||
Aspect Software, Inc. |
(d) |
Software & Services |
L+525 |
1.8% | 5/6/16 | 6,436 | 6,307 | 6,470 | ||||||||||||||
Attachmate Corp. |
(d)(e) |
Software & Services |
L+575 |
1.5% | 11/22/17 | 10,311 | 10,157 | 10,523 | ||||||||||||||
Audio Visual Services Group, Inc. |
(d) |
Technology Hardware & Equipment |
L+550 |
1.3% | 11/9/18 | 3,948 | 3,959 | 3,977 | ||||||||||||||
Avaya Inc. |
(d)(e)(i) |
Technology Hardware & Equipment |
L+450 |
10/26/17 | 9,905 | 9,184 | 9,717 | |||||||||||||||
Avaya Inc. |
(d) |
Technology Hardware & Equipment |
L+675 |
1.3% | 3/31/18 | 14,827 | 14,891 | 15,072 | ||||||||||||||
Azure Midstream Energy LLC |
(d) |
Energy |
L+550 |
1.0% | 11/15/18 | 4,500 | 4,434 | 4,534 | ||||||||||||||
BlackBrush TexStar L.P. |
(d)(f) |
Energy |
L+650 |
1.3% | 6/4/19 | 14,179 | 14,049 | 14,311 | ||||||||||||||
Boomerang Tube, LLC |
(d)(h) |
Energy |
L+950 |
1.5% | 10/11/17 | 18,870 | 18,408 | 18,210 | ||||||||||||||
Cadillac Jack, Inc. |
(f)(h)(j) |
Consumer Services |
L+700 |
1.0% | 12/20/17 | 35,000 | 34,655 | 34,650 | ||||||||||||||
Caesars Entertainment Operating Co. |
(e)(f)(j) |
Consumer Services |
L+425 |
1/26/18 | 16,351 | 15,017 | 15,513 | |||||||||||||||
Caesars Entertainment Operating Co. |
(f)(j) |
Consumer Services |
L+525 |
1/28/18 | 2,500 | 2,369 | 2,394 | |||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(d)(e)(f) |
Consumer Services |
L+600 |
1.0% | 10/1/20 | 72,907 | 68,627 | 72,679 | ||||||||||||||
Capital Vision Services, LLC |
(f)(h) |
Health Care Equipment & Services |
L+725 |
1.3% | 12/3/17 | 19,828 | 19,828 | 19,977 | ||||||||||||||
Cenveo Corp. |
(d) |
Commercial & Professional Services |
L+500 |
1.3% | 2/13/17 | 3,628 | 3,613 | 3,658 | ||||||||||||||
Citgo Petroleum Corp. |
(e) |
Energy |
L+600 |
2.0% | 6/24/15 | 2,536 | 2,551 | 2,561 | ||||||||||||||
Citgo Petroleum Corp. |
(e)(f) |
Energy |
L+700 |
2.0% | 6/23/17 | 7,571 | 7,557 | 7,666 | ||||||||||||||
Clear Channel Communications, Inc. |
(d)(f) |
Media |
L+365 |
1/29/16 | 16,079 | 13,772 | 15,604 | |||||||||||||||
Clover Technologies Group, LLC |
(d) |
Commercial & Professional Services |
L+550 |
1.3% | 5/7/18 | 6,277 | 6,249 | 6,277 | ||||||||||||||
Collective Brands, Inc. |
(d)(f) |
Consumer Durables & Apparel |
L+600 |
1.3% | 10/9/19 | 12,782 | 12,721 | 12,845 | ||||||||||||||
Corel Corp. |
(d)(f)(h)(j) |
Software & Services |
L+825 |
6/7/19 | 117,000 | 117,000 | 117,878 | |||||||||||||||
Corel Corp. |
(j) |
Software & Services |
L+825 |
6/7/18 | 10,000 | 10,000 | 10,000 | |||||||||||||||
Corner Investment PropCo, LLC |
(d)(f)(i) |
Consumer Services |
L+975 |
1.3% | 11/2/19 | 25,750 | 25,363 | 26,265 | ||||||||||||||
CoSentry.Net, LLC |
(d)(g)(h) |
Software & Services |
L+800 |
1.3% | 12/31/19 | 54,500 | 54,500 | 54,500 | ||||||||||||||
Crestwood Holdings LLC |
(d) |
Energy |
L+600 |
1.0% | 6/19/19 | 5,735 | 5,709 | 5,907 | ||||||||||||||
Dent Wizard International Corp. |
(d)(f)(g)(h) |
Commercial & Professional Services |
L+800 |
4/25/19 | 136,354 | 135,127 | 139,081 | |||||||||||||||
Dent Wizard International Corp. |
Commercial & Professional Services |
L+425 |
4/25/19 | 15,000 | 15,000 | 15,000 | ||||||||||||||||
Eastman Kodak Co. |
(d) |
Consumer Durables & Apparel |
L+625 |
1.0% | 9/3/19 | 10,855 | 10,647 | 10,844 | ||||||||||||||
Education Management LLC |
(f)(j) |
Consumer Services |
L+400 |
6/1/16 | 3,935 | 3,393 | 3,788 | |||||||||||||||
Education Management LLC |
(e)(j) |
Consumer Services |
L+700 |
1.3% | 3/30/18 | 15,697 | 15,638 | 15,771 | ||||||||||||||
ERC Ireland Holdings Ltd. |
(g)(i)(j) |
Telecommunication Services |
EURIBOR+300, 1.0% PIK |
9/30/17 | 22,006 | 27,607 | 36,063 | |||||||||||||||
FairPoint Communications, Inc. |
(d)(e)(j) |
Telecommunication Services |
L+625 |
1.3% | 2/14/19 | $ | 21,711 | 21,517 | 22,487 | |||||||||||||
Flanders Corp. |
(f)(h) |
Capital Goods |
L+950 |
1.5% | 5/14/18 | 37,793 | 37,069 | 38,548 | ||||||||||||||
Florida Gaming Centers, Inc. |
(f)(l) |
Consumer Services |
16.5% |
4/25/16 | 13,144 | 13,017 | 13,407 | |||||||||||||||
FR Utility Services LLC |
(d) |
Energy |
L+575 |
1.0% | 10/18/19 | 6,481 | 6,418 | 6,481 |
See notes to consolidated financial statements.
F-59
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Fram Group Holdings Inc. |
(d) |
Automobiles & Components |
L+500 |
1.5% | 7/29/17 | $ | 1,344 | $ | 1,325 | $ | 1,335 | |||||||||||
Harlan Sprague Dawley, Inc. |
(d) |
Pharmaceuticals, Biotechnology & Life Sciences |
L+550 |
7/11/14 | 1,276 | 1,154 | 1,148 | |||||||||||||||
HBC Solutions, Inc. |
(d)(f)(g)(h) |
Media |
L+875 |
1.5% | 2/4/18 | 81,371 | 81,371 | 81,371 | ||||||||||||||
Ikaria Acquisition Inc. |
(d) |
Pharmaceuticals, Biotechnology & Life Sciences |
L+600 |
1.3% | 7/3/18 | 5,798 | 5,718 | 5,841 | ||||||||||||||
ILC Industries, LLC |
(d)(h) |
Capital Goods |
L+650 |
1.5% | 7/11/18 | 9,746 | 9,592 | 9,770 | ||||||||||||||
Infiltrator Systems, Inc. |
(f) |
Capital Goods |
L+825 |
1.3% | 6/27/18 | 30,000 | 30,000 | 30,150 | ||||||||||||||
Infiltrator Systems, Inc. |
(f)(g)(h) |
Capital Goods |
L+825 |
1.3% | 6/27/18 | 170,000 | 170,000 | 170,850 | ||||||||||||||
Infogroup Inc. |
(d) |
Software & Services |
L+650 |
1.5% | 5/25/18 | 3,004 | 2,699 | 2,456 | ||||||||||||||
Insight Equity A.P. X, L.P. |
(f)(g)(h) |
Household & Personal Products |
L+850 |
1.0% | 10/26/18 | 65,000 | 63,934 | 66,300 | ||||||||||||||
Intralinks, Inc. |
(f)(j) |
Software & Services |
L+450 |
1.5% | 6/15/14 | 1,022 | 989 | 1,022 | ||||||||||||||
inVentiv Health, Inc. |
(e) |
Health Care Equipment & Services |
L+625 |
1.5% | 5/15/18 | 2,725 | 2,708 | 2,702 | ||||||||||||||
Lantiq Deutschland GmbH |
(f)(j) |
Software & Services |
L+900 |
2.0% | 11/16/15 | 12,105 | 11,519 | 11,742 | ||||||||||||||
Larchmont Resources, LLC |
(d) |
Energy |
L+725 |
1.0% | 8/7/19 | 11,087 | 10,982 | 11,294 | ||||||||||||||
Leading Edge Aviation Services, Inc. |
(d)(f)(g)(h) |
Capital Goods |
L+850 |
1.5% | 4/5/18 | 35,787 | 35,206 | 35,787 | ||||||||||||||
Leading Edge Aviation Services, Inc. |
(f)(g) |
Capital Goods |
L+850 |
1.5% | 4/5/18 | 8,250 | 8,250 | 8,250 | ||||||||||||||
Leedsworld Inc. |
(d) |
Retailing |
L+475 |
1.3% | 6/28/19 | 9,750 | 9,661 | 9,787 | ||||||||||||||
Maritime Telecommunications Network, Inc. |
(f) |
Telecommunication Services |
L+600 |
1.5% | 3/4/16 | 4,109 | 4,080 | 3,575 | ||||||||||||||
McGraw-Hill Global Education Holdings, LLC |
(d)(e) |
Media |
L+775 |
1.3% | 3/22/19 | 18,594 | 18,089 | 18,969 | ||||||||||||||
MetoKote Corp. |
(h) |
Materials |
L+800 |
1.3% | 9/30/19 | 20,000 | 20,000 | 20,200 | ||||||||||||||
MetoKote Corp. |
Materials |
L+800 |
1.3% | 9/30/19 | 3,810 | 3,810 | 3,848 | |||||||||||||||
Micronics, Inc. |
(d)(h) |
Capital Goods |
L+800 |
1.3% | 3/28/19 | 22,529 | 22,124 | 22,529 | ||||||||||||||
MMI International Ltd. |
(d)(j) |
Technology Hardware & Equipment |
L+600 |
1.3% | 11/20/18 | 10,612 | 10,323 | 10,340 | ||||||||||||||
MMM Holdings, Inc. |
(h) |
Health Care Equipment & Services |
L+825 |
1.5% | 12/12/17 | 10,040 | 9,877 | 10,120 | ||||||||||||||
MModal Inc. |
(d) |
Health Care Equipment & Services |
L+650 |
1.3% | 8/16/19 | 7,182 | 7,070 | 6,190 | ||||||||||||||
Mood Media Corp. |
(d)(j) |
Media |
L+550 |
1.5% | 5/7/18 | 3,014 | 2,990 | 3,028 | ||||||||||||||
MSO of Puerto Rico, Inc. |
(h) |
Health Care Equipment & Services |
L+825 |
1.5% | 12/12/17 | 7,302 | 7,184 | 7,360 | ||||||||||||||
National Mentor Holdings, Inc. |
(d) |
Health Care Equipment & Services |
L+525 |
1.3% | 2/9/17 | 4,929 | 4,929 | 4,970 | ||||||||||||||
National Vision, Inc. |
(d) |
Health Care Equipment & Services |
L+575 |
1.3% | 8/2/18 | 4,672 | 4,680 | 4,686 | ||||||||||||||
New HB Acquisition, LLC |
(d) |
Food, Beverage & Tobacco |
L+550 |
1.3% | 4/9/20 | 3,896 | 3,860 | 4,042 | ||||||||||||||
Nova Wildcat Amerock, LLC |
(h) |
Consumer Durables & Apparel |
L+825 |
1.3% | 9/10/19 | 20,000 | 20,000 | 20,000 | ||||||||||||||
Panda Sherman Power, LLC |
(d)(f) |
Energy |
L+750 |
1.5% | 9/14/18 | 9,273 | 9,203 | 9,551 | ||||||||||||||
Panda Temple Power, LLC (TLA) |
(f) |
Energy |
L+700 |
1.5% | 7/17/18 | 3,000 | 3,000 | 3,081 | ||||||||||||||
Patheon Inc. |
(d)(j) |
Pharmaceuticals, Biotechnology & Life Sciences |
L+600 |
1.3% | 12/14/18 | 10,156 | 9,892 | 10,275 | ||||||||||||||
Princeton Review, Inc. |
(g) |
Consumer Services |
L+550 |
1.5% | 12/7/14 | 1,041 | 996 | 859 | ||||||||||||||
PRV Aerospace, LLC |
(d) |
Capital Goods |
L+525 |
1.3% | 5/9/18 | 4,939 | 4,929 | 4,961 | ||||||||||||||
RBS Holding Co. LLC |
(d) |
Commercial & Professional Services |
L+800 |
1.5% | 3/23/17 | 9,788 | 6,198 | 4,943 | ||||||||||||||
Reddy Ice Holdings, Inc. |
(d) |
Food & Staples Retailing |
L+550 |
1.3% | 5/1/19 | 1,182 | 1,170 | 1,181 | ||||||||||||||
Safariland, LLC |
(d)(f)(h) |
Capital Goods |
L+800 |
1.3% | 9/20/19 | 156,800 | 156,800 | 158,368 | ||||||||||||||
Shell Topco L.P. |
(d)(h) |
Energy |
L+750 |
1.5% | 9/28/18 | 33,000 | 32,594 | 33,908 | ||||||||||||||
Sirius Computer Solutions, Inc. |
(d) |
Software & Services |
L+575 |
1.3% | 12/7/18 | 8,096 | 8,027 | 8,228 | ||||||||||||||
Smarte Carte, Inc. |
(d)(f)(h) |
Commercial & Professional Services |
L+650 |
1.3% | 11/30/17 | 57,950 | 57,403 | 58,819 | ||||||||||||||
Smile Brands Group Inc. |
(d)(e)(h) |
Health Care Equipment & Services |
L+625 |
1.3% | 8/15/19 | 30,474 | 29,825 | 30,131 |
See notes to consolidated financial statements.
F-60
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Sorenson Communication, Inc. |
(d)(e)(f)(h) |
Telecommunication Services |
L+825 |
1.3% | 10/31/14 | $ | 65,711 | $ | 65,711 | $ | 66,697 | |||||||||||
Sports Authority, Inc. |
(d)(f) |
Consumer Durables & Apparel |
L+600 |
1.5% | 11/16/17 | 22,190 | 22,041 | 22,162 | ||||||||||||||
Stallion Oilfield Holdings, Inc. |
(d) |
Energy |
L+675 |
1.3% | 6/19/18 | 4,975 | 4,929 | 5,087 | ||||||||||||||
Swiss Watch International, Inc. |
(d)(f)(h) |
Consumer Durables & Apparel |
L+725 |
1.3% | 11/8/18 | 48,500 | 47,692 | 48,985 | ||||||||||||||
Technicolor SA |
(d)(e)(j) |
Media |
L+600 |
1.3% | 7/10/20 | 33,885 | 32,921 | 34,254 | ||||||||||||||
Tervita Corp. |
(d)(j) |
Commercial & Professional Services |
L+500 |
1.3% | 5/15/18 | 8,035 | 7,965 | 8,083 | ||||||||||||||
Therakos, Inc. |
(d)(f) |
Pharmaceuticals, Biotechnology & Life Sciences |
L+625 |
1.3% | 12/27/17 | 27,060 | 26,494 | 27,162 | ||||||||||||||
ThermaSys Corp. |
(d) |
Capital Goods |
L+400 |
1.3% | 5/3/19 | 9,875 | 9,785 | 9,768 | ||||||||||||||
Totes Isotoner Corp. |
(d) |
Consumer Durables & Apparel |
L+575 |
1.5% | 7/7/17 | 6,622 | 6,546 | 6,660 | ||||||||||||||
Toys R Us-Delaware, Inc. |
(e) |
Consumer Durables & Apparel |
L+450 |
1.5% | 9/1/16 | 1,520 | 1,524 | 1,379 | ||||||||||||||
TravelCLICK, Inc. |
(d) |
Consumer Services |
L+450 |
1.3% | 3/16/16 | 7,776 | 7,712 | 7,854 | ||||||||||||||
Tri-Northern Acquisition, Inc. |
(f)(h) |
Retailing |
L+800 |
1.3% | 7/1/19 | 54,725 | 54,725 | 54,725 | ||||||||||||||
Tri-Northern Acquisition, Inc. |
(f) |
Retailing |
L+800 |
1.3% | 7/1/19 | 11,379 | 11,379 | 11,379 | ||||||||||||||
Virtual Radiologic Corp. |
(g) |
Health Care Equipment & Services |
L+550 |
1.8% | 12/22/16 | 3,492 | 3,446 | 2,060 | ||||||||||||||
VPG Group Holdings LLC |
(d)(f)(h) |
Materials |
L+900 |
1.0% | 10/4/16 | 64,070 | 63,409 | 65,031 | ||||||||||||||
Willbros Group, Inc. |
(h)(j) |
Energy |
L+975 |
1.3% | 8/5/19 | 15,960 | 15,422 | 16,199 | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansFirst Lien |
2,128,667 | 2,172,047 | ||||||||||||||||||||
Unfunded Loan Commitments |
(48,439 | ) | (48,439 | ) | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Net Senior Secured LoansFirst Lien |
2,080,228 | 2,123,608 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Senior Secured LoansSecond Lien34.0% |
||||||||||||||||||||||
Advance Pierre Foods, Inc. |
(e)(f)(g) |
Food & Staples Retailing |
L+825 |
1.3% | 10/10/17 | 22,556 | 22,250 | 21,879 | ||||||||||||||
Advantage Sales & Marketing Inc. |
(e) |
Commercial & Professional Services |
L+725 |
1.0% | 6/12/18 | 14,844 | 14,844 | 15,081 | ||||||||||||||
Affordable Care, Inc. |
(d)(f)(g)(h) |
Health Care Equipment & Services |
L+925 |
1.3% | 12/26/19 | 40,000 | 39,493 | 40,200 | ||||||||||||||
Alliance Laundry Systems LLC |
Capital Goods |
L+825 |
1.3% | 12/10/19 | 2,012 | 1,994 | 2,041 | |||||||||||||||
American EnergyUtica, LLC |
(f) |
Energy |
L+475, 4.75% PIK |
1.5% | 9/30/18 | 75,689 | 75,689 | 75,689 | ||||||||||||||
American Racing and Entertainment, LLC |
(g) |
Consumer Services |
12.0% |
7/1/18 | 16,800 | 16,299 | 16,821 | |||||||||||||||
Attachmate Corp. |
(e)(f)(i) |
Software & Services |
L+950 |
1.5% | 11/22/18 | 31,218 | 30,464 | 30,646 | ||||||||||||||
Audio Visual Services Group, Inc. |
(d)(f)(g) |
Technology Hardware & Equipment |
L+950 |
1.3% | 5/9/18 | 52,885 | 51,962 | 54,603 | ||||||||||||||
Brasa (Holdings) Inc. |
(f) |
Consumer Services |
L+950 |
1.5% | 1/20/20 | 11,180 | 10,813 | 11,292 | ||||||||||||||
Brock Holdings III, Inc. |
(e)(g) |
Energy |
L+825 |
1.8% | 3/16/18 | 7,756 | 7,678 | 7,902 | ||||||||||||||
Camp International Holding Co. |
(d) |
Capital Goods |
L+725 |
1.0% | 11/29/19 | 6,207 | 6,301 | 6,343 | ||||||||||||||
CHG Buyer Corp. |
(d) |
Health Care Equipment & Services |
L+775 |
1.3% | 11/19/20 | 5,158 | 5,065 | 5,248 | ||||||||||||||
Consolidated Precision Products Corp. |
(f) |
Capital Goods |
L+775 |
1.0% | 4/30/21 | 16,750 | 16,669 | 17,085 | ||||||||||||||
Crossmark Holdings, Inc. |
Commercial & Professional Services |
L+750 |
1.3% | 12/21/20 | 7,778 | 7,707 | 7,749 | |||||||||||||||
DEI Sales, Inc. |
(f)(g) |
Commercial & Professional Services |
L+900 |
1.5% | 1/15/18 | 57,500 | 56,850 | 57,284 | ||||||||||||||
Eastman Kodak Co. |
(f) |
Consumer Durables & Apparel |
L+950 |
1.3% | 9/3/20 | 50,000 | 48,791 | 50,438 | ||||||||||||||
EZE Software Group LLC |
(e) |
Software & Services |
L+725 |
1.3% | 4/5/21 | 2,381 | 2,359 | 2,427 | ||||||||||||||
Fram Group Holdings Inc. |
(e) |
Automobiles & Components |
L+900 |
1.5% | 1/29/18 | 2,000 | 1,993 | 1,907 | ||||||||||||||
ILC Industries, LLC |
(f)(g) |
Capital Goods |
L+1000 |
1.5% | 7/11/19 | 27,976 | 27,085 | 26,857 | ||||||||||||||
Keystone Automotive Operations, Inc. |
(f) |
Automobiles & Components |
L+950 |
1.3% | 8/15/20 | 44,500 | 43,644 | 46,169 | ||||||||||||||
Kronos Inc. |
(e)(f) |
Software & Services |
L+850 |
1.3% | 4/30/20 | 27,290 | 27,042 | 28,297 |
See notes to consolidated financial statements.
F-61
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
LM U.S. Member LLC |
(g) |
Transportation |
L+825 |
1.3% | 10/26/20 | $ | 9,375 | $ | 9,248 | $ | 9,510 | |||||||||||
Mitchell International, Inc. |
(g) |
Software & Services |
L+750 |
1.0% | 10/11/21 | 15,000 | 14,854 | 15,258 | ||||||||||||||
OSP Group, Inc. |
(d)(f)(g)(h) |
Consumer Durables & Apparel |
L+850 |
1.3% | 7/31/20 | 105,000 | 105,000 | 106,575 | ||||||||||||||
P2 Upstream Acquisition Co. |
(g) |
Energy |
L+800 |
1.0% | 5/1/20 | 4,091 | 4,051 | 4,173 | ||||||||||||||
Paw Luxco II Sarl |
(j) |
Consumer Durables & Apparel |
EURIBOR+950 |
1/29/19 | | 20,000 | 24,230 | 24,882 | ||||||||||||||
Pelican Products, Inc. |
(d) |
Capital Goods |
L+1000 |
1.5% | 6/14/19 | $ | 6,667 | 6,555 | 6,700 | |||||||||||||
Pregis Corp. |
(f)(g) |
Capital Goods |
L+1000 |
1.5% | 3/23/18 | 50,000 | 49,283 | 50,250 | ||||||||||||||
Ranpak Corp. |
(g) |
Commercial & Professional Services |
L+725 |
1.3% | 4/23/20 | 11,324 | 11,218 | 11,663 | ||||||||||||||
Sensus USA Inc. |
(d)(e) |
Capital Goods |
L+725 |
1.3% | 5/9/18 | 8,571 | 8,576 | 8,571 | ||||||||||||||
SESAC Holdings Inc. |
(f) |
Media |
L+875 |
1.3% | 7/12/19 | 3,000 | 2,961 | 3,075 | ||||||||||||||
Stadium Management Corp. |
(f) |
Consumer Services |
L+950 |
1.3% | 12/7/18 | 23,529 | 23,163 | 23,647 | ||||||||||||||
TNT Crane & Rigging, Inc. |
Energy |
L+900 |
1.0% | 11/27/21 | 1,500 | 1,381 | 1,448 | |||||||||||||||
TravelCLICK, Inc. |
(f)(g) |
Consumer Services |
L+850 |
1.3% | 3/26/18 | 34,925 | 34,620 | 35,973 | ||||||||||||||
Travelport LLC |
(g) |
Consumer Services |
4.0%, 4.4% PIK |
12/1/16 | 24,036 | 20,167 | 24,546 | |||||||||||||||
TriZetto Group, Inc. |
(g) |
Software & Services |
L+725 |
1.3% | 3/28/19 | 8,372 | 8,265 | 8,037 | ||||||||||||||
Vertafore, Inc. |
(e) |
Software & Services |
L+825 |
1.5% | 10/27/17 | 14,750 | 14,711 | 15,027 | ||||||||||||||
Wall Street Systems Holdings, Inc. |
(d) |
Software & Services |
L+800 |
1.3% | 10/25/20 | 7,000 | 6,878 | 7,068 | ||||||||||||||
WildHorse Resources, LLC |
(f) |
Energy |
L+625 |
1.3% | 12/13/18 | 15,407 | 15,123 | 15,484 | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansSecond Lien |
875,276 | 897,845 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Senior Secured Bonds14.6% |
||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(f)(g) |
Materials |
10.5% |
6/1/19 | 78,500 | 76,913 | 56,520 | |||||||||||||||
Allen Systems Group, Inc. |
(f)(g) |
Software & Services |
10.5% |
11/15/16 | 38,448 | 30,409 | 21,723 | |||||||||||||||
Aspect Software, Inc. |
(e) |
Software & Services |
10.6% |
5/15/17 | 4,000 | 4,000 | 4,075 | |||||||||||||||
Avaya Inc. |
(e)(f)(g) |
Technology Hardware & Equipment |
7.0% |
4/1/19 | 23,500 | 22,008 | 23,148 | |||||||||||||||
Avaya Inc. |
(e) |
Technology Hardware & Equipment |
9.0% |
4/1/19 | 5,000 | 5,000 | 5,250 | |||||||||||||||
Blackboard Inc. |
Software & Services |
7.8% |
11/15/19 | 6,500 | 6,500 | 6,486 | ||||||||||||||||
Caesars Entertainment Operating Co. |
(f)(i)(j) |
Consumer Services |
9.0% |
2/15/20 | 20,000 | 19,066 | 19,481 | |||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(e)(f) |
Consumer Services |
11.0% |
10/1/21 | 54,598 | 54,288 | 56,398 | |||||||||||||||
Chassix, Inc. |
Automobiles & Components |
9.3% |
8/1/18 | 2,000 | 2,067 | 2,140 | ||||||||||||||||
Clear Channel Communications, Inc. |
(d)(e) |
Media |
9.0% |
12/15/19 | 1,152 | 989 | 1,182 | |||||||||||||||
Dole Food Co., Inc. |
(g) |
Food & Staples Retailing |
7.3% |
5/1/19 | 6,400 | 6,400 | 6,424 | |||||||||||||||
FairPoint Communications, Inc. |
(f)(j) |
Telecommunication Services |
8.8% |
8/15/19 | 19,750 | 19,750 | 20,984 | |||||||||||||||
Global A&T Electronics Ltd. |
(j) |
Technology Hardware & Equipment |
10.0% |
2/1/19 | 9,000 | 9,000 | 7,920 | |||||||||||||||
HOA Restaurant Group, LLC |
(f) |
Consumer Services |
11.3% |
4/1/17 | 14,100 | 14,109 | 14,805 | |||||||||||||||
JW Aluminum Co. |
(f)(g) |
Materials |
11.5% |
11/15/17 | 47,980 | 47,336 | 47,920 | |||||||||||||||
Kinetic Concepts, Inc. |
(f) |
Health Care Equipment & Services |
10.5% |
11/1/18 | 11,660 | 11,146 | 13,465 | |||||||||||||||
Logans Roadhouse Inc. |
(e)(g) |
Consumer Services |
10.8% |
10/15/17 | 18,494 | 16,084 | 13,843 | |||||||||||||||
Neff Rental LLC |
(f) |
Capital Goods |
9.6% |
5/15/16 | 7,352 | 7,597 | 7,793 | |||||||||||||||
Ryerson Inc. |
(e) |
Capital Goods |
9.0% |
10/15/17 | 3,100 | 3,100 | 3,294 | |||||||||||||||
Sorenson Communication, Inc. |
(g) |
Telecommunication Services |
10.5% |
2/1/15 | 39,000 | 35,991 | 29,171 | |||||||||||||||
Speedy Cash Intermediate Holdings Corp. |
(f) |
Diversified Financials |
10.8% |
5/15/18 | 19,000 | 19,294 | 20,170 | |||||||||||||||
Tervita Corp. |
(e)(j) |
Commercial & Professional Services |
8.0% |
11/15/18 | 3,250 | 3,250 | 3,356 | |||||||||||||||
Total Senior Secured Bonds |
414,297 | 385,548 |
See notes to consolidated financial statements.
F-62
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Subordinated Debt16.2% |
||||||||||||||||||||||
Alta Mesa Holdings, L.P. |
(e) |
Energy |
9.6% |
10/15/18 | $ | 11,700 | $ | 11,598 | $ | 12,572 | ||||||||||||
Asurion, LLC |
(f) |
Insurance |
L+950 |
1.5% | 8/16/19 | 15,000 | 14,629 | 15,488 | ||||||||||||||
Aurora Diagnostics, LLC |
(f)(g) |
Pharmaceuticals, Biotechnology & Life Sciences |
10.8% |
1/15/18 | 18,065 | 18,109 | 13,368 | |||||||||||||||
Brand Energy & Infrastructure Services, Inc. |
(g) |
Energy |
8.5% |
12/1/21 | 25,000 | 25,000 | 25,500 | |||||||||||||||
Comstock Resources, Inc. |
(f)(j) |
Energy |
9.5% |
6/15/20 | 10,500 | 10,075 | 11,780 | |||||||||||||||
CrownRock, L.P. |
(e)(f) |
Energy |
7.1% |
4/15/21 | 25,000 | 25,000 | 24,856 | |||||||||||||||
Cumulus Media Inc. |
(f)(j) |
Media |
7.8% |
5/1/19 | 5,000 | 4,518 | 5,313 | |||||||||||||||
Exopack Holdings S.A. |
(g)(j) |
Materials |
7.9% |
11/1/19 | 2,500 | 2,500 | 2,500 | |||||||||||||||
Flanders Corp. |
(f)(g) |
Capital Goods |
10.0%, 3.8% PIK |
5/14/18 | 15,818 | 15,661 | 16,193 | |||||||||||||||
Harland Clarke Holdings Corp. |
(g) |
Commercial & Professional Services |
9.5% |
5/15/15 | 2,193 | 2,060 | 2,202 | |||||||||||||||
Hub International Ltd. |
(e) |
Insurance |
7.9% |
10/1/21 | 2,250 | 2,250 | 2,326 | |||||||||||||||
Ipreo Holdings LLC |
(f) |
Software & Services |
11.8% |
8/15/18 | 10,000 | 9,966 | 10,513 | |||||||||||||||
Kinetic Concepts, Inc. |
(e)(f)(g) |
Health Care Equipment & Services |
12.5% |
11/1/19 | 24,700 | 23,586 | 27,849 | |||||||||||||||
KODA Distribution Group, Inc. |
(f) |
Materials |
11.3% |
9/30/19 | 32,500 | 31,877 | 32,825 | |||||||||||||||
Monitronics International, Inc. |
(e)(j) |
Consumer Services |
9.1% |
4/1/20 | 2,250 | 2,250 | 2,396 | |||||||||||||||
Mood Media Corp. |
(e)(f)(g)(j) |
Media |
9.3% |
10/15/20 | 31,400 | 30,632 | 27,632 | |||||||||||||||
QR Energy, L.P. |
(e)(j) |
Energy |
9.3% |
8/1/20 | 3,250 | 3,210 | 3,385 | |||||||||||||||
Resolute Energy Corp. |
(e)(j) |
Energy |
8.5% |
5/1/20 | 8,500 | 8,589 | 8,948 | |||||||||||||||
RKI Exploration & Production, LLC |
(e) |
Energy |
8.5% |
8/1/21 | 10,900 | 10,900 | 11,538 | |||||||||||||||
Samson Investment Co. |
(f) |
Energy |
9.8% |
2/15/20 | 10,000 | 10,000 | 10,929 | |||||||||||||||
Sequel Industrial Products Holdings, LLC |
(g) |
Energy |
12.0%, 2.5% PIK |
5/10/18 | 15,792 | 15,551 | 16,187 | |||||||||||||||
Sidewinder Drilling Inc. |
(f)(g) |
Capital Goods |
9.8% |
11/15/19 | 8,000 | 8,000 | 7,080 | |||||||||||||||
ThermaSys Corp. |
(f)(g) |
Capital Goods |
9.0%, 1.8% PIK |
5/3/20 | 130,956 | 130,956 | 130,301 | |||||||||||||||
VPG Group Holdings LLC |
(f) |
Materials |
11.0%, 2.0% PIK |
7/15/19 | 5,047 | 5,047 | 5,047 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Subordinated Debt |
421,964 | 426,728 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Collateralized Securities5.3% |
||||||||||||||||||||||
ACASC 2013-2A B |
(g)(j) |
Diversified Financials |
12.6% |
10/15/23 | 30,500 | 30,019 | 30,896 | |||||||||||||||
Apidos CDO IV Class E |
(g)(j) |
Diversified Financials |
L+360 |
10/27/18 | 2,000 | 1,301 | 1,908 | |||||||||||||||
Ares 2007 CLO 11A Class E |
(g)(j) |
Diversified Financials |
L+600 |
10/11/21 | 4,775 | 3,327 | 4,760 | |||||||||||||||
Ares 2007 CLO 12X Class E |
(g)(j) |
Diversified Financials |
L+575 |
11/25/20 | 2,252 | 1,863 | 2,219 | |||||||||||||||
Carlyle Azure CLO Class Income |
(j) |
Diversified Financials |
18.9% |
5/27/20 | 28,000 | 11,436 | 14,276 | |||||||||||||||
Dryden CDO 23A Class Subord. |
(j) |
Diversified Financials |
17.5% |
7/17/23 | 10,000 | 6,428 | 8,066 | |||||||||||||||
JP Morgan Chase Bank, N.A. Credit-Linked Notes |
(g)(j) |
Diversified Financials |
11.2% |
12/20/21 | 16,740 | 16,710 | 16,740 | |||||||||||||||
Lightpoint CLO 2006 V Class D |
(g)(j) |
Diversified Financials |
L+365 |
8/5/19 | 6,500 | 3,758 | 6,054 | |||||||||||||||
Rampart CLO 2007 1A Class Subord. |
(j) |
Diversified Financials |
40.3% |
10/25/21 | 10,000 | 3,676 | 7,404 | |||||||||||||||
Stone Tower CLO VI Class Subord. |
(g)(j) |
Diversified Financials |
39.8% |
4/17/21 | 5,000 | 3,030 | 5,230 | |||||||||||||||
Wind River CLO Ltd. 2012 1A Class Sub B |
(j) |
Diversified Financials |
13.5% |
1/15/24 | 42,504 | 38,658 | 42,955 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
120,206 | 140,508 | ||||||||||||||||||||
|
|
|
|
See notes to consolidated financial statements.
F-63
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Number of Shares |
Amortized Cost |
Fair Value(c) |
|||||||||||||||||
Equity/Other6.2%(k) |
||||||||||||||||||||||
American Energy Ohio Holdings, LLC, Common Equity |
(l)(m) |
Energy |
5,070,590 | $ | 5,071 | $ | 5,071 | |||||||||||||||
Aquilex Corp., Common Equity, Class A Shares |
(f) |
Energy |
15,128 | 1,087 | 3,333 | |||||||||||||||||
Aquilex Corp., Common Equity, Class B Shares |
(f)(g) |
Energy |
32,637 | 1,690 | 7,190 | |||||||||||||||||
Burleigh Point, Ltd., Warrants |
(j)(l) |
Retailing |
17,256,081 | 1,898 | 4,659 | |||||||||||||||||
CoSentry.Net, LLC, Preferred Equity |
(g)(l) |
Software & Services |
2,632 | 2,500 | 2,500 | |||||||||||||||||
Eastman Kodak Co., Common Equity |
(f)(l) |
Consumer Durables & Apparel |
61,859 | 1,202 | 2,147 | |||||||||||||||||
ERC Ireland Holdings Ltd., Common Equity |
(g)(j)(l) |
Telecommunication Services |
21,099 | | | |||||||||||||||||
ERC Ireland Holdings Ltd., Warrants |
(g)(j)(l) |
Telecommunication Services |
4,943 | | | |||||||||||||||||
Flanders Corp., Common Equity |
(g)(l) |
Capital Goods |
5,000,000 | 5,000 | 9,500 | |||||||||||||||||
Florida Gaming Centers, Inc., Warrants |
(g)(l) |
Consumer Services |
71 | | 2,979 | |||||||||||||||||
Florida Gaming Corp., Warrants |
(g)(l) |
Consumer Services |
226,635 | | | |||||||||||||||||
HBC Solutions, Inc., Common Equity, Class A Units |
(l) |
Media |
26,984 | 3,051 | 2,855 | |||||||||||||||||
Ipreo Holdings LLC, Common Equity |
(g)(l) |
Software & Services |
1,000,000 | 1,000 | 2,100 | |||||||||||||||||
JW Aluminum Co., Common Equity |
(g)(l) |
Materials |
37,500 | 3,225 | | |||||||||||||||||
Leading Edge Aviation Services, Inc., Common Equity |
(g)(l) |
Capital Goods |
4,401 | 464 | 924 | |||||||||||||||||
Leading Edge Aviation Services, Inc., Preferred Equity |
(g)(l) |
Capital Goods |
1,303 | 1,303 | 1,303 | |||||||||||||||||
Micronics, Inc., Common Equity |
(l) |
Capital Goods |
50,000 | 500 | 520 | |||||||||||||||||
Micronics, Inc., Preferred Equity |
(l) |
Capital Goods |
50 | 500 | 500 | |||||||||||||||||
Milagro Holdings, LLC, Common Equity |
(g)(l) |
Energy |
12,057 | 50 | | |||||||||||||||||
Milagro Holdings, LLC, Preferred Equity |
(l) |
Energy |
283,947 | 11,180 | 2,104 | |||||||||||||||||
Plains Offshore Operations Inc., Preferred Equity |
(f)(g) |
Energy |
50,000 | 55,404 | 62,630 | |||||||||||||||||
Plains Offshore Operations Inc., Warrants |
(f)(g)(l) |
Energy |
1,013,444 | 1,722 | 2,635 | |||||||||||||||||
Safariland, LLC, Common Equity |
(g)(l) |
Capital Goods |
25,000 | 2,500 | 5,303 | |||||||||||||||||
Safariland, LLC, Preferred Equity |
(g) |
Capital Goods |
1,021 | 20,881 | 20,843 | |||||||||||||||||
Safariland, LLC, Warrants |
(g)(l) |
Capital Goods |
2,263 | 473 | 962 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Common Equity |
(g)(l) |
Energy |
3,330,600 | 3,400 | 6,661 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Preferred Equity |
(g)(l) |
Energy |
8,000,000 | 9,180 | 9,190 | |||||||||||||||||
Sequel Industrial Products Holdings, LLC, Warrants |
(g)(l) |
Energy |
20,681 | 13 | 41 | |||||||||||||||||
ThermaSys Corp., Common Equity |
(g)(l) |
Capital Goods |
51,813 | 1 | | |||||||||||||||||
ThermaSys Corp., Preferred Equity |
(g) |
Capital Goods |
51,813 | 5,181 | 3,756 | |||||||||||||||||
VPG Group Holdings LLC, Class A-2 Units |
(g)(l) |
Materials | 2,500,000 | 3,638 | 3,638 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Equity/Other |
142,114 | 163,344 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
TOTAL INVESTMENTS156.7% |
$ | 4,054,085 | 4,137,581 | |||||||||||||||||||
|
|
|||||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(56.7%) |
(1,496,589 | ) | ||||||||||||||||||||
|
|
|||||||||||||||||||||
NET ASSETS100.0% |
$ | 2,640,992 | ||||||||||||||||||||
|
|
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
See notes to consolidated financial statements.
F-64
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Fair value determined by the Companys board of directors (see Note 7). |
(d) | Security or portion thereof held within Arch Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8). |
(e) | Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8). |
(f) | Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(g) | Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
(h) | Security or portion thereof held within Walnut Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8). |
(i) | Position or portion thereof unsettled as of December 31, 2013. |
(j) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. As of December 31, 2013, 84.4% of the Companys total assets represented qualifying assets. |
(k) | Listed investments may be treated as debt for GAAP or tax purposes. |
(l) | Security is non-income producing. |
(m) | Security held within IC American Energy Investments, Inc., a wholly-owned subsidiary of the Company. |
See notes to consolidated financial statements.
F-65
FS Investment Corporation
Consolidated Schedule of Investments
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Senior Secured LoansFirst Lien77.5% |
||||||||||||||||||||||
A.P. Plasman Inc. |
(f)(h)(j) |
Capital Goods |
L+850 |
1.5% | 12/29/16 | $ | 53,350 | $ | 52,456 | $ | 54,150 | |||||||||||
AccentCare, Inc. |
(d) |
Health Care Equipment & Services |
L+500 |
1.5% | 12/22/16 | 2,017 | 1,828 | 1,573 | ||||||||||||||
Advantage Sales & Marketing Inc. |
(d) |
Commercial & Professional Services |
L+375 |
1.5% | 12/18/17 | 4,550 | 4,544 | 4,592 | ||||||||||||||
Airvana Network Solutions Inc. |
(f) |
Telecommunication Services |
L+800 |
2.0% | 3/25/15 | 3,685 | 3,677 | 3,702 | ||||||||||||||
AlixPartners, LLP |
(d)(f) |
Diversified Financials |
L+525 |
1.3% | 6/28/19 | 9,950 | 9,878 | 10,092 | ||||||||||||||
Alkermes, Inc. |
(d)(j) |
Pharmaceuticals, Biotechnology & Life Sciences |
L+350 |
1.0% | 9/18/19 | 4,200 | 4,159 | 4,247 | ||||||||||||||
Allied Security Holdings, LLC |
(d) |
Commercial & Professional Services |
L+400 |
1.3% | 2/3/17 | 3,851 | 3,833 | 3,880 | ||||||||||||||
Altegrity, Inc. |
(d)(e) |
Commercial & Professional Services |
L+600 |
1.8% | 2/20/15 | 5,121 | 5,115 | 5,125 | ||||||||||||||
Amaya Holdings Corp. |
(d)(h) |
Consumer Services |
L+775 |
1.3% | 11/5/15 | 25,000 | 24,642 | 25,000 | ||||||||||||||
American & Efird Global, LLC |
(f)(h) |
Consumer Durables & Apparel |
L+900 |
1.5% | 12/21/16 | 43,400 | 42,486 | 44,051 | ||||||||||||||
American Racing and Entertainment, LLC Term Loan A |
(f) |
Consumer Services |
L+700 |
6/30/14 | 14,500 | 14,500 | 14,500 | |||||||||||||||
American Racing and Entertainment, LLC Term Loan B |
(f) |
Consumer Services |
9.0% |
6/30/14 | 7,750 | 7,750 | 7,789 | |||||||||||||||
American Racing and Entertainment, LLC Term Loan C |
(f) |
Consumer Services |
9.0% |
6/30/14 | 750 | 750 | 754 | |||||||||||||||
Applied Systems, Inc. |
(d) |
Software & Services |
L+400 |
1.5% | 12/8/16 | 3,506 | 3,490 | 3,536 | ||||||||||||||
Ardent Medical Services, Inc. |
(d)(e) |
Health Care Equipment & Services |
L+500 |
1.5% | 9/15/15 | 13,248 | 13,164 | 13,314 | ||||||||||||||
Ardent Medical Services, Inc. |
(d)(e)(i) |
Health Care Equipment & Services |
L+525 |
1.5% | 5/23/18 | 8,488 | 8,403 | 8,589 | ||||||||||||||
Aspect Software, Inc. |
(d) |
Software & Services |
L+525 |
1.8% | 5/7/16 | 6,765 | 6,581 | 6,824 | ||||||||||||||
Attachmate Corp. |
(d)(e) |
Software & Services |
L+575 |
1.5% | 11/22/17 | 11,421 | 11,213 | 11,547 | ||||||||||||||
Avaya Inc. |
(d) |
Technology Hardware & Equipment |
L+275 |
10/24/14 | 1,973 | 1,944 | 1,939 | |||||||||||||||
Avaya Inc. |
(d)(e) |
Technology Hardware & Equipment |
L+450 |
10/26/17 | 9,012 | 8,208 | 7,976 | |||||||||||||||
AZ Chem U.S. Inc. |
(h)(i) |
Materials |
L+575 |
1.5% | 12/22/17 | 4,545 | 4,451 | 4,611 | ||||||||||||||
Barbri, Inc. |
(d) |
Consumer Services |
L+450 |
1.5% | 6/16/17 | 3,227 | 3,219 | 3,233 | ||||||||||||||
Barrington Broadcasting Group LLC |
(f) |
Media |
L+600 |
1.5% | 6/14/17 | 2,889 | 2,816 | 2,917 | ||||||||||||||
BBB Industries, LLC |
(f) |
Automobiles & Components |
L+450 |
2.0% | 6/27/14 | 8,025 | 7,993 | 7,945 | ||||||||||||||
BJs Wholesale Club, Inc. |
(d)(e) |
Food & Staples Retailing |
L+450 |
1.3% | 9/26/19 | 14,000 | 13,864 | 14,204 | ||||||||||||||
Blackboard Inc. |
(d)(f)(h) |
Software & Services |
L+600 |
1.5% | 10/4/18 | 18,307 | 17,142 | 18,536 | ||||||||||||||
Boomerang Tube, LLC |
(d)(h) |
Energy |
L+950 |
1.5% | 10/11/17 | 24,688 | 23,971 | 24,379 | ||||||||||||||
Brasa (Holdings) Inc. |
(d) |
Consumer Services |
L+625 |
1.3% | 7/19/19 | 5,819 | 5,749 | 5,877 | ||||||||||||||
Bushnell Inc. |
(d) |
Consumer Durables & Apparel |
L+425 |
1.5% | 8/24/15 | 7,581 | 7,342 | 7,584 | ||||||||||||||
Caesars Entertainment Operating Co. |
(d)(e)(f)(j) |
Consumer Services |
L+425 |
1/26/18 | 19,166 | 16,718 | 16,624 | |||||||||||||||
Cannery Casino Resorts, LLC |
(d) |
Consumer Services |
L+475 |
1.3% | 10/2/18 | 3,990 | 3,951 | 4,008 | ||||||||||||||
Capital Vision Services, LLC |
(f)(h) |
Health Care Equipment & Services |
Prime+625 |
1.3% | 12/3/17 | 17,196 | 17,196 | 17,196 | ||||||||||||||
Capital Vision Services, LLC |
Health Care Equipment & Services |
L+100 |
12/3/17 | 2,804 | 2,804 | 2,804 | ||||||||||||||||
CCM Merger, Inc. |
(d) |
Consumer Services |
L+475 |
1.3% | 3/1/17 | 4,746 | 4,694 | 4,766 | ||||||||||||||
Cengage Learning Acquisitions, Inc. |
(d)(i) |
Consumer Durables & Apparel |
L+225 |
7/3/14 | 3,117 | 2,618 | 2,471 | |||||||||||||||
Chrysler Group LLC |
(d)(e)(f)(h) |
Automobiles & Components |
L+475 |
1.3% | 5/24/17 | 22,444 | 21,726 | 22,952 | ||||||||||||||
Citgo Petroleum Corp. |
(e)(j) |
Energy |
L+600 |
2.0% | 6/24/15 | 3,036 | 3,066 | 3,062 | ||||||||||||||
Citgo Petroleum Corp. |
(e)(f)(j) |
Energy |
L+700 |
2.0% | 6/23/17 | 7,661 | 7,643 | 7,779 | ||||||||||||||
Clear Channel Communications, Inc. |
(d)(e)(f)(i) |
Media |
L+365 |
1/29/16 | 27,557 | 22,354 | 22,842 |
See notes to consolidated financial statements.
F-66
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Collective Brands, Inc. |
(f) |
Consumer Durables & Apparel |
L+600 |
1.3% | 10/9/19 | $ | 10,820 | $ | 10,662 | $ | 10,968 | |||||||||||
CompuCom Systems, Inc. |
(d) |
Software & Services |
L+525 |
1.3% | 10/4/18 | 3,448 | 3,415 | 3,472 | ||||||||||||||
The Container Store, Inc. |
(d)(e) |
Consumer Durables & Apparel |
L+500 |
1.3% | 4/5/19 | 13,065 | 13,001 | 13,187 | ||||||||||||||
Corel Corp. |
(d)(j) |
Software & Services |
L+700 |
5/2/14 | 9,400 | 9,352 | 9,447 | |||||||||||||||
Corner Investment PropCo, LLC |
(d)(f)(j) |
Consumer Services |
L+975 |
1.3% | 11/1/19 | 24,000 | 23,532 | 23,730 | ||||||||||||||
Crestwood Holdings LLC |
(f) |
Energy |
L+825 |
1.5% | 3/26/18 | 16,689 | 16,603 | 17,050 | ||||||||||||||
DAE Aviation Holdings, Inc. |
(h) |
Capital Goods |
L+500 |
1.3% | 10/29/18 | 6,825 | 6,690 | 6,927 | ||||||||||||||
DAE Aviation Holdings, Inc. |
(h) |
Capital Goods |
L+500 |
1.3% | 11/2/18 | 3,094 | 3,033 | 3,140 | ||||||||||||||
Del Monte Foods Co. |
(d) |
Food, Beverage & Tobacco |
L+300 |
1.5% | 3/8/18 | 2,876 | 2,832 | 2,886 | ||||||||||||||
Drumm Investors LLC |
(d)(f) |
Health Care Equipment & Services |
L+375 |
1.3% | 5/4/18 | 8,542 | 8,021 | 8,037 | ||||||||||||||
Dynegy Inc. |
(f) |
Energy |
L+775 |
1.5% | 8/5/16 | 6,096 | 6,225 | 6,393 | ||||||||||||||
Eastman Kodak Co. |
(g) |
Consumer Durables & Apparel |
L+750 |
1.0% | 7/19/13 | 7,232 | 7,181 | 7,252 | ||||||||||||||
Education Management LLC |
(f)(j) |
Consumer Services |
L+400 |
6/1/16 | 3,978 | 3,233 | 3,257 | |||||||||||||||
Education Management LLC |
(e)(j) |
Consumer Services |
L+700 |
1.3% | 3/29/18 | 15,870 | 15,796 | 13,271 | ||||||||||||||
Electrical Components International, Inc. |
(f) |
Capital Goods |
L+525 |
1.5% | 2/4/16 | 235 | 218 | 236 | ||||||||||||||
Electrical Components International, Inc. |
(g) |
Capital Goods |
L+525 |
1.5% | 2/4/17 | 3,573 | 3,295 | 3,582 | ||||||||||||||
EquiPower Resources Holdings, LLC |
(d) |
Utilities |
L+425 |
1.3% | 12/21/18 | 4,975 | 4,996 | 5,054 | ||||||||||||||
ERC Ireland Holdings Ltd. |
(i)(j) |
Telecommunication Services |
EURIBOR+300, 1.0% PIK |
9/30/17 | | 11,173 | 10,733 | 11,896 | ||||||||||||||
Fairway Group Acquisition Co. |
(d)(f)(h) |
Food & Staples Retailing |
L+675 |
1.5% | 8/17/18 | $ | 25,325 | 25,037 | 25,578 | |||||||||||||
Flanders Corp. |
(f)(h) |
Capital Goods |
L+950 |
1.5% | 5/16/18 | 38,993 | 38,104 | 39,188 | ||||||||||||||
Fleetgistics Holdings, Inc. |
(f) |
Transportation |
L+588 |
2.0% | 3/23/15 | 2,026 | 2,011 | 1,783 | ||||||||||||||
Flexera Software, Inc. |
(d) |
Software & Services |
L+625 |
1.3% | 9/29/17 | 2,925 | 2,923 | 2,948 | ||||||||||||||
Florida Gaming Centers, Inc. |
(f) |
Consumer Services |
15.8% |
4/25/16 | 12,517 | 12,343 | 12,455 | |||||||||||||||
Fram Group Holdings Inc. |
(d) |
Automobiles & Components |
L+500 |
1.5% | 7/29/17 | 1,990 | 1,952 | 1,992 | ||||||||||||||
FREIF North American Power I LLC |
(d) |
Energy |
L+450 |
1.5% | 3/29/19 | 3,073 | 3,080 | 3,111 | ||||||||||||||
FREIF North American Power I LLC |
(d) |
Energy |
L+450 |
1.5% | 3/29/19 | 880 | 882 | 891 | ||||||||||||||
Generac Power Systems, Inc. |
(d)(j) |
Capital Goods |
L+500 |
1.3% | 5/30/18 | 3,563 | 3,630 | 3,653 | ||||||||||||||
Generic Drug Holdings, Inc. |
(d) |
Retailing |
L+475 |
1.3% | 9/28/19 | 2,728 | 2,701 | 2,753 | ||||||||||||||
Genesys Telecom Holdings, U.S., Inc. |
(d) |
Telecommunication Services |
L+525 |
1.5% | 1/31/19 | 1,711 | 1,724 | 1,730 | ||||||||||||||
Gymboree Corp. |
(d) | Consumer Durables & Apparel |
L+350 |
1.5% | 2/23/18 | 3,702 | 3,477 | 3,420 | ||||||||||||||
Halifax Media Holdings LLC |
(f)(h) | Media |
L+1050 |
0.8% | 6/30/16 | 16,068 | 15,748 | 15,907 | ||||||||||||||
Hamilton Lane Advisors, LLC |
(d) | Diversified Financials |
L+500 |
1.5% | 2/23/18 | 2,730 | 2,717 | 2,750 | ||||||||||||||
Harbor Freight Tools USA, Inc. |
(d) | Consumer Durables & Apparel |
L+425 |
1.3% | 11/14/17 | 4,365 | 4,364 | 4,424 | ||||||||||||||
HarbourVest Partners L.P. |
(d) | Diversified Financials |
L+375 |
1.0% | 11/21/17 | 5,752 | 5,724 | 5,781 | ||||||||||||||
Harland Clarke Holdings Corp. |
(f) | Commercial & Professional Services |
L+250 |
6/30/14 | 6,334 | 5,741 | 6,135 | |||||||||||||||
Hawaiian Telcom Communications, Inc. |
(d)(f)(h) | Telecommunication Services |
L+575 |
1.3% | 2/28/17 | 16,979 | 16,864 | 17,335 | ||||||||||||||
Hupah Finance Inc. |
(d)(e) | Capital Goods | L+500 | 1.3% | 1/21/19 | 11,333 | 11,275 | 11,475 | ||||||||||||||
Hyland Software, Inc. |
(d) | Software & Services | L+425 | 1.3% | 10/25/19 | 4,918 | 4,918 | 4,939 | ||||||||||||||
IASIS Healthcare LLC |
(d) | Health Care Equipment & Services | L+375 | 1.3% | 5/3/18 | 1,453 | 1,427 | 1,459 | ||||||||||||||
Ikaria Acquisition Inc. |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | L+650 | 1.3% | 9/18/17 | 3,967 | 3,948 | 3,992 | ||||||||||||||
ILC Industries, LLC |
(d)(h) | Capital Goods | L+600 | 1.5% | 7/11/18 | 10,131 | 9,941 | 10,038 | ||||||||||||||
Immucor, Inc. |
(d) | Health Care Equipment & Services | L+450 | 1.3% | 8/17/18 | 3,873 | 3,882 | 3,929 |
See notes to consolidated financial statements.
F-67
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
INC Research, LLC |
(d)(f) | Health Care Equipment & Services | L+575 | 1.3% | 7/12/18 | $ | 16,788 | $ | 16,522 | $ | 16,913 | |||||||||||
INEOS Finance Plc |
(d)(e)(f)(j) | Materials | L+525 | 1.3% | 5/4/18 | 18,914 | 18,713 | 19,145 | ||||||||||||||
Infogroup Inc. |
(d) | Software & Services | L+425 | 1.5% | 5/25/18 | 3,338 | 2,940 | 3,004 | ||||||||||||||
Insight Equity A.P. X, L.P. |
(f)(g)(h) | Household & Personal Products | L+850 | 1.0% | 10/26/18 | 65,000 | 63,736 | 65,000 | ||||||||||||||
Intelsat Jackson Holdings SA |
(d)(j) | Telecommunication Services | L+325 | 1.3% | 4/2/18 | 2,963 | 2,962 | 2,993 | ||||||||||||||
Intralinks, Inc. |
(f)(j) | Software & Services | L+425 | 1.5% | 6/15/14 | 1,033 | 938 | 1,034 | ||||||||||||||
inVentiv Health, Inc. |
(d) | Health Care Equipment & Services | L+500 | 1.5% | 8/4/16 | 1,066 | 997 | 1,040 | ||||||||||||||
inVentiv Health, Inc. |
(e) | Health Care Equipment & Services | L+525 | 1.5% | 5/15/18 | 2,725 | 2,704 | 2,671 | ||||||||||||||
Ipreo Holdings LLC |
(d)(f) | Software & Services | L+525 | 1.3% | 8/7/17 | 8,968 | 8,861 | 9,024 | ||||||||||||||
Jason Inc. (TLA) |
(g) | Capital Goods | L+625 | 2.0% | 9/21/14 | 2,403 | 2,395 | 2,399 | ||||||||||||||
Jason Inc. (TLB) |
(g) | Capital Goods | L+625 | 2.0% | 9/21/14 | 971 | 968 | 973 | ||||||||||||||
JHCI Acquisition, Inc. |
(d) | Transportation | L+250 | 6/19/14 | 2,304 | 2,192 | 2,070 | |||||||||||||||
KIK Custom Products Inc. |
(e)(j) | Household & Personal Products | L+225 | 6/2/14 | 10,274 | 9,693 | 9,657 | |||||||||||||||
Kronos Inc. |
(d) | Commercial & Professional Services | L+425 | 1.3% | 10/25/19 | 4,500 | 4,478 | 4,560 | ||||||||||||||
La Paloma Generating Co., LLC |
(e)(f) | Energy | L+550 | 1.5% | 8/25/17 | 8,697 | 8,445 | 8,686 | ||||||||||||||
Lantiq Deutschland GmbH |
(f)(j) | Software & Services | L+900 | 2.0% | 11/16/15 | 12,105 | 11,241 | 11,076 | ||||||||||||||
Leading Edge Aviation Services, Inc. |
(d)(g)(h) | Capital Goods | L+850 | 1.5% | 4/5/18 | 36,301 | 35,651 | 35,212 | ||||||||||||||
Maritime Telecommunications Network, Inc. |
(f) | Telecommunication Services | L+600 | 1.5% | 3/3/16 | 5,169 | 5,117 | 5,159 | ||||||||||||||
MMM Holdings, Inc. |
Health Care Equipment & Services | L+825 | 1.5% | 12/12/17 | 13,509 | 13,240 | 13,527 | |||||||||||||||
Mood Media Corp. |
(d)(j) | Media | L+550 | 1.5% | 5/7/18 | 3,045 | 3,016 | 3,054 | ||||||||||||||
MSO of Puerto Rico, Inc. |
Health Care Equipment & Services | L+825 | 1.5% | 12/12/17 | 9,825 | 9,629 | 9,838 | |||||||||||||||
National Mentor Holdings, Inc. |
(d) | Health Care Equipment & Services | L+525 | 1.3% | 2/9/17 | 7,980 | 7,980 | 7,985 | ||||||||||||||
National Vision, Inc. |
(d) | Health Care Equipment & Services | L+575 | 1.3% | 8/2/18 | 4,764 | 4,774 | 4,835 | ||||||||||||||
Natural Products Group, LLC |
(g) | Household & Personal Products | Prime+600 | 4.0% | 3/5/15 | 1,325 | 1,266 | 1,272 | ||||||||||||||
Navistar, Inc. |
(d)(f)(h)(j) | Capital Goods | L+550 | 1.5% | 8/17/17 | 20,944 | 20,891 | 21,082 | ||||||||||||||
NCI Building Systems, Inc. |
(d)(e)(g)(h)(j) | Capital Goods | L+675 | 1.3% | 5/2/18 | 31,573 | 30,815 | 31,635 | ||||||||||||||
NCO Group, Inc. |
(e)(h) | Software & Services | L+675 | 1.3% | 4/3/18 | 19,807 | 19,448 | 19,900 | ||||||||||||||
Nexeo Solutions, LLC |
Capital Goods | L+350 | 1.5% | 9/7/17 | 3,990 | 3,912 | 3,926 | |||||||||||||||
NSH Merger Sub, Inc. |
(d)(f) | Health Care Equipment & Services | L+650 | 1.8% | 2/2/17 | 19,042 | 18,869 | 18,613 | ||||||||||||||
Nuveen Investments, Inc. |
(d) | Diversified Financials | L+550 | 5/13/17 | 9,000 | 9,004 | 9,055 | |||||||||||||||
NXP BV |
(d)(j) | Semiconductors & Semiconductor Equipment | L+425 | 1.3% | 3/3/17 | 2,351 | 2,375 | 2,402 | ||||||||||||||
On Assignment, Inc. |
(d)(j) | Commercial & Professional Services | L+375 | 1.3% | 5/15/19 | 2,992 | 2,976 | 3,033 | ||||||||||||||
Onex Carestream Finance L.P. |
(d)(j) |
Health Care Equipment & Services |
L+350 |
1.5% | 2/25/17 | 1,419 | 1,383 | 1,416 | ||||||||||||||
Orbitz Worldwide, Inc. |
(d)(j) |
Retailing |
L+300 |
7/25/14 | 4,216 | 4,058 | 4,056 | |||||||||||||||
Ozburn-Hessey Holding Co., LLC(d)(f) |
Transportation |
L+625 |
2.0% | 4/8/16 | 5,650 | 5,446 | 5,650 | |||||||||||||||
Panda Sherman Power, LLC |
(d) |
Energy |
L+750 |
1.5% | 9/14/18 | 9,273 | 9,192 | 9,435 | ||||||||||||||
Panda Temple Power, LLC (TLA) |
(f) |
Energy |
L+700 |
1.5% | 7/17/18 | 3,000 | 3,000 | 3,045 | ||||||||||||||
Party City Holdings Inc. |
(d)(e)(f) |
Retailing |
L+450 |
1.3% | 7/26/19 | 16,593 | 16,513 | 16,809 | ||||||||||||||
Patheon Inc. |
(d)(i)(j) |
Pharmaceuticals, Biotechnology & Life Sciences |
L+600 |
1.3% | 12/6/18 | 10,259 | 9,951 | 10,259 | ||||||||||||||
Pelican Products, Inc. |
(d) |
Capital Goods |
L+550 |
1.5% | 7/11/18 | 2,972 | 2,944 | 2,954 |
See notes to consolidated financial statements.
F-68
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Peninsula Gaming LLC |
(f)(j) |
Consumer Services |
L+450 |
1.3% | 8/3/17 | $ | 4,605 | $ | 4,562 | $ | 4,671 | |||||||||||
Pharmaceutical Product Development, Inc. |
(d) |
Health Care Equipment & Services |
L+500 |
1.3% | 12/5/18 | 8,967 | 8,890 | 9,126 | ||||||||||||||
Pharmaceutical Research Associates, Inc. |
(d)(i) |
Health Care Equipment & Services |
L+525 |
1.3% | 11/27/18 | 5,833 | 5,775 | 5,841 | ||||||||||||||
PL Propylene LLC |
(d)(j) |
Materials |
L+575 |
1.3% | 3/23/17 | 6,833 | 6,714 | 6,944 | ||||||||||||||
Presidio, Inc. |
(d)(f)(g)(h) |
Software & Services |
L+450 |
1.3% | 3/31/17 | 15,302 | 15,231 | 15,455 | ||||||||||||||
Princeton Review, Inc. |
(g) |
Consumer Services |
L+550 |
1.5% | 12/7/14 | 1,113 | 1,022 | 990 | ||||||||||||||
Property Data (U.S.) I, Inc. |
(f) |
Software & Services |
L+550 |
1.5% | 1/4/17 | 4,295 | 4,251 | 4,303 | ||||||||||||||
Protection One, Inc. |
(d) |
Consumer Services |
L+450 |
1.3% | 3/21/19 | 2,544 | 2,551 | 2,580 | ||||||||||||||
PRV Aerospace, LLC |
(d) |
Capital Goods |
L+525 |
1.3% | 5/9/18 | 4,976 | 4,965 | 4,989 | ||||||||||||||
RBS Holding Co. LLC |
(d) |
Commercial & Professional Services |
Prime+600 |
3/23/17 | 9,825 | 6,065 | 3,635 | |||||||||||||||
RBS Worldpay, Inc. |
(d) |
Software & Services |
L+400 |
1.3% | 11/30/17 | 1,522 | 1,524 | 1,534 | ||||||||||||||
Remy International, Inc. |
(d)(j) |
Automobiles & Components |
L+450 |
1.8% | 12/16/16 | 1,923 | 1,861 | 1,940 | ||||||||||||||
Reynolds Group Holdings, Inc. |
(d)(j) |
Consumer Durables & Apparel |
L+375 |
1.0% | 9/28/18 | 4,293 | 4,293 | 4,349 | ||||||||||||||
Rocket Software, Inc. |
(d) |
Software & Services |
L+450 |
1.3% | 2/8/18 | 6,630 | 6,636 | 6,673 | ||||||||||||||
Roundys Supermarkets, Inc. |
(d)(j) |
Food & Staples Retailing |
L+450 |
1.3% | 2/13/19 | 2,776 | 2,648 | 2,619 | ||||||||||||||
Sabre Inc. |
(d) |
Consumer Services |
L+575 |
12/29/17 | 1,487 | 1,471 | 1,500 | |||||||||||||||
Sabre Inc. |
(e) |
Consumer Services |
L+600 |
1.3% | 12/29/17 | 4,978 | 4,931 | 5,052 | ||||||||||||||
Safariland, LLC |
(d)(f)(h) |
Capital Goods |
L+925 |
1.5% | 7/27/18 | 45,243 | 44,392 | 46,601 | ||||||||||||||
Sagittarius Restaurants LLC |
(d)(f) |
Consumer Services |
L+550 |
2.0% | 5/18/15 | 6,530 | 6,497 | 6,505 | ||||||||||||||
Shell Topco L.P. |
(d)(h) |
Energy |
L+750 |
1.5% | 9/28/18 | 33,000 | 32,524 | 33,000 | ||||||||||||||
Sheridan Production Co., LLC |
(e) |
Energy |
L+375 |
1.3% | 9/14/19 | 5,224 | 5,173 | 5,279 | ||||||||||||||
Shield Finance Co. Sarl |
(f)(j) |
Software & Services |
L+525 |
1.3% | 5/10/19 | 10,974 | 10,822 | 11,002 | ||||||||||||||
Sirius Computer Solutions, Inc. |
(d)(i) |
Software & Services |
L+575 |
1.3% | 11/30/18 | 9,808 | 9,710 | 9,900 | ||||||||||||||
Sitel, LLC |
(e) |
Telecommunication Services |
L+675 |
1/30/17 | 5,966 | 5,743 | 5,951 | |||||||||||||||
Six3 Systems, Inc. |
(d) |
Software & Services |
L+575 |
1.3% | 10/4/19 | 4,674 | 4,629 | 4,674 | ||||||||||||||
Smarte Carte, Inc. |
(d)(f)(h) |
Commercial & Professional Services |
L+650 |
1.3% | 11/30/17 | 61,000 | 60,288 | 61,000 | ||||||||||||||
Smile Brands Group Inc. |
(d)(e) |
Health Care Equipment & Services |
L+525 |
1.8% | 12/21/17 | 13,717 | 13,308 | 12,962 | ||||||||||||||
Sophia, L.P. |
(d)(e)(f) |
Software & Services |
L+500 |
1.3% | 7/19/18 | 13,966 | 13,880 | 14,165 | ||||||||||||||
Sorenson Communication, Inc. |
(d)(e)(f)(h) |
Telecommunication Services |
L+400 |
2.0% | 8/16/13 | 50,402 | 49,586 | 49,609 | ||||||||||||||
Spansion LLC |
(e)(j) |
Semiconductors & Semiconductor Equipment |
L+350 |
1.3% | 2/9/15 | 6,369 | 6,285 | 6,418 | ||||||||||||||
Sports Authority, Inc. |
(d)(e)(f) |
Consumer Durables & Apparel |
L+600 |
1.5% | 11/16/17 | 22,418 | 22,234 | 22,615 | ||||||||||||||
Sprouts Farmers Markets Holdings, LLC |
Food & Staples Retailing |
L+475 |
4/18/16 | 5,250 | 5,250 | 5,001 | ||||||||||||||||
Sprouts Farmers Markets Holdings, LLC |
(d) |
Food & Staples Retailing |
L+475 |
1.3% | 4/18/18 | 4,803 | 4,746 | 4,861 | ||||||||||||||
SRA International, Inc. |
(d)(e)(f) |
Software & Services |
L+525 |
1.3% | 7/20/18 | 21,624 | 20,910 | 20,489 | ||||||||||||||
Star West Generation LLC |
(d) |
Energy |
L+450 |
1.5% | 5/17/18 | 5,923 | 5,860 | 5,949 | ||||||||||||||
Surgery Center Holdings, Inc. |
(d)(f)(h) |
Health Care Equipment & Services |
L+500 |
1.5% | 2/6/17 | 14,693 | 14,473 | 14,620 | ||||||||||||||
Swiss Watch International, Inc. |
(d)(f)(h) |
Consumer Durables & Apparel |
L+725 |
1.3% | 11/8/18 | 50,000 | 49,022 | 50,000 | ||||||||||||||
Technicolor SA |
(j) |
Media |
EURIBOR+500 |
2.0% | 5/26/16 | | 2,345 | 2,770 | 3,080 | |||||||||||||
Technicolor SA |
(j) |
Media |
EURIBOR+600 |
2.0% | 5/26/17 | | 6,279 | 7,402 | 8,249 | |||||||||||||
Technicolor SA |
(g)(j) |
Media |
L+500 |
2.0% | 5/26/16 | $ | 1,659 | 1,507 | 1,651 | |||||||||||||
Technicolor SA |
(g)(j) |
Media |
L+600 |
2.0% | 5/26/17 | 4,376 | 3,967 | 4,357 |
See notes to consolidated financial statements.
F-69
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Texas Competitive Electric Holdings Co. LLC |
(d)(e)(f)(g)(i) |
Utilities |
L+350 |
10/10/14 | $ | 76,891 | $ | 56,163 | $ | 58,221 | ||||||||||||
Texas Competitive Electric Holdings Co. LLC |
(g) |
Utilities |
L+450 |
10/10/17 | 38,867 | 26,875 | 25,992 | |||||||||||||||
TI Group Automotive Systems, LLC |
(d)(e)(j) |
Capital Goods |
L+550 |
1.3% | 3/14/18 | 8,956 | 8,709 | 9,045 | ||||||||||||||
Titlemax, Inc. |
(f)(h) |
Diversified Financials |
L+850 |
1.5% | 6/15/15 | 25,000 | 24,790 | 25,500 | ||||||||||||||
Total Safety U.S., Inc. |
(d)(f) |
Energy |
L+625 |
1.3% | 10/31/17 | 9,900 | 9,667 | 10,032 | ||||||||||||||
Totes Isotoner Corp. |
(d) |
Consumer Durables & Apparel |
L+575 |
1.5% | 7/7/17 | 6,928 | 6,830 | 6,945 | ||||||||||||||
Toys R Us-Delaware, Inc. |
(d)(e) |
Consumer Durables & Apparel |
L+450 |
1.5% | 9/1/16 | 3,842 | 3,843 | 3,729 | ||||||||||||||
TravelCLICK, Inc. |
(d) |
Consumer Services |
L+500 |
1.5% | 3/16/16 | 7,836 | 7,746 | 7,836 | ||||||||||||||
Travelport LLC |
(e)(f)(g) |
Consumer Services |
L+475 |
8/21/15 | 15,682 | 14,327 | 15,143 | |||||||||||||||
U.S. Security Associates Holdings, Inc. |
(d) |
Commercial & Professional Services |
L+475 |
1.3% | 7/28/17 | 3,959 | 3,958 | 3,985 | ||||||||||||||
Unifrax I LLC |
(e)(f) |
Capital Goods |
L+500 |
1.5% | 11/28/18 | 13,958 | 13,707 | 14,145 | ||||||||||||||
United Surgical Partners International Inc. |
(d) |
Health Care Equipment & Services |
L+475 |
1.3% | 4/3/19 | 4,374 | 4,372 | 4,418 | ||||||||||||||
Univar Inc. |
(e) |
Materials |
L+350 |
1.5% | 6/30/17 | 6,509 | 6,509 | 6,500 | ||||||||||||||
Univision Communications Inc. |
(e)(f) |
Media |
L+425 |
3/31/17 | 9,593 | 8,591 | 9,454 | |||||||||||||||
Virtual Radiologic Corp. |
(g) |
Health Care Equipment & Services |
Prime+450 |
12/22/16 | 3,528 | 3,468 | 3,105 | |||||||||||||||
Vision Solutions, Inc. |
(d) |
Software & Services |
L+450 |
1.5% | 7/22/16 | 6,800 | 6,753 | 6,787 | ||||||||||||||
VPG Group Holdings LLC |
(f)(h) |
Materials |
L+900 |
1.0% | 10/4/16 | 55,055 | 54,173 | 55,056 | ||||||||||||||
Wall Street Systems Holdings, Inc. |
(d) |
Software & Services |
L+450 |
1.3% | 10/24/19 | 5,000 | 4,926 | 5,013 | ||||||||||||||
WASH Multifamily Laundry Systems, LLC |
(g) |
Commercial & Professional Services |
Prime+375 |
8/28/14 | 3,830 | 3,803 | 3,825 | |||||||||||||||
West Corp. |
(d) |
Software & Services |
L+450 |
1.3% | 6/29/18 | 7,297 | 7,245 | 7,422 | ||||||||||||||
Wide OpenWest Finance, LLC |
(d) |
Media |
L+500 |
1.3% | 7/17/18 | 6,219 | 6,211 | 6,299 | ||||||||||||||
Willbros United States Holdings, Inc. |
(h)(j) |
Energy |
L+750 |
2.0% | 6/30/14 | 6,705 | 6,635 | 6,721 | ||||||||||||||
WireCo WorldGroup Inc. |
(d) |
Capital Goods |
L+475 |
1.3% | 2/15/17 | 3,558 | 3,554 | 3,638 | ||||||||||||||
Woodstream Corp. |
(f) |
Household & Personal Products |
L+350 |
8/31/14 | 705 | 665 | 673 | |||||||||||||||
Woodstream Corp. |
(g) |
Household & Personal Products |
Prime+375 |
8/31/14 | 1,530 | 1,508 | 1,522 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansFirst Lien |
1,929,800 | 1,959,963 | ||||||||||||||||||||
Unfunded Loan Commitments |
(14,804 | ) | (14,804 | ) | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Net Senior Secured LoanFirst Lien |
1,914,996 | 1,945,159 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Senior Secured LoanSecond Lien30.4% |
||||||||||||||||||||||
Advance Pierre Foods, Inc. |
(e)(f)(g) |
Food & Staples Retailing |
L+825 |
1.3% | 10/10/17 | 25,556 | 25,133 | 26,075 | ||||||||||||||
Advantage Sales & Marketing Inc. |
(e)(f) |
Commercial & Professional Services |
L+775 |
1.5% | 6/18/18 | 20,314 | 20,363 | 20,466 | ||||||||||||||
Affordable Care, Inc. |
(d)(e)(f)(g)(h) |
Health Care Equipment & Services |
Prime+825 |
12/26/19 | 40,000 | 39,401 | 39,400 | |||||||||||||||
AlixPartners, LLP |
(e) |
Diversified Financials |
L+925 |
1.5% | 12/27/19 | 15,000 | 14,570 | 15,197 | ||||||||||||||
Alliance Laundry Systems LLC |
(d)(e) |
Capital Goods |
L+825 |
1.3% | 12/10/19 | 4,919 | 4,870 | 4,987 | ||||||||||||||
American Racing and Entertainment, LLC |
(g) |
Consumer Services |
12.0% |
7/2/18 | 16,800 | 16,227 | 16,632 | |||||||||||||||
AssuraMed Holding, Inc. |
(f) |
Health Care Equipment & Services |
L+800 |
1.3% | 4/24/20 | 10,000 | 9,803 | 10,137 | ||||||||||||||
Asurion, LLC |
(d)(e) |
Insurance |
L+750 |
1.5% | 5/24/19 | 12,229 | 12,179 | 12,623 | ||||||||||||||
Attachmate Corp. |
(e)(f) |
Software & Services |
L+950 |
1.5% | 11/22/18 | 29,000 | 28,145 | 28,608 | ||||||||||||||
Audio Visual Services Group, Inc. |
(d)(f)(g) |
Technology Hardware & Equipment |
L+900 |
1.3% | 4/30/19 | 52,885 | 51,845 | 52,224 | ||||||||||||||
BJs Wholesale Club, Inc. |
(e)(f) |
Food & Staples Retailing |
L+850 |
1.3% | 3/26/20 | 8,298 | 8,217 | 8,547 | ||||||||||||||
Blackboard Inc. |
(f)(g) |
Software & Services |
L+1000 |
1.5% | 4/4/19 | 22,000 | 20,107 | 21,197 |
See notes to consolidated financial statements.
F-70
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
BNY ConvergEx Group, LLC |
(g) |
Software & Services |
L+700 |
1.8% | 12/18/17 | $ | 9,000 | $ | 9,021 | $ | 8,533 | |||||||||||
Brasa (Holdings) Inc. |
(f) |
Consumer Services |
L+950 |
1.5% | 1/20/20 | 17,391 | 16,731 | 17,652 | ||||||||||||||
Brock Holdings III, Inc. |
(e) |
Energy |
L+825 |
1.8% | 3/16/18 | 7,756 | 7,660 | 7,815 | ||||||||||||||
Camp International Holding Co. |
(d) |
Capital Goods |
L+875 |
1.3% | 11/29/19 | 6,207 | 6,090 | 6,340 | ||||||||||||||
Cannery Casino Resorts, LLC |
(g) |
Consumer Services |
L+875 |
1.3% | 10/2/19 | 12,000 | 11,767 | 11,470 | ||||||||||||||
CHG Buyer Corp. |
(d) |
Health Care Equipment & Services |
L+775 |
1.3% | 11/20/20 | 5,787 | 5,673 | 5,827 | ||||||||||||||
DEI Sales, Inc. |
(f)(g) |
Commercial & Professional Services |
L+850 |
1.5% | 1/15/18 | 57,500 | 56,734 | 57,500 | ||||||||||||||
EquiPower Resources Holdings, LLC |
(d) |
Utilities |
L+850 |
1.5% | 6/21/19 | 7,000 | 6,868 | 7,204 | ||||||||||||||
FR Brand Acquisition Corp. |
(e)(g)(i) |
Energy |
L+975 |
1.3% | 10/23/19 | 36,000 | 34,475 | 35,580 | ||||||||||||||
Fram Group Holdings Inc. |
(e) |
Automobiles & Components |
L+900 |
1.5% | 1/29/18 | 7,000 | 6,972 | 6,650 | ||||||||||||||
Hubbard Radio, LLC |
(f) |
Telecommunication Services |
L+725 |
1.5% | 4/30/18 | 1,429 | 1,417 | 1,457 | ||||||||||||||
ILC Industries, LLC |
(f)(g) |
Capital Goods |
L+1000 |
1.5% | 6/14/19 | 37,000 | 35,681 | 36,630 | ||||||||||||||
JHCI Acquisition, Inc. |
(g) |
Transportation |
L+550 |
12/19/14 | 11,250 | 10,549 | 10,144 | |||||||||||||||
Kronos Inc. |
(d)(e)(f) |
Software & Services |
L+850 |
1.3% | 4/30/20 | 30,769 | 30,466 | 30,846 | ||||||||||||||
LM U.S. Member LLC |
Transportation |
L+825 |
1.3% | 10/15/20 | 9,375 | 9,236 | 9,457 | |||||||||||||||
Multi Packaging Solutions, Inc. |
(f) |
Commercial & Professional Services |
L+900 |
1.3% | 5/4/19 | 23,250 | 22,903 | 22,785 | ||||||||||||||
NES Rentals Holdings, Inc. |
(g) |
Capital Goods |
L+1150 |
1.8% | 10/14/14 | 8,500 | 8,461 | 8,500 | ||||||||||||||
Paw Luxco II Sarl |
(j) |
Consumer Durables & Apparel |
EURIBOR+950 |
1/29/19 | | 20,000 | 23,768 | 23,190 | ||||||||||||||
Pelican Products, Inc. |
(d) |
Capital Goods |
L+1000 |
1.5% | 6/14/19 | $ | 6,667 | 6,541 | 6,633 | |||||||||||||
Pharmaceutical Research Associates, Inc. |
(f) |
Health Care Equipment & Services |
L+925 |
1.3% | 11/27/19 | 25,000 | 24,751 | 25,266 | ||||||||||||||
Pregis Corp. |
(f)(g) |
Capital Goods |
L+1000 |
1.5% | 3/23/18 | 45,000 | 44,211 | 44,550 | ||||||||||||||
Samson Investment Co. |
(d) |
Energy |
L+475 |
1.3% | 9/25/18 | 5,515 | 5,475 | 5,581 | ||||||||||||||
Sedgwick CMS Holdings Inc. |
Commercial & Professional Services |
L+750 |
1.5% | 5/30/17 | 500 | 500 | 508 | |||||||||||||||
Sensus U.S.A. Inc. |
(d)(e) |
Capital Goods |
L+725 |
1.3% | 5/9/18 | 8,571 | 8,577 | 8,614 | ||||||||||||||
Sheridan Holdings, Inc. |
(f) |
Health Care Equipment & Services |
L+775 |
1.3% | 7/1/19 | 2,727 | 2,702 | 2,769 | ||||||||||||||
Smart & Final Inc. |
(g) |
Food & Staples Retailing |
L+925 |
1.3% | 11/16/20 | 6,400 | 6,209 | 6,464 | ||||||||||||||
Southern Pacific Resource Corp. |
(e)(f)(j) |
Energy |
Prime+750 |
1/7/16 | 13,693 | 13,571 | 13,878 | |||||||||||||||
SRAM, LLC |
(d) |
Consumer Durables & Apparel |
L+700 |
1.5% | 12/7/18 | 5,000 | 4,960 | 5,088 | ||||||||||||||
Stadium Management Corp. |
(f) |
Consumer Services |
L+950 |
1.3% | 12/7/18 | 23,529 | 23,095 | 23,647 | ||||||||||||||
TriZetto Group, Inc. |
Software & Services |
L+725 |
1.3% | 3/27/19 | 8,372 | 8,250 | 8,337 | |||||||||||||||
Venoco, Inc. |
(d)(g) |
Energy |
L+700 |
1.5% | 6/30/17 | 7,857 | 7,705 | 8,024 | ||||||||||||||
Vertafore, Inc. |
(e) |
Software & Services |
L+825 |
1.5% | 10/27/17 | 14,750 | 14,703 | 14,833 | ||||||||||||||
Wall Street Systems Holdings, Inc. |
(d) |
Software & Services |
L+800 |
1.3% | 4/24/20 | 7,000 | 6,862 | 7,018 | ||||||||||||||
Web.com Group, Inc. |
(d)(f)(j) |
Software & Services |
L+950 |
1.5% | 10/26/18 | 4,187 | 4,098 | 4,323 | ||||||||||||||
WP CPP Holdings, LLC |
(d)(e)(h)(i) |
Capital Goods |
L+925 |
1.3% | 6/28/20 | 15,000 | 14,850 | 15,150 | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansSecond Lien |
752,392 | 764,356 | ||||||||||||||||||||
|
|
|
|
See notes to consolidated financial statements.
F-71
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Senior Secured Bonds18.6% |
||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(f)(g) |
Materials |
10.5% |
6/1/19 | $ | 78,500 | $ | 76,710 | $ | 78,010 | ||||||||||||
Allen Systems Group, Inc. |
(f) |
Software & Services |
10.5% |
11/15/16 | 15,323 | 14,205 | 11,186 | |||||||||||||||
Aspect Software, Inc. |
(e) |
Software & Services |
10.6% |
5/15/17 | 4,000 | 4,000 | 3,631 | |||||||||||||||
Avaya Inc. |
(e)(f)(g) |
Technology Hardware & Equipment |
7.0% |
4/1/19 | 23,500 | 21,792 | 22,002 | |||||||||||||||
Avaya Inc. |
(e) |
Technology Hardware & Equipment |
9.0% |
4/1/19 | 5,000 | 5,000 | 5,075 | |||||||||||||||
Cenveo Corp. |
(e)(f) |
Commercial & Professional Services |
8.9% |
2/1/18 | 23,788 | 21,717 | 22,711 | |||||||||||||||
Chester Downs & Marina, LLC |
(e) |
Consumer Services |
9.3% |
2/1/20 | 3,750 | 3,784 | 3,700 | |||||||||||||||
Clear Channel Communications, Inc. |
(d)(e)(f)(i) |
Media |
9.0% |
12/15/19 | 8,254 | 7,498 | 7,606 | |||||||||||||||
Eastman Kodak Co. |
(f)(l) |
Consumer Durables & Apparel |
10.6% |
3/15/19 | 14,500 | 12,136 | 11,932 | |||||||||||||||
Eastman Kodak Co. |
(l) |
Consumer Durables & Apparel |
9.8% |
3/1/18 | 18,992 | 13,990 | 15,599 | |||||||||||||||
Edgen Murray Corp. |
(e)(j) |
Capital Goods |
8.8% |
11/1/20 | 1,400 | 1,390 | 1,414 | |||||||||||||||
Energy Future Intermediate Holding Co. LLC |
(f) |
Utilities |
11.8% |
3/1/22 | 14,250 | 14,689 | 15,924 | |||||||||||||||
Energy Future Intermediate Holding Co. LLC |
(g) |
Utilities |
6.9% |
8/15/17 | 1,100 | 1,100 | 1,173 | |||||||||||||||
First Data Corp. |
(g) |
Software & Services |
6.8% |
11/1/20 | 2,000 | 1,985 | 2,037 | |||||||||||||||
HOA Restaurant Group, LLC |
(f) |
Consumer Services |
11.3% |
4/1/17 | 14,100 | 14,121 | 12,985 | |||||||||||||||
INEOS Finance Plc |
(e)(j) |
Materials |
7.5% |
5/1/20 | 850 | 850 | 890 | |||||||||||||||
INEOS Finance Plc |
(e)(j) |
Materials |
8.4% |
2/15/19 | 3,000 | 3,000 | 3,238 | |||||||||||||||
JW Aluminum Co. |
(f) |
Materials |
11.5% |
11/15/17 | 20,000 | 19,633 | 19,400 | |||||||||||||||
Kinetic Concepts, Inc. |
(e)(f) |
Health Care Equipment & Services |
10.5% |
11/1/18 | 18,660 | 18,093 | 19,640 | |||||||||||||||
Neff Rental LLC |
Capital Goods |
9.6% |
5/15/16 | 1,352 | 1,363 | 1,402 | ||||||||||||||||
NES Rentals Holdings, Inc. |
(f)(g) |
Capital Goods |
12.3% |
4/15/15 | 38,375 | 38,683 | 39,573 | |||||||||||||||
Paetec Holdings Corp. |
(e)(j) |
Telecommunication Services |
8.9% |
6/30/17 | 4,680 | 4,767 | 5,031 | |||||||||||||||
Palace Entertainment Holdings, LLC |
(e) |
Consumer Services |
8.9% |
4/15/17 | 2,400 | 2,400 | 2,541 | |||||||||||||||
PH Holding LLC |
(f) |
Consumer Durables & Apparel |
9.8% |
12/31/17 | 10,000 | 9,810 | 10,100 | |||||||||||||||
Reynolds Group Holdings, Inc. |
(e)(j) |
Consumer Durables & Apparel |
5.8% |
10/15/20 | 6,750 | 6,750 | 6,986 | |||||||||||||||
Reynolds Group Holdings, Inc. |
(e)(j) |
Consumer Durables & Apparel |
7.1% |
4/15/19 | 3,000 | 3,121 | 3,253 | |||||||||||||||
Ryerson Inc. |
(e) |
Capital Goods |
9.0% |
10/15/17 | 3,100 | 3,100 | 3,149 | |||||||||||||||
Sorenson Communication, Inc. |
(g) |
Telecommunication Services |
10.5% |
2/1/15 | 39,000 | 33,702 | 32,525 | |||||||||||||||
Speedy Cash Intermediate Holdings Corp. |
(f) |
Diversified Financials |
10.8% |
5/15/18 | 16,000 | 16,164 | 17,104 | |||||||||||||||
Symbion, Inc. |
(e)(f) |
Health Care Equipment & Services |
8.0% |
6/15/16 | 12,460 | 12,327 | 12,881 | |||||||||||||||
Technicolor SA |
(g)(j) |
Media |
9.4% |
4/23/16 | 2,241 | 2,078 | 2,314 | |||||||||||||||
Technicolor SA |
(g)(j) |
Media |
9.4% |
5/26/17 | 13,495 | 12,478 | 13,934 | |||||||||||||||
Texas Competitive Electric Holdings Co. LLC |
(f) |
Utilities |
11.5% |
10/1/20 | 10,000 | 9,916 | 7,909 | |||||||||||||||
Titlemax, Inc. |
(f) |
Diversified Financials |
13.3% |
7/15/15 | 14,500 | 15,073 | 16,149 | |||||||||||||||
Tops Markets LLC |
(e) |
Food & Staples Retailing |
8.9% |
12/15/17 | 2,750 | 2,750 | 2,851 | |||||||||||||||
Travelport LLC |
(g) |
Consumer Services |
L+600 PIK |
12/1/16 | 22,933 | 18,111 | 18,404 | |||||||||||||||
Univision Communications Inc. |
(f) |
Media |
6.9% |
5/15/19 | 6,800 | 6,754 | 7,128 | |||||||||||||||
Viasystems Group Inc. |
(e)(j) |
Technology Hardware & Equipment |
7.9% |
5/1/19 | 5,000 | 5,000 | 4,912 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured Bonds |
460,040 | 466,299 | ||||||||||||||||||||
|
|
|
|
See notes to consolidated financial statements.
F-72
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Subordinated Debt20.4% |
||||||||||||||||||||||
Advantage Sales & Marketing Inc. |
(g) |
Commercial & Professional Services |
13.0% |
12/23/18 | $ | 10,000 | $ | 9,818 | $ | 9,850 | ||||||||||||
Alta Mesa Holdings, L.P. |
(e) |
Energy |
9.6% |
10/15/18 | 16,700 | 16,557 | 17,264 | |||||||||||||||
Asurion, LLC |
(f) |
Insurance |
L+950 |
1.5% | 8/16/19 | 15,000 | 14,586 | 16,000 | ||||||||||||||
Aurora Diagnostics, LLC |
(f) |
Pharmaceuticals, Biotechnology & Life Sciences |
10.8% |
1/15/18 | 20,065 | 20,120 | 18,761 | |||||||||||||||
Aurora USA Oil & Gas, Inc. |
(j) |
Energy |
9.9% |
2/15/17 | 3,000 | 3,041 | 3,236 | |||||||||||||||
BakerCorp. International Inc. |
(f) |
Commercial & Professional Services |
8.3% |
6/1/19 | 5,000 | 5,000 | 5,069 | |||||||||||||||
Bresnan Broadband Holdings LLC |
(e)(j) |
Telecommunication Services |
8.0% |
12/15/18 | 5,000 | 5,000 | 5,419 | |||||||||||||||
Calumet Lubricants Co., L.P. |
(f)(j) |
Energy |
9.4% |
5/1/19 | 5,800 | 5,800 | 6,330 | |||||||||||||||
Calumet Lubricants Co., L.P. |
(f)(j) |
Energy |
9.6% |
8/1/20 | 1,500 | 1,475 | 1,646 | |||||||||||||||
Cincinnati Bell Inc. |
(e)(j) |
Telecommunication Services |
8.4% |
10/15/20 | 8,895 | 8,750 | 9,651 | |||||||||||||||
Comstock Resources, Inc. |
(e)(f)(j) |
Energy |
9.5% |
6/15/20 | 21,000 | 20,061 | 22,301 | |||||||||||||||
Cumulus Media Inc. |
(f)(j) |
Media |
7.8% |
5/1/19 | 5,000 | 4,453 | 4,895 | |||||||||||||||
Del Monte Foods Co. |
(e) |
Food, Beverage & Tobacco |
7.6% |
2/15/19 | 3,500 | 3,498 | 3,654 | |||||||||||||||
Entercom Radio, LLC |
(e)(j) |
Media |
10.5% |
12/1/19 | 13,500 | 13,360 | 14,873 | |||||||||||||||
EPL Oil & Gas, Inc. |
(e)(j) |
Energy |
8.3% |
2/15/18 | 3,200 | 3,169 | 3,300 | |||||||||||||||
First Data Corp. |
(g) |
Software & Services |
12.6% |
1/15/21 | 5,000 | 5,309 | 5,284 | |||||||||||||||
Flanders Corp. |
(g) |
Capital Goods |
10.0%, 3.8% PIK |
5/14/18 | 8,153 | 7,969 | 8,194 | |||||||||||||||
Gymboree Corp. |
(g) |
Consumer Durables & Apparel |
9.1% |
12/1/18 | 7,000 | 6,418 | 6,306 | |||||||||||||||
Harland Clarke Holdings Corp. |
(g) |
Commercial & Professional Services |
9.5% |
5/15/15 | 2,689 | 2,432 | 2,473 | |||||||||||||||
Infiltrator Systems, Inc. |
Capital Goods |
12%, 2.0% PIK |
3/11/18 | 63,558 | 62,508 | 65,942 | ||||||||||||||||
Ipreo Holdings LLC |
(f) |
Software & Services |
11.8% |
8/15/18 | 10,000 | 9,960 | 10,600 | |||||||||||||||
J.Crew Group, Inc. |
Consumer Durables & Apparel |
8.1% |
3/1/19 | 1,200 | 1,200 | 1,273 | ||||||||||||||||
JBS U.S.A. LLC |
(e)(j) |
Food, Beverage & Tobacco |
8.3% |
2/1/20 | 3,000 | 2,960 | 3,173 | |||||||||||||||
Kinetic Concepts, Inc. |
(e)(f)(g) |
Health Care Equipment & Services |
12.5% |
11/1/19 | 26,700 | 25,405 | 25,565 | |||||||||||||||
Lin Television Corp. |
(e)(j) |
Media |
6.4% |
1/15/21 | 750 | 750 | 787 | |||||||||||||||
Lone Pine Resources Canada Ltd. |
(g)(j) |
Energy |
10.4% |
2/15/17 | 5,000 | 4,938 | 4,676 | |||||||||||||||
MModal Inc. |
(e)(g) |
Health Care Equipment & Services |
10.8% |
8/15/20 | 2,418 | 2,370 | 2,249 | |||||||||||||||
Monitronics International, Inc. |
(e)(j) |
Consumer Services |
9.1% |
4/1/20 | 2,250 | 2,250 | 2,331 | |||||||||||||||
Mood Media Corp. |
(e)(f)(j) |
Media |
9.3% |
10/15/20 | 24,250 | 24,277 | 25,252 | |||||||||||||||
The Pantry, Inc. |
(g)(j) |
Food & Staples Retailing |
8.4% |
8/1/20 | 5,500 | 5,500 | 5,789 | |||||||||||||||
Petco Holdings, Inc. |
(e) |
Retailing |
8.5% |
10/15/17 | 1,000 | 995 | 1,034 | |||||||||||||||
Pharmaceutical Product Development, Inc. |
(g) |
Health Care Equipment & Services |
9.5% |
12/1/19 | 2,900 | 2,900 | 3,302 | |||||||||||||||
QR Energy, L.P. |
(e)(j) |
Energy |
9.3% |
8/1/20 | 3,250 | 3,206 | 3,441 | |||||||||||||||
Quicksilver Resources Inc. |
(e)(j) |
Energy |
7.1% |
4/1/16 | 1,000 | 891 | 802 | |||||||||||||||
Resolute Energy Corp. |
(e)(j) |
Energy |
8.5% |
5/1/20 | 10,500 | 10,629 | 10,671 | |||||||||||||||
Samson Investment Co. |
(e)(f) |
Energy |
9.8% |
2/15/20 | 19,420 | 19,630 | 20,585 | |||||||||||||||
SandRidge Energy, Inc. |
(e)(j) |
Energy |
8.1% |
10/15/22 | 7,500 | 7,500 | 8,234 | |||||||||||||||
Sequel Industrial Products Holdings, LLC |
(g) |
Energy |
12.0%, 2.5% PIK |
5/10/18 | 15,500 | 15,214 | 15,655 | |||||||||||||||
Sidewinder Drilling Inc. |
(f)(g) |
Capital Goods |
9.8% |
11/15/19 | 8,000 | 8,000 | 8,030 |
See notes to consolidated financial statements.
F-73
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Rate |
Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Symmetry Medical Inc. |
(g)(j) |
Health Care Equipment & Services |
12.0%, 2.0% PIK |
12/29/17 | $ | 33,170 | $ | 32,305 | $ | 34,413 | ||||||||||||
ThermaSys Corp. |
Capital Goods |
10.0%, 2.5% PIK |
12/31/16 | 86,210 | 84,674 | 86,210 | ||||||||||||||||
Univar Inc. |
(f) |
Materials |
12.0% |
6/30/18 | 3,000 | 2,953 | 3,045 | |||||||||||||||
Viking Cruises, Ltd. |
(e)(j) |
Consumer Services |
8.5% |
10/15/22 | 4,075 | 4,075 | 4,406 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Subordinated Debt |
491,906 | 511,971 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Collateralized Securities4.7% |
||||||||||||||||||||||
Apidos CDO IV Class E |
(g)(j) |
Diversified Financials |
L+360 |
10/27/18 | 2,000 | 1,214 | 1,660 | |||||||||||||||
Ares 2007 CLO 11A Class E |
(g)(j) |
Diversified Financials |
L+600 |
10/11/21 | 4,775 | 3,221 | 4,320 | |||||||||||||||
Ares 2007 CLO 12X Class E |
(g)(j) |
Diversified Financials |
L+575 |
11/25/20 | 2,252 | 1,820 | 2,128 | |||||||||||||||
Carlyle Azure CLO Class Income |
(j) |
Diversified Financials |
23.3% |
5/27/20 | 28,000 | 13,099 | 18,141 | |||||||||||||||
Dryden CDO 23A Class E |
(j) | Diversified Financials | L+700 | 7/20/23 | 4,500 | 3,634 | 3,984 | |||||||||||||||
Dryden CDO 23A Class Subord. |
(j) | Diversified Financials | 15.2% | 7/17/23 | 10,000 | 7,650 | 8,710 | |||||||||||||||
Galaxy VII CLO Class Subord. |
(j) | Diversified Financials | 28.9% | 10/13/18 | 2,000 | 886 | 1,422 | |||||||||||||||
Lightpoint CLO 2006 V Class D |
(g)(j) | Diversified Financials | L+365 | 8/5/19 | 6,500 | 3,490 | 5,168 | |||||||||||||||
Mountain View CLO II Class Pref. |
(j) | Diversified Financials | 34.5% | 1/12/21 | 9,225 | 4,658 | 8,819 | |||||||||||||||
Octagon CLO 2006 10A Class Income |
(j) | Diversified Financials | 54.0% | 10/18/20 | 4,375 | 2,346 | 4,472 | |||||||||||||||
Rampart CLO 2007 1A Class Subord. |
(j) | Diversified Financials | 55.8% | 10/25/21 | 10,000 | 5,290 | 11,973 | |||||||||||||||
Stone Tower CLO VI Class Subord. |
(g)(j) | Diversified Financials | 48.9% | 4/17/21 | 5,000 | 3,067 | 6,226 | |||||||||||||||
Wind River CLO Ltd. 2012 1A Class Sub B |
(j) | Diversified Financials | 16.8% | 1/15/24 | 42,504 | 41,036 | 41,971 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
91,411 | 118,994 | ||||||||||||||||||||
|
|
|
|
Portfolio Company(a) |
Footnotes |
Industry |
Number of |
Amortized Cost |
Fair Value(c) |
|||||||||
Equity/Other5.1%(k) |
||||||||||||||
Aquilex Corp., Common Equity, Class A Shares |
(f)(l) | Energy | 15,128 | 2,266 | 5,977 | |||||||||
Aquilex Corp., Common Equity, Class B Shares |
(f)(g)(l) | Energy | 32,637 | 4,889 | 12,895 | |||||||||
ERC Ireland Holdings Ltd., Common Equity |
(i)(j)(l) | Telecommunication Services | 13,510 | | | |||||||||
ERC Ireland Holdings Ltd., Warrants |
(i)(j)(l) | Telecommunication Services | 2,617 | | | |||||||||
Flanders Corp., Common Equity |
(g)(l) | Capital Goods | 5,000,000 | 5,000 | 6,500 | |||||||||
Florida Gaming Centers, Inc., Warrants |
(g)(l) | Consumer Services | 71 | | 99 | |||||||||
Florida Gaming Corp., Warrants |
(g)(l) | Consumer Services | 226,635 | | | |||||||||
Ipreo Holdings LLC, Common Equity |
(g)(l) | Software & Services | 1,000,000 | 1,000 | 1,350 | |||||||||
JW Aluminum Co., Common Equity |
(g)(l) | Materials | 37,500 | 3,225 | | |||||||||
Leading Edge Aviation Services, Inc., Common Equity |
(g)(l) | Capital Goods | 2,623 | 262 | | |||||||||
Leading Edge Aviation Services, Inc., Preferred Equity |
(g)(l) | Capital Goods | 738 | 738 | 608 | |||||||||
Micronics, Inc., Common Equity |
(g)(l) | Energy | 12,057 | 50 | | |||||||||
Micronics, Inc., Preferred Equity |
(l) | Energy | 283,947 | 11,181 | 6,673 | |||||||||
Plains Offshore Operations Inc., Preferred Equity |
(f)(g) | Energy | 523,068 | 51,941 | 55,924 | |||||||||
Plains Offshore Operations Inc., Warrants |
(f)(g)(l) | Energy | 1,013,444 | 1,722 | 2,432 |
See notes to consolidated financial statements.
F-74
FS Investment Corporation
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes |
Industry |
Number of |
Amortized Cost |
Fair Value(c) |
|||||||||
Safariland, LLC, Common Equity |
(g)(l) | Capital Goods | 25,000 | $ | 2,500 | $ | 3,738 | |||||||
Safariland, LLC, Preferred Equity |
(g) | Capital Goods | 1,095 | 10,031 | 10,572 | |||||||||
Safariland, LLC, Warrants |
(g)(l) | Capital Goods | 2,263 | 246 | 338 | |||||||||
Sequel Industrial Products Holdings, LLC, Common Equity |
(g)(l) | Energy | 3,330,600 | 3,400 | 4,330 | |||||||||
Sequel Industrial Products Holdings, LLC, Preferred Equity |
(g)(l) | Energy | 87,607 | 8,354 | 8,366 | |||||||||
Sequel Industrial Products Holdings, LLC, Warrants |
(g)(l) | Energy | 20,681 | 12 | 16 | |||||||||
ThermaSys Corp., Common Equity |
(g)(l) | Capital Goods | 51,813 | 1 | 694 | |||||||||
ThermaSys Corp., Preferred Equity |
(g)(l) | Capital Goods | 51,813 | 5,181 | 5,181 | |||||||||
VPG Group Holdings LLC, Class A-2 Units |
(g)(l) | Materials | 2,500,000 | 2,500 | 2,250 | |||||||||
|
|
|
|
|||||||||||
Total Equity/Other |
114,499 | 127,943 | ||||||||||||
|
|
|
|
|||||||||||
TOTAL INVESTMENTS156.7% |
$ | 3,825,244 | 3,934,722 | |||||||||||
|
|
|||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(56.7%) |
(1,422,984 | ) | ||||||||||||
|
|
|||||||||||||
NET ASSETS100.0% |
$ | 2,511,738 | ||||||||||||
|
|
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Fair value determined by the Companys board of directors (see Note 7). |
(d) | Security or portion thereof held within Arch Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8). |
(e) | Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8). |
(f) | Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(g) | Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
(h) | Security or portion thereof held within Walnut Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8). |
(i) | Position or portion thereof unsettled as of December 31, 2012. |
(j) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. As of December 31, 2012, 83.4% of the Companys total assets represented qualifying assets. |
(k) | Listed investments may be treated as debt for GAAP or tax purposes. |
(l) | Security is non-income producing. |
See notes to consolidated financial statements.
F-75
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Investment Corporation, or the Company, was incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and formally commenced operations on January 2, 2009. The Company 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. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for 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 December 31, 2013, the Company had five wholly-owned financing subsidiaries, Broad Street Funding LLC, or Broad Street, Arch Street Funding LLC, or Arch Street, Locust Street Funding LLC, or Locust Street, Race Street Funding LLC, or Race Street, and Walnut Street Funding LLC, or Walnut Street, a sixth wholly-owned subsidiary, IC American Energy Investments, Inc., through which it holds an equity interest in American Energy Ohio Holdings, LLC, a non-controlled and non-affiliated portfolio company, and a seventh wholly-owned subsidiary, FSIC Investments, Inc., through which it may hold certain investments in portfolio companies from time to time. The consolidated financial statements include both the Companys accounts and the accounts of its wholly-owned subsidiaries as of December 31, 2013. All significant intercompany transactions have been eliminated in consolidation.
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 through secondary market transactions in the over-the-counter market for institutional loans or directly from its target companies as primary market investments.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying audited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.
Use of Estimates: The preparation of the audited 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.
Cash and Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. All cash balances are maintained with high credit quality financial institutions, which are members of the Federal Deposit Insurance Corporation.
Valuation of Portfolio Investments: The Company determines the net asset value of its investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by the Companys
F-76
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
board of directors. In connection with that determination, the Companys investment adviser, FB Income Advisor, LLC, or FB Advisor, provides the Companys board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, or the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
With respect to investments for which market quotations are not readily available, the Company undertakes a multi-step valuation process each quarter, as described below:
| the Companys quarterly valuation process begins with FB Advisors management team providing a preliminary valuation of each portfolio company or investment to the Companys valuation committee, which valuation may be obtained from an independent valuation firm, if applicable; |
| preliminary valuation conclusions are then documented and discussed with the Companys valuation committee; |
| the Companys valuation committee reviews the preliminary valuation and FB Advisors management team, together with its independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and |
| the Companys board of directors discusses valuations and determines the fair value of each investment in the Companys portfolio in good faith based on various statistical and other factors, including the input and recommendation of FB Advisor, the valuation committee and any third-party valuation firm, if applicable. |
Determination of fair value involves subjective judgments and estimates. Accordingly, these notes to the Companys audited consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on the Companys consolidated financial statements. Below is a description of factors that the Companys board of directors may consider when valuing the Companys debt and equity investments.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Company may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors
F-77
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
that the Companys board of directors may consider include the borrowers ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing the Companys debt investments.
For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
The Companys equity interests in portfolio companies for which there is no liquid public market are valued at fair value. The Companys board of directors, in its analysis of fair value, may consider various factors, such as 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. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or the Companys actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
The Companys board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Companys board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of the Companys equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.
When the Company receives warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the Companys board of directors allocates the cost basis in the investment between the debt securities and any such warrants or other equity securities received at the time of origination. The Companys board of directors subsequently values these warrants or other equity securities received at fair value.
The fair values of the Companys investments are determined in good faith by the Companys board of directors. The Companys board of directors is solely responsible for the valuation of the Companys portfolio investments at fair value as determined in good faith pursuant to the Companys valuation policy and consistently applied valuation process.
Revenue Recognition: Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis to the extent that it expects to collect such amounts. The Company records dividend income on the ex-dividend date. The Company does not accrue as a receivable interest or dividends on loans and securities if it has reason to doubt its ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and the Company amortizes such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Upfront structuring fees are recorded as fee income when earned. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.
F-78
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency: Gains or losses on the sale of investments are calculated by using the specific identification method. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.
Capital Gains Incentive Fee: The Company has entered into an investment advisory and administrative services agreement with FB Advisor, dated as of February 12, 2008, which was amended on August 5, 2008, and which, as amended, is referred to herein as the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). Such fee will equal 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 and administrative services 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 Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, the Company changed its methodology for accruing for this incentive fee to include 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 investment advisory and administrative services agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of 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 adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. 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 2.0%. 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 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.
F-79
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
In connection with the Companys 2013 annual meeting of stockholders, the Company received stockholder approval to amend the investment advisory and administrative services agreement effective upon the listing of the Companys common stock on a national securities exchange. Upon such event, if any, the hurdle rate used to compute the subordinated incentive fee on income will be based on the net asset value of the Companys assets rather than adjusted capital. In addition to the amendments approved by stockholders, the subordinated incentive fee on income will become 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 2.0% hurdle, 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 quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.
Income Taxes: The Company has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. To qualify for and maintain qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and distribute to its stockholders, for each taxable year, at least 90% of its investment company taxable income, which is generally the Companys net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. As a RIC, the Company will not have to pay corporate-level federal income taxes on any income that it distributes to its stockholders. The Company intends to make distributions in an amount sufficient to qualify for and maintain its RIC status each year and to not pay any federal income taxes on income so distributed. The Company is also subject to nondeductible federal excise taxes if it does not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes. The Company accrued $5,742 and $500 in estimated excise taxes payable in respect of income received during the years ended December 31, 2013 and 2012, respectively. During the years ended December 31, 2013 and 2012, respectively, the Company paid $1,347 and $761 in excise and other taxes.
Uncertainty in Income Taxes: The Company evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the Companys consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is more likely than not to be sustained assuming examination by taxing authorities. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations. During the years ended December 31, 2013, 2012 and 2011, the Company did not incur any interest or penalties.
F-80
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
The Company has analyzed the tax positions taken on federal and state income tax returns for all open tax years, and has concluded that no provision for income tax is required in the Companys financial statements. The Companys federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Distributions: Distributions to the Companys stockholders are recorded as of the record date. Subject to the discretion of the Companys board of directors and applicable legal restrictions, the Company intends to declare and pay such distributions on a monthly basis. Net realized capital gains, if any, are distributed or deemed distributed at least annually.
Reclassifications: Certain amounts in the consolidated financial statements for the years ended December 31, 2012 and 2011 have been reclassified to conform to the classifications used to prepare the consolidated financial statements for the year ended December 31, 2013. These reclassifications had no material impact on the Companys consolidated financial position, results of operations or cash flows as previously reported.
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Companys common stock during the years ended December 31, 2013, 2012 and 2011:
Year Ended December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Gross Proceeds from Offering(1) |
| $ | | 83,239,728 | $ | 886,432 | 115,853,483 | $ | 1,232,134 | |||||||||||||||
Reinvestment of Distributions |
10,771,271 | 109,373 | 10,140,536 | 98,763 | 3,662,625 | 37,241 | ||||||||||||||||||
|
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|
|||||||||||||
Total Gross Proceeds |
10,771,271 | 109,373 | 93,380,264 | 985,195 | 119,516,108 | 1,269,375 | ||||||||||||||||||
Commissions and Dealer Manager Fees |
| | | (83,084 | ) | | (115,443 | ) | ||||||||||||||||
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Net Proceeds to Company |
10,771,271 | 109,373 | 93,380,264 | 902,111 | 119,516,108 | 1,153,932 | ||||||||||||||||||
Share Repurchase Program |
(3,341,931 | ) | (33,806 | ) | (1,879,983 | ) | (18,324 | ) | (458,229 | ) | (4,416 | ) | ||||||||||||
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Net Proceeds from Share Transactions |
7,429,340 | $ | 75,567 | 91,500,281 | $ | 883,787 | 119,057,879 | $ | 1,149,516 | |||||||||||||||
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(1) | Following the closing of its continuous public offering in May 2012, the Company has continued to issue shares only pursuant to its distribution reinvestment plan. |
Public Offering of Shares
In May 2012, the Company closed its continuous public offering of shares of common stock to new investors. The Company sold 247,454,171 shares (as adjusted for stock distributions) of common stock for gross
F-81
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
proceeds of $2,605,158 in its continuous public offering. Following the closing of its continuous public offering, the Company has continued to issue shares pursuant to its distribution reinvestment plan. As of February 27, 2014, the Company had sold a total of 267,132,789 shares (as adjusted for stock distributions) of common stock and raised total gross proceeds of $2,802,259, including approximately $1,000 contributed by the principals of the Companys investment adviser in February 2008.
During the years ended December 31, 2013, 2012 and 2011, the Company sold 10,771,271, 93,380,264 and 119,516,108 shares for gross proceeds of $109,373, $985,195 and $1,269,375 at an average price per share of $10.15, $10.55 and $10.62, respectively. The gross proceeds received during the years ended December 31, 2013, 2012 and 2011 include reinvested stockholder distributions of $109,373, $98,763 and $37,241, for which the Company issued 10,771,271, 10,140,536 and 3,662,625 shares of common stock, respectively. During the period from January 1, 2014 to February 27, 2014, the Company issued 1,903,771 shares of common stock for gross proceeds of $19,466 at a price per share of $10.22 pursuant to its distribution reinvestment plan.
The proceeds from the issuance of common stock as presented on the Companys consolidated statements of changes in net assets and consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $0, $83,084 and $115,443 for the years ended December 31, 2013, 2012 and 2011, respectively.
Share Repurchase Program
Historically, the Company conducted quarterly tender offers pursuant to its share repurchase program to provide limited liquidity to its stockholders. In anticipation of the potential listing of the Companys shares of common stock on the New York Stock Exchange LLC, or NYSE, the Companys board of directors has terminated its share repurchase program effective March 21, 2014. If and when the Companys common stock is listed on the NYSE, the Company anticipates that the listing will provide its stockholders with liquidity and therefore does not expect to implement a new share repurchase program following the listing.
Prior to the termination of the share repurchase program in anticipation of the listing, the Companys board of directors considered the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock and under what terms:
| the effect of such repurchases on the Companys qualification as a RIC (including the consequences of any necessary asset sales); |
| the liquidity of the Companys assets (including fees and costs associated with disposing of assets); |
| the Companys investment plans and working capital requirements; |
| the relative economies of scale with respect to the Companys size; |
| the Companys history in repurchasing shares of common stock or portions thereof; and |
| the condition of the securities markets. |
The Company limited the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it could repurchase with the proceeds it received from the sale of shares of common stock under its distribution reinvestment plan. At the discretion of the Companys board of directors,
F-82
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
the Company was also permitted to use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company limited the number of shares of common stock to be repurchased in any calendar year to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of shares of common stock that the Company offered to repurchase may have been less in light of the limitations noted above.
Under the share repurchase program, the Company offered to repurchase shares of common stock on each date of repurchase at a price equal to the price at which shares of common stock were issued pursuant to the Companys distribution reinvestment plan on the distribution date coinciding with the applicable share repurchase date. The repurchase price was determined by the Companys board of directors or a committee thereof, in its sole discretion, and was (i) not less than the net asset value per share of the Companys common stock (as determined in good faith by the Companys board of directors or a committee thereof) immediately prior to the repurchase date and (ii) not more than 2.5% greater than the net asset value per share as of such date.
The first such tender offer commenced in March 2010, and the repurchase occurred in connection with the Companys April 1, 2010 semi-monthly closing.
The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program during the years ended December 31, 2013, 2012 and 2011:
For the Three Months Ended |
Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares |
|||||||||||||
Fiscal 2011 |
||||||||||||||||||
December 31, 2010 |
January 3, 2011 | 99,633 | 100 | % | $ | 9.585 | $ | 955 | ||||||||||
March 31, 2011 |
April 1, 2011 | 158,258 | 100 | % | $ | 9.675 | $ | 1,531 | ||||||||||
June 30, 2011 |
July 1, 2011 | 79,250 | 100 | % | $ | 9.675 | $ | 767 | ||||||||||
September 30, 2011 |
October 3, 2011 | 121,088 | 100 | % | $ | 9.585 | $ | 1,161 | ||||||||||
Fiscal 2012 |
||||||||||||||||||
December 31, 2011 |
January 3, 2012 | 385,526 | 100 | % | $ | 9.585 | $ | 3,695 | ||||||||||
March 31, 2012 |
April 2, 2012 | 411,815 | 100 | % | $ | 9.675 | $ | 3,984 | ||||||||||
June 30, 2012 |
July 2, 2012 | 410,578 | 100 | % | $ | 9.720 | $ | 3,991 | ||||||||||
September 30, 2012 |
October 1, 2012 | 672,064 | 100 | % | $ | 9.900 | $ | 6,653 | ||||||||||
Fiscal 2013 |
||||||||||||||||||
December 31, 2012 |
January 2, 2013 | 883,047 | 100 | % | $ | 10.000 | $ | 8,830 | ||||||||||
March 31, 2013 |
April 1, 2013 | 1,053,119 | 100 | % | $ | 10.100 | $ | 10,637 | ||||||||||
June 30, 2013 |
July 1, 2013 | 749,224 | 100 | % | $ | 10.200 | $ | 7,642 | ||||||||||
September 30, 2013 |
October 1, 2013 | 656,541 | 100 | % | $ | 10.200 | $ | 6,697 |
On January 2, 2014, the Company repurchased 872,865 shares (representing 100% of shares of common stock tendered for repurchase) at $10.20 per share for aggregate consideration totaling $8,903.
F-83
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions
Compensation of the Dealer Manager and Investment Adviser
Pursuant to the investment advisory and administrative services agreement, FB Advisor is entitled to an annual base management fee of 2.0% of the average value of the Companys gross assets and an incentive fee based on the Companys performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on January 2, 2009, upon commencement of the Companys operations. Management fees are paid on a quarterly basis in arrears.
The incentive fee consists of three parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of 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 adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. 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 2.0%. 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 2.5%, or 10.0% annually, of adjusted capital. This catch-up feature allows FB Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.
In connection with the Companys 2013 annual meeting of stockholders, the Company received stockholder approval to amend the investment advisory and administrative services agreement effective upon the listing of the Companys common stock on a national securities exchange. Upon such event, if any, the hurdle rate used to compute the subordinated incentive fee on income will be based on the net asset value of the Companys assets rather than adjusted capital. In addition to the amendments approved by stockholders, the subordinated incentive fee on income will become 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 2.0% hurdle, 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 quarterly hurdle rate and there will be no delay of payment if prior quarters are below the 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 and administrative services 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
F-84
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
basis, less the aggregate amount of any previously paid capital gain 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, under the terms of the investment advisory and administrative services agreement, 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.
The third part of the incentive fee, which is referred to as the subordinated liquidation incentive fee, equals 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation. The investment advisory and administrative services agreement will be amended effective upon the listing of the Companys common stock on a national securities exchange, if any, to eliminate the subordinated liquidation incentive fee.
The Company reimburses FB Advisor for expenses necessary to perform services related to the Companys administration and operations. The amount of this reimbursement is set at the lesser of (1) FB Advisors actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FB Advisor is required to allocate the cost of such services to the Company based on objective factors such as assets, revenues, time allocations and/or other reasonable metrics. The Companys board of directors then assesses the reasonableness of such reimbursements 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.
Franklin Square Holdings, L.P., or Franklin Square Holdings, the Companys sponsor and an affiliate of FB Advisor, has funded certain of the Companys offering costs and organization costs. Under the terms of the investment advisory and administrative services agreement, when the Companys registration statement was declared effective by the SEC and the Company was successful in raising gross proceeds in excess of $2,500, or the minimum offering requirement, from persons who were not affiliated with the Company or FB Advisor, FB Advisor became entitled to receive 1.5% of gross proceeds raised in the Companys continuous public offering until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On January 2, 2009, the Company satisfied the minimum offering requirement. The Company did not pay any reimbursements under this arrangement during the years ended December 31, 2013 or 2012. The Company paid total reimbursements of $641 to FB Advisor and its affiliates during the year ended December 31, 2011. The reimbursements were recorded as a reduction of capital. As of December 31, 2013, no amounts remain reimbursable to FB Advisor and its affiliates under this arrangement.
The dealer manager for the Companys continuous public offering was FS2 Capital Partners, LLC, or FS2, which is one of the Companys affiliates. Under the dealer manager agreement among the Company, FB Advisor and FS2, FS2 was entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in the Companys continuous public offering, all or a portion of which were re-allowed to selected broker-dealers.
F-85
FS Investment Corporation
Notes to 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 and administrative services agreement and the dealer manager agreement during the years ended December 31, 2013, 2012 and 2011:
Year Ended December 31, | ||||||||||||||||
Related Party |
Source Agreement |
Description |
2013 | 2012 | 2011 | |||||||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Base Management Fee(1) |
$ | 90,247 | $ | 68,059 | $ | 27,791 | ||||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Capital Gains
Incentive Fee(2) |
$ | 4,173 | $ | 39,751 | $ | (4,063 | ) | |||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Subordinated Incentive Fee on Income(3) |
$ | 62,253 | $ | 13,393 | $ | | ||||||||
FB Advisor |
Investment Advisory and Administrative Services Agreement | Administrative Services Expenses(4) |
$ | 5,165 | $ | 5,297 | $ | 2,625 | ||||||||
FS2 |
Dealer Manager Agreement | Dealer Manager Fee(5) | $ | | $ | 15,842 | $ | 22,109 |
(1) | During the years ended December 31, 2013, 2012 and 2011, $89,054, $56,124 and $21,517, respectively, in base management fees were paid to FB Advisor. As of December 31, 2013, $22,700 in base management fees were payable to FB Advisor. |
(2) | During the year ended December 31, 2013, the Company accrued capital gains incentive fees of $4,173 based on the performance of its portfolio, of which $2,583 was based on unrealized gains and $1,590 was based on realized gains. During the year ended December 31, 2012, the Company accrued capital gains incentive fees of $39,751 based on the performance of its portfolio, of which $27,960 was based on unrealized gains and $11,791 was based on realized gains. During the year ended December 31, 2011, the Company reversed $4,063 in capital gains incentive fees accrued by the Company as of December 31, 2010 as a result of unrealized losses in its portfolio during the year ended December 31, 2011. No capital gains incentive fees are actually payable by the Company with respect to unrealized gains unless and until those gains are actually realized. The Company paid FB Advisor $11,791 in capital gains incentive fees during the year ended December 31, 2013. As of December 31, 2013, $1,590 in capital gains incentive fees were payable to FB Advisor. |
(3) | During the year ended December 31, 2013, $61,343 of subordinated incentive fees on income were paid to FB Advisor. As of December 31, 2013, a subordinated incentive fee on income of $14,303 was payable to FB Advisor. |
(4) | During the years ended December 31, 2013, 2012 and 2011, $4,463, $4,772 and $2,501, 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 $4,959, $4,504 and $2,781, respectively, in administrative services expenses to FB Advisor during the years ended December 31, 2013, 2012 and 2011. |
(5) | Represents aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers. |
Potential Conflicts of Interest
FB Advisors senior management team is comprised of the same personnel as the senior management teams of FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings other affiliated BDCs and affiliated closed-end management investment company. As a result, such personnel provide investment advisory services to the Company and each
F-86
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
of FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and FS Global Credit Opportunities Fund. While none of FB Advisor, FS Investment Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC or FS Global Advisor, LLC, is currently making private corporate debt investments for clients other than the Company, FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FB Advisor 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. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation III and/or FS Global Credit Opportunities Fund rather than to the Company.
Exemptive Relief
In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to 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 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 may not only enhance its ability to further its investment objectives and strategy, but may also increase favorable investment opportunities for the Company, in part by allowing it to participate in larger investments, together with the Companys co-investment affiliates, than would be available to it if it had not obtained such relief. Because the Company did not seek exemptive relief to engage in co-investment transactions with GSO / Blackstone Debt Funds Management LLC, or GDFM, and its affiliates, it will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Expense Reimbursement
Beginning on February 26, 2009, Franklin Square Holdings agreed to reimburse the Company for expenses in an amount that was sufficient to ensure that, for tax purposes, the Companys net investment income and net capital gains were equal to or greater than the cumulative distributions paid to stockholders in each quarter. This arrangement was designed to ensure that no portion of the Companys distributions would represent a return of capital for stockholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of the Companys expenses.
Pursuant to an expense support and conditional reimbursement agreement, dated as of March 13, 2012, and amended and restated as of May 16, 2013, or, as amended and restated, the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Companys distributions to stockholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Companys distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to stockholders. Under those circumstances, Franklin Square
F-87
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Holdings will not reimburse the Company for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Companys cumulative distributions paid to its stockholders in each quarter, less the sum of the Companys net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, the Company has a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Companys net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders; provided, however, that (i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense support payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Companys average net assets attributable to its shares of common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Companys average net assets attributable to its shares of common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means the Companys total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
The Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Companys conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
F-88
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Franklin Square Holdings is controlled by the Companys chairman and chief executive officer, Michael C. Forman, and the Companys vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Companys expenses in future quarters. During the years ended December 31, 2013, 2012 and 2011, no such reimbursements were required from Franklin Square Holdings.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company have declared and paid on its common stock during the years ended December 31, 2013, 2012 and 2011:
Distribution | ||||||||
For the Year Ended December 31, |
Per Share | Amount | ||||||
2011(1)(2) |
$ | 0.9098 | $ | 86,657 | ||||
2012(3)(4) |
0.8586 | 197,906 | ||||||
2013(5) |
0.8303 | 212,153 |
(1) | In addition to regular semi-monthly cash distributions during such period, cash distributions declared and paid on the Companys common stock during the year ended December 31, 2011 include approximately $10,284, or approximately $0.115 per share, in special cash distributions. |
(2) | On April 13, 2011, the Companys board of directors determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.032156 per share to $0.033594 per share, effective May 1, 2011. |
(3) | In addition to regular cash distributions during such period, cash distributions declared and paid on the Companys common stock during the year ended December 31, 2012 include approximately $12,417, or approximately $0.05 per share, in special cash distributions. |
(4) | On May 15, 2012, the Companys board of directors determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.033594 per share to $0.03375 per share, effective May 16, 2012. Beginning in June 2012, the Company declared and paid regular cash distributions on a monthly basis in an amount equal to $0.0675 per share. |
(5) | On June 25, 2013, the Companys board of directors determined to increase the amount of the regular monthly cash distributions payable to stockholders of record from $0.0675 per share to $0.06975 per share, effective as of June 28, 2013. On October 16, 2013, the Companys board of directors determined to increase the amount of regular monthly cash distributions payable to stockholders of record from $0.06975 per share to $0.0720 per share, effective as of November 29, 2013. |
On January 7, 2014, the Companys board of directors declared a regular monthly cash distribution of $0.0720 per share, which was paid on January 31, 2014 to stockholders of record on January 30, 2014. On February 4, 2014, the Companys board of directors declared a regular monthly cash distribution of $0.0720 per share, which will be paid on February 28, 2014 to stockholders of record on February 27, 2014. 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.
F-89
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The Company has adopted an opt in distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive distributions in cash unless they specifically opt in to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Companys common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholders ability to participate in the distribution reinvestment plan. On February 19, 2014, the Company notified stockholders that it planned to terminate its distribution reinvestment plan in contemplation of, and subject to, the potential listing of the Companys shares of common stock on the NYSE. Subject to applicable legal restrictions, and the discretion of its board of directors, the Company expects to adopt a new distribution reinvestment plan following and in connection with the listing of its shares of common stock on the NYSE. If the Companys current distribution reinvestment plan is terminated and pending the adoption of a new distribution reinvestment plan, stockholders that had elected to participate in the earlier distribution reinvestment plan will receive cash rather than shares of common stock in respect of any cash distribution the Company declares.
The Company may fund its cash distributions to stockholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. 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 will represent a return of capital for tax purposes. A return of capital generally is a return of a stockholders investment rather than a return of earnings 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 paid-in capital surplus, 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 years ended December 31, 2013, 2012 and 2011:
Year Ended December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Source of Distribution |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||||||||
Offering proceeds |
$ | | | $ | | | $ | | | |||||||||||||||
Borrowings |
| | | | | | ||||||||||||||||||
Net investment income(1) |
212,153 | 100 | % | 144,364 | 73 | % | 74,663 | 86 | % | |||||||||||||||
Capital gains proceeds from the sale of assets |
| | 53,542 | 27 | % | 11,994 | 14 | % | ||||||||||||||||
Non-capital gains proceeds from the sale of assets |
| | | | | | ||||||||||||||||||
Distributions on account of preferred and common equity |
| | | | | | ||||||||||||||||||
Expense reimbursement from sponsor |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 212,153 | 100 | % | $ | 197,906 | 100 | % | $ | 86,657 | 100 | % | ||||||||||||
|
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|
|
|
|
|
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|
|
|
|
(1) | During the years ended December 31, 2013, 2012 and 2011, 89.3%, 92.1% and 89.6%, respectively, of the Companys gross investment income was attributable to cash interest earned, 9.1%, 6.8% and 9.2%, respectively, was attributable to non-cash accretion of discount and 1.6%, 1.1% and 1.2%, respectively, was attributable to paid-in-kind, or PIK, interest. |
F-90
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The Companys net investment income on a tax basis for the years ended December 31, 2013, 2012 and 2011 was $236,936, $185,513 and $91,254, respectively. As of December 31, 2013, 2012 and 2011, the Company had $137,867, $57,740 and $16,591, respectively, of undistributed net investment income and realized gains on a tax basis. The Companys undistributed net investment income on a tax basis as of December 31, 2012 was adjusted following the filing of the Companys 2012 tax return in September 2013. The adjustment was primarily due to tax-basis income received by the Company during the year ended December 31, 2012 exceeding GAAP-basis income with respect to collateralized securities and interests in partnerships held in its investment portfolio during such period. The tax notices for such collateralized securities and interests in partnerships were received by the Company subsequent to the filing of the Companys annual report on Form 10-K for the year ended December 31, 2012.
The difference between the Companys GAAP-basis net investment income and its tax-basis net investment income is primarily due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company, the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gain for tax purposes, the reversal of non-deductible excise taxes and, with respect to the years ended December 31, 2012 and 2011, the inclusion of a portion of the periodic net settlement payments due on the Companys total return swap in tax-basis net investment income and the amount by which tax-basis income received by the Company with respect to collateralized securities and interests in partnerships exceeded its GAAP-basis income.
The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the years ended December 31, 2013, 2012 and 2011:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
GAAP-basis net investment income |
$ | 244,976 | $ | 133,907 | $ | 71,364 | ||||||
Tax accretion of discount on investments |
| | 4,035 | |||||||||
Reversal of incentive fee accrual on unrealized gains |
2,583 | 27,960 | (4,063 | ) | ||||||||
Taxable income adjustment on collateralized securities and partnerships |
| 9,355 | 14,446 | |||||||||
Excise taxes |
5,742 | 500 | | |||||||||
Tax-basis net investment income portion of total return swap payments |
| 12,356 | 5,169 | |||||||||
Reclassification of unamortized original issue discount |
(15,904 | ) | | | ||||||||
Other miscellaneous differences |
(461 | ) | 1,435 | 303 | ||||||||
|
|
|
|
|
|
|||||||
Tax-basis net investment income |
$ | 236,936 | $ | 185,513 | $ | 91,254 | ||||||
|
|
|
|
|
|
The Company may make certain adjustments to the classification of stockholders equity as a result of permanent book-to-tax differences. During the year ended December 31, 2013, the Company increased accumulated undistributed net realized gains on investments and gain/loss on foreign currency by $8,441 and decreased capital in excess of par value and accumulated undistributed (distributions in excess of) net investment income by $6,633 and $1,808, respectively. During the years ended December 31, 2012 and 2011, the Company reduced accumulated undistributed net realized gains on investments and gain/loss on foreign currency by $13,480 and $9,385, respectively, and increased accumulated undistributed (distributions in excess of) net investment income by $13,480 and $9,385, respectively, to reflect the reclassification of a portion of realized gains on the total return swap into tax-basis net investment income.
F-91
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
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. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.
As of December 31, 2013 and 2012, the components of accumulated earnings on a tax basis were as follows:
Year ended December 31, | ||||||||
2013 | 2012 | |||||||
Distributable ordinary income |
$ | 82,523 | $ | 57,740 | ||||
Distributable realized gains |
55,344 | | ||||||
Incentive fee accrual on unrealized gains |
(30,543 | ) | (27,960 | ) | ||||
Unamortized organization costs |
(429 | ) | (472 | ) | ||||
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(1) |
67,085 | 84,352 | ||||||
|
|
|
|
|||||
$ | 173,980 | $ | 113,660 | |||||
|
|
|
|
(1) | As of December 31, 2013 and 2012, the gross unrealized appreciation on the Companys investments and gain on foreign currency was $136,679 and $114,920, respectively. As of December 31, 2013 and 2012, the gross unrealized depreciation on the Companys investments and loss on foreign currency was $69,594 and $30,568, respectively. |
The aggregate cost of the Companys investments for federal income tax purposes totaled $4,070,314 and $3,850,245 as of December 31, 2013 and 2012, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $67,085 and $84,352 as of December 31, 2013 and 2012, respectively.
Note 6. Investment Portfolio
The following table summarizes the composition of the Companys investment portfolio at cost and fair value as of December 31, 2013 and 2012:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||||||||
Senior Secured LoansFirst Lien |
$ | 2,080,228 | $ | 2,123,608 | 51 | % | $ | 1,914,996 | $ | 1,945,159 | 50 | % | ||||||||||||
Senior Secured LoansSecond Lien |
875,276 | 897,845 | 22 | % | 752,392 | 764,356 | 19 | % | ||||||||||||||||
Senior Secured Bonds |
414,297 | 385,548 | 9 | % | 460,040 | 466,299 | 12 | % | ||||||||||||||||
Subordinated Debt |
421,964 | 426,728 | 10 | % | 491,906 | 511,971 | 13 | % | ||||||||||||||||
Collateralized Securities |
120,206 | 140,508 | 4 | % | 91,411 | 118,994 | 3 | % | ||||||||||||||||
Equity/Other |
142,114 | 163,344 | 4 | % | 114,499 | 127,943 | 3 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 4,054,085 | $ | 4,137,581 | 100 | % | $ | 3,825,244 | $ | 3,934,722 | 100 | % | |||||||||||||
|
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|
|
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|
|
(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
F-92
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
The Company does not control and is not an affiliate of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to control a portfolio company if it owned 25% or more of its voting securities and would be an affiliate of a portfolio company if it owned 5% or more of its voting securities.
The Companys investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of December 31, 2013, the Company had five such investments with aggregate unfunded commitments of $48,439 and one equity investment with an unfunded commitment of $4,629. As of December 31, 2012, the Company had three such investments with aggregate unfunded commitments of $14,804. The Company maintains sufficient cash on hand to fund such unfunded commitments should the need arise.
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 December 31, 2013 and 2012:
December 31, 2013 | December 31, 2012 | |||||||||||||||
Industry Classification |
Fair Value |
Percentage of Portfolio |
Fair Value |
Percentage of Portfolio |
||||||||||||
Automobiles & Components |
$ | 51,551 | 1 | % | $ | 41,479 | 1 | % | ||||||||
Capital Goods |
858,352 | 21 | % | 675,187 | 17 | % | ||||||||||
Commercial & Professional Services |
318,196 | 8 | % | 271,978 | 7 | % | ||||||||||
Consumer Durables & Apparel |
306,917 | 7 | % | 264,722 | 7 | % | ||||||||||
Consumer Services |
436,650 | 11 | % | 293,408 | 7 | % | ||||||||||
Diversified Financials |
160,678 | 4 | % | 220,622 | 6 | % | ||||||||||
Energy |
468,036 | 11 | % | 430,444 | 11 | % | ||||||||||
Food & Staples Retailing |
29,484 | 1 | % | 96,739 | 2 | % | ||||||||||
Food, Beverage & Tobacco |
4,042 | 0 | % | 9,713 | 0 | % | ||||||||||
Health Care Equipment & Services |
176,010 | 4 | % | 362,456 | 9 | % | ||||||||||
Household & Personal Products |
66,300 | 2 | % | 78,124 | 2 | % | ||||||||||
Insurance |
17,814 | 0 | % | 28,623 | 1 | % | ||||||||||
Materials |
233,719 | 6 | % | 199,089 | 5 | % | ||||||||||
Media |
193,283 | 5 | % | 154,599 | 4 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences |
57,794 | 1 | % | 37,259 | 1 | % | ||||||||||
Retailing |
69,171 | 2 | % | 24,652 | 1 | % | ||||||||||
Semiconductors & Semiconductor Equipment |
| | 8,820 | 0 | % | |||||||||||
Software & Services |
366,976 | 9 | % | 339,641 | 9 | % | ||||||||||
Technology Hardware & Equipment |
134,121 | 3 | % | 94,128 | 2 | % | ||||||||||
Telecommunication Services |
178,977 | 4 | % | 152,458 | 4 | % | ||||||||||
Transportation |
9,510 | 0 | % | 29,104 | 1 | % | ||||||||||
Utilities |
| | 121,477 | 3 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,137,581 | 100 | % | $ | 3,934,722 | 100 | % | ||||||||
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|
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|
|
F-93
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market 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 December 31, 2013 and 2012, the Companys investments were categorized as follows in the fair value hierarchy:
Valuation Inputs |
December 31, 2013 | December 31, 2012 | ||||||
Level 1 - Price quotations in active markets |
$ | 2,147 | $ | | ||||
Level 2 - Significant other observable inputs |
| | ||||||
Level 3 - Significant unobservable inputs |
4,135,434 | 3,934,722 | ||||||
|
|
|
|
|||||
$ | 4,137,581 | $ | 3,934,722 | |||||
|
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|
|
The Companys investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its 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. Twenty-seven senior secured loan investments, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, 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 valued by the same independent valuation firm, 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. Also, one equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.
F-94
FS Investment Corporation
Notes to 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 December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its 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. Twenty-one senior secured loan investments, one senior secured bond investment and seven subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, 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, call features and other relevant terms of the debt. All of the Companys equity/other investments were valued by the same independent valuation firm, 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. One senior secured loan investment, which was newly-issued and purchased near December 31, 2012, was valued at cost, as the Companys board of directors determined that the cost of such investment was the best indication of its fair value.
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services 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 to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. The Company periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which the Company purchases and sells its investments. The Companys valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Companys valuation process.
F-95
FS Investment Corporation
Notes to 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 year ended December 31, 2013 and 2012 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
For the Year Ended December 31, 2013 | ||||||||||||||||||||||||||||
Senior Secured Loans - First Lien |
Senior Secured Loans - Second Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/Other | Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | 1,945,159 | $ | 764,356 | $ | 466,299 | $ | 511,971 | $ | 118,994 | $ | 127,943 | $ | 3,934,722 | ||||||||||||||
Accretion of discount (amortization of premium) |
24,984 | 6,725 | 5,648 | 5,303 | 549 | 57 | 43,266 | |||||||||||||||||||||
Net realized gain (loss) |
7,628 | 3,098 | 20,815 | 9,786 | 5,687 | | 47,014 | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
13,217 | 10,605 | (35,008 | ) | (15,301 | ) | (7,281 | ) | 6,841 | (26,927 | ) | |||||||||||||||||
Purchases |
1,646,725 | 446,626 | 231,539 | 239,201 | 47,340 | 29,100 | 2,640,531 | |||||||||||||||||||||
Paid-in-kind interest |
816 | 689 | 484 | 4,093 | | 1,633 | 7,715 | |||||||||||||||||||||
Sales and redemptions |
(1,514,921 | ) | (334,254 | ) | (304,229 | ) | (328,325 | ) | (24,781 | ) | (4,377 | ) | (2,510,887 | ) | ||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
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|
|||||||||||||||
Fair value at end of period |
$ | 2,123,608 | $ | 897,845 | $ | 385,548 | $ | 426,728 | $ | 140,508 | $ | 161,197 | $ | 4,135,434 | ||||||||||||||
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|
|||||||||||||||
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 |
$ | 31,181 | $ | 4,397 | $ | 3,767 | $ | (2,661 | ) | $ | (3,588 | ) | $ | 4,493 | $ | 37,589 | ||||||||||||
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|
For the Year Ended December 31, 2012 | ||||||||||||||||||||||||||||
Senior Secured Loans - First Lien |
Senior Secured Loans - Second Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/Other | Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | 1,023,183 | $ | 388,508 | $ | 115,360 | $ | 233,877 | $ | 68,366 | $ | 15,064 | $ | 1,844,358 | ||||||||||||||
Accretion of discount (amortization of premium) |
11,891 | 4,089 | 2,121 | 1,229 | 850 | 638 | 20,818 | |||||||||||||||||||||
Net realized gain (loss) |
24,103 | 6,951 | 3,815 | 578 | 9,167 | 2,394 | 47,008 | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
30,197 | 20,722 | 12,147 | 23,116 | 22,681 | 18,536 | 127,399 | |||||||||||||||||||||
Purchases |
2,208,650 | 571,638 | 403,326 | 531,551 | 52,822 | 95,347 | 3,863,334 | |||||||||||||||||||||
Paid-in-kind interest |
| 197 | | 3,055 | | | 3,252 | |||||||||||||||||||||
Sales and redemptions |
(1,352,865 | ) | (227,749 | ) | (70,470 | ) | (281,435 | ) | (34,892 | ) | (4,036 | ) | (1,971,447 | ) | ||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
|
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|
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|
|
|
|||||||||||||||
Fair value at end of period |
$ | 1,945,159 | $ | 764,356 | $ | 466,299 | $ | 511,971 | $ | 118,994 | $ | 127,943 | $ | 3,934,722 | ||||||||||||||
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|
|
|||||||||||||||
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 |
$ | 35,962 | $ | 16,558 | $ | 11,316 | $ | 18,792 | $ | 24,362 | $ | 18,186 | $ | 125,176 | ||||||||||||||
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F-96
FS Investment Corporation
Notes to 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 of assets valued by an independent valuation firm as of December 31, 2013 and 2012 were as follows:
Type of Investment |
Fair Value at December 31, 2013(1) |
Valuation Technique(2) |
Unobservable Input |
Range | Weighted Average | |||||||
Senior Secured LoansFirst Lien |
$ | 1,406,294 | Market Comparables | Market Yield (%) | 6.5% - 16.0% | 8.8% | ||||||
Senior Secured LoansSecond Lien |
200,044 | Market Comparables | Market Yield (%) | 10.3% - 11.8% | 10.9% | |||||||
Subordinated Debt |
211,066 | Market Comparables | Market Yield (%) | 7.8% - 13.8% | 11.1% | |||||||
Collateralized Securities |
16,740 | Market Comparables | Market Yield (%) | 11.5% - 12.5% | 12.0% | |||||||
Equity/Other |
161,197 | Market Comparables | Market Yield (%) | 13.5% - 15.8% | 15.1% | |||||||
EBITDA Multiples (x) | 5.0x - 13.3x | 7.3x | ||||||||||
Production Multiples (Mmb/d) | $37,500.0 - $42,500.0 | $40,000.0 | ||||||||||
Proved Reserves Multiples (Mmboe) | $8.0 - $9.0 | $8.5 | ||||||||||
PV-10 Multiples (x) | 0.6x - 0.7x | 0.6x | ||||||||||
Discounted Cash Flow | Discount Rate (%) | 17.3% - 24.3% | 17.6% | |||||||||
Option Valuation Model | Volatility (%) | 52.5% - 61.5% | 53.0% |
(1) | Except as otherwise described in this footnote, the remaining Level 3 assets 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. As of December 31, 2013, $48,439 of the senior secured loans-first lien investments consisted of unfunded loan commitments. |
(2) | For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement. |
F-97
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
Type of Investment |
Fair Value at December 31, 2012(1) |
Valuation Technique(2) |
Unobservable |
Range | Weighted Average | |||||||
Senior Secured LoansFirst Lien |
$ | 605,163 | Market Comparables | Market Yield (%) | 6.8% - 17.3% | 9.7% | ||||||
Senior Secured LoansSecond Lien |
118,682 | Market Comparables | Market Yield (%) | 10.3% - 12.8% | 11.2% | |||||||
Senior Secured Bonds |
10,100 | Market Comparables | Market Yield (%) | 9.3% - 9.8% | 9.5% | |||||||
Subordinated Debt |
224,059 | Market Comparables | Market Yield (%) | 9.3% - 14.5% | 12.9% | |||||||
Equity/Other |
127,943 | Market Comparables | Market Yield (%) | 15.3% - 15.8% | 15.5% | |||||||
EBITDA Multiples (x) | 3.3x - 12.5x | 6.9x | ||||||||||
Production Multiples (Mmb/d) | $57,500.0 - $62,500.0 | $60,000.0 | ||||||||||
Proved Reserves Multiples (Mmboe) | $12.5 - $13.5 | $13.0 | ||||||||||
PV-10 Multiples (x) | 0.8x - 0.9x | 0.9x | ||||||||||
Revenue Multiples | 1.6x - 1.6x | 1.6x | ||||||||||
Discounted Cash Flow | Discount Rate (%) | 17.3% - 17.3% | 17.3% | |||||||||
Option Valuation Model | Volatility (%) | 44.0% - 59.7% | 44.0% |
(1) | Except as otherwise described in this footnote, the remaining Level 3 assets 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. One senior secured loan investment ($39,400), which was newly-issued and purchased near December 31, 2012, was valued at cost, as the Companys board of directors determined that the cost of such investment was the best indication of its fair value. As of December 31, 2012, $14,804 of the senior secured loans-first lien investments consisted of unfunded loan commitments. |
(2) | For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement. |
Note 8. Financing Arrangements
The following table presents summary information with respect to the Companys outstanding financing arrangements as of December 31, 2013.
Facility |
Type of Facility | Rate |
Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
Arch Street Credit Facility |
Revolving | L+1.75% | $ | 373,682 | $ | 176,318 | August 29, 2015 | |||||||
Broad Street Credit Facility |
Revolving | L+1.50% | $ | 125,000 | $ | | December 20, 2014 | |||||||
JPM Facility |
Repurchase | 3.25% | $ | 950,000 | $ | | April 15, 2017 | |||||||
Walnut Street Credit Facility |
Revolving | L + 1.50% to 2.75% | $ | 225,000 | $ | 25,000 | May 17, 2017 |
F-98
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
Arch Street Credit Facility
On August 29, 2012, Arch Street, the Companys wholly-owned, special-purpose financing subsidiary, terminated its total return swap financing arrangement, or TRS, with Citibank, N.A., or Citibank, and entered into a revolving credit facility, or the Arch Street credit facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto.
The Arch Street credit facility provides for borrowings in an aggregate principal amount up to $550,000 on a committed basis. The Company may contribute cash or debt securities to Arch Street from time to time, subject to certain restrictions set forth in the Arch Street credit facility, and will retain a residual interest in any assets contributed through its ownership of Arch Street or will receive fair market value for any debt securities sold to Arch Street. Arch Street may purchase additional debt securities from various sources. Arch Streets obligations to the lenders under the facility are secured by a first priority security interest in substantially all of the assets of Arch Street, including its portfolio of debt securities. The obligations of Arch Street under the facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of the Companys investment in Arch Street.
Borrowings under the Arch Street credit facility accrue interest at a rate equal to the three-month London Interbank Offered Rate, or LIBOR, plus 1.75% per annum during the first two years of the facility and three-month LIBOR plus 2.00% per annum thereafter. Borrowings under the facility are subject to compliance with an equity coverage ratio with respect to the current value of Arch Streets portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Arch Streets portfolio. Beginning November 27, 2012, Arch Street became required to pay a non-usage fee to the extent the aggregate principal amount available under the Arch Street credit facility is not borrowed. Outstanding borrowings under the facility will be amortized beginning nine months prior to the scheduled maturity date. Any amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 29, 2015.
As of December 31, 2013 and 2012, $373,682 and $497,682, respectively, was outstanding under the Arch Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $4,446 in connection with obtaining the Arch 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 December 31, 2013, $2,458 of such deferred financing costs had yet to be amortized to interest expense.
The effective interest rate on the borrowings under the Arch Street credit facility was 1.99% per annum as of December 31, 2013. Interest is payable quarterly in arrears and commenced August 29, 2012. The Company recorded interest expense of $11,885 and $4,295 for the years ended December 31, 2013 and 2012, respectively, of which $1,481 and $507, respectively, related to the amortization of deferred financing costs and $311 and $22, respectively, related to commitment fees on the unused portion of the facility. The Company paid $12,121 and $0 in interest expense during the years ended December 31, 2013 and 2012, respectively. The average borrowings under the Arch Street credit facility for the year ended December 31, 2013 were $488,712 with a weighted average interest rate (including the effect of non-usage fees) of 2.10%. The average borrowings under the Arch Street credit facility for the period from August 29, 2012 to December 31, 2012 were $470,962, with a weighted average interest rate (including the effect of non-usage fees) of 2.33%.
F-99
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
In connection with the Arch Street credit facility, Arch Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within five business days of when due; (b) the insolvency or bankruptcy of Arch Street or the Company; (c) the failure of Arch Street to be beneficially owned and controlled by the Company; (d) the resignation or removal of the Company as Arch Streets investment manager; and (e) GDFM (or any affiliate thereof or any replacement thereof approved in writing by Citibank) no longer serving as the investment sub-adviser to the Company. Upon the occurrence of an event of default, the lenders may declare the outstanding principal and interest and all other amounts owing under the facility immediately due and payable. During the continuation of an event of default, Arch Street must pay interest at a default rate.
Borrowings of Arch Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Broad Street Credit Facility
On January 28, 2011, Broad Street, the Companys wholly-owned, special-purpose financing subsidiary, Deutsche Bank AG, New York Branch, or Deutsche Bank, and the other lenders party thereto entered into an amended and restated multi-lender, syndicated revolving credit facility, or the Broad Street credit facility, which amended and restated the revolving credit facility that Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto. On March 23, 2012, Broad Street and Deutsche Bank entered into an amendment to the Broad Street credit facility which extended the maturity date of the facility to March 23, 2013, increased the aggregate amount which could be borrowed under the facility to $380,000 and reduced the interest rate for all borrowings under the facility to a rate of LIBOR + 1.50% per annum. On December 13, 2012, Broad Street repaid $140,000 of borrowings under the facility, thereby reducing the amount which could be borrowed under the facility to $240,000. On March 22, 2013, Broad Street and Deutsche Bank entered into an amendment to the facility to extend the maturity date of the facility to December 22, 2013. On December 20, 2013, Broad Street and Deutsche Bank entered into a further amendment to the facility which extended the maturity date to December 20, 2014 and reduced the maximum amount which could be borrowed under the facility to $125,000. The Broad Street credit facility provides for borrowings of up to $125,000 at a rate of LIBOR plus 1.50% per annum. Deutsche Bank is a lender and serves as administrative agent under the facility.
Under the Broad Street credit facility, the Company transfers debt securities to Broad Street from time to time as a contribution to capital and retains a residual interest in the contributed debt securities through its ownership of Broad Street. The obligations of Broad Street under the facility are non-recourse to the Company and its exposure under the facility is limited to the value of its investment in Broad Street.
As of December 31, 2013 and 2012, $125,000 and $240,000, respectively, was outstanding under the Broad Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $2,566 in connection with obtaining and amending the 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 December 31, 2013, all of the deferred financing costs have been amortized to interest expense.
F-100
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The effective interest rate under the Broad Street credit facility was 1.74% per annum as of December 31, 2013. Interest is paid quarterly in arrears and commenced August 20, 2010. The Company recorded interest expense of $4,414, $8,517 and $9,155 for the years ended December 31, 2013, 2012 and 2011, respectively, of which $225, $958 and $877, respectively, related to the amortization of deferred financing costs and $72, $18 and $0, respectively, related to commitment fees on the unused portion of the credit facility. The Company paid $4,735, $8,143 and $7,930 in interest expense for the years ended December 31, 2013, 2012 and 2011, respectively. The average borrowings under the credit facility for the years ended December 31, 2013, 2012 and 2011 were $230,466, $368,023 and $337,898, respectively, with a weighted average interest rate (including the effect of non-usage fees) of 1.76%, 2.05% and 2.45%, respectively, including the effect of non-usage fees.
Borrowings under the Broad Street credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Broad Street varies depending upon the types of assets in Broad Streets portfolio. The occurrence of certain events described as Super-Collateralization Events in the credit agreement that governs the facility, or a decline in the Companys net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of GDFM; (ii) the bankruptcy or insolvency of GDFM or FB Advisor; (iii) GDFM ceasing to act as the Companys sub-adviser or FB Advisor ceasing to act as the Companys investment adviser; (iv) the Company ceasing to act as Broad Streets investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value at least equal to $50,000; and (v) the Company, GDFM or FB Advisor committing fraud or other illicit acts in its or their investment advisory capacities.
In connection with the facility, Broad Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the facility exceeding the applicable advance rates; (c) the purchase by Broad Street of certain ineligible assets; (d) the insolvency or bankruptcy of Broad Street or the Company; (e) the Company ceasing to act as investment manager of Broad Streets assets; (f) the decline of the Companys net asset value below $50,000; and (g) fraud or other illicit acts by the Company, FB Advisor or GDFM in its or their investment advisory capacities. During the continuation of an event of default, Broad Street must pay interest at a default rate.
Borrowings of Broad Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
JPM Financing
On April 23, 2013, through its two wholly-owned, special-purpose financing subsidiaries, Locust Street and Race Street, the Company entered into an amendment, or the April 2013 amendment, to its debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which was originally entered into on July 21, 2011 (and previously amended on September 26, 2012). The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $700,000 to $950,000; and (ii) extended the final repurchase date under the financing arrangement from October 15, 2016 to April 15,
F-101
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
2017. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.
Pursuant to the financing arrangement, the aggregate market value of assets expected to be held by Locust Street when the financing arrangement is fully-ramped is approximately $1,791,500. The assets held by Locust Street secure the obligations of Locust Street under certain Class A Floating Rate Notes, or the Class A Notes, to be issued from time to time by Locust Street to Race Street pursuant to the Amended and Restated Indenture, dated as of September 26, 2012 and as supplemented by Supplemental Indenture No. 1, dated April 23, 2013, with Citibank, as trustee, or the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Locust Street from time to time is $1,140,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of April 15, 2024. Race Street will purchase the Class A Notes to be issued by Locust Street from time to time at a purchase price equal to their par value.
Pursuant to the Amended and Restated Indenture, Locust Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the Amended and Restated Indenture contains the following events of default: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date or to make interest payments on the Class A Notes within five business days of when due; (b) the failure of the aggregate outstanding principal balance (subject to certain reductions) of the assets securing the Class A Notes to be at least 130% of the outstanding principal amount of the Class A Notes; and (c) GDFM ceasing to be the sub-adviser to the Companys investment adviser, FB Advisor.
Race Street, in turn, has entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of April 23, 2013, and subsequently amended as of October 24, 2013, or, collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $1,140,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility is $950,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than April 15, 2017. The repurchase price paid by Race Street to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing April 15, 2015, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.
If at any time during the term of the JPM Facility the market value of the assets held by Locust Street securing the Class A Notes declines by an amount greater than 27% of their initial aggregate purchase price, or
F-102
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such assets at such time is less than the Margin Threshold. In such event, in order to satisfy any such margin-posting requirements, Race Street intends to borrow funds from the Company pursuant to a revolving credit agreement, dated as of July 21, 2011 and as amended as of September 26, 2012, between Race Street, as borrower, and the Company, as lender, or the Revolving Credit Agreement. The Company may, in its sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.
Pursuant to the financing arrangement, the aggregate market value of assets expected to be held by Race Street when the financing arrangement is fully-ramped is $720,000. The assets held by Race Street secure the obligations of Race Street under the JPM Facility.
Pursuant to the JPM Facility, Race Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the JPM Facility contains the following events of default: (a) the failure to pay the repurchase price upon the applicable payment dates; (b) the failure to post required cash collateral with JPM as discussed above; and (c) the occurrence of an event of default under the Indenture.
In connection with the Class A Notes and the Amended and Restated Indenture, Locust Street also entered into: (i) an amended and restated collateral management agreement with the Company, as collateral manager, dated as of September 26, 2012, pursuant to which the Company will manage the assets of Locust Street; and (ii) an amended and restated collateral administration agreement with Virtus Group, LP, or Virtus, as collateral administrator, and the Company, as collateral manager, dated as of September 26, 2012, pursuant to which Virtus will perform certain administrative services with respect to the assets of Locust Street. In connection with the JPM Facility, Race Street also entered into a collateral management agreement with the Company, as collateral manager, dated as of September 26, 2012, pursuant to which the Company will manage the assets of Race Street.
As of December 31, 2013 and 2012, Class A Notes in the aggregate principal amount of $1,140,000 and $812,000, respectively, had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $950,000 and $676,667, respectively. The carrying amount outstanding under the JPM Facility approximates its fair value. The Company funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of December 31, 2013 and 2012, Race Streets liability under the JPM Facility was $950,000 and $676,667, respectively, plus $6,690 and $4,298, respectively, of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on the Companys financial statements.
As of December 31, 2013 and 2012, the fair value of assets held by Locust Street was $1,870,351 and $1,307,933, respectively, which included assets purchased by Locust Street with proceeds from the issuance of Class A Notes. As of December 31, 2013 and 2012, the fair value of assets held by Race Street was $747,330 and $598,528, respectively.
The Company incurred costs of $425 in connection with obtaining the JPM 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 JPM Facility. As of December 31, 2013, $173 of such deferred financing costs had yet to be amortized to interest expense.
F-103
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The effective interest rate on the borrowings under the JPM Facility was 3.25% per annum as of December 31, 2013. The Company recorded interest expense of $26,558, $14,753 and $2,179 for the years ended December 31, 2013, 2012 and 2011, respectively, of which $106, $101 and $45, respectively, related to the amortization of deferred financing costs. The Company paid $24,060, $11,648 and $840 in interest expense during the years ended December 31, 2013, 2012 and 2011, respectively. The average borrowings under the JPM Facility for the years ended December 31, 2013, 2012 and 2011 were $802,746, $406,002 and $129,917, respectively, with a weighted average interest rate of 3.25%, 3.61% and 3.66%, respectively.
Amounts outstanding under the JPM Facility will be considered borrowings by the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Walnut Street Credit Facility
On May 17, 2012, Walnut Street, the Companys wholly-owned, special-purpose financing subsidiary, Wells Fargo Securities, LLC, and Wells Fargo Bank, National Association, or collectively with Wells Fargo Securities, LLC, Wells Fargo, entered into a revolving credit facility, or the Walnut Street credit facility. Wells Fargo Securities, LLC serves as the administrative agent and Wells Fargo Bank, National Association is the sole lender, collateral agent, account bank and collateral custodian under the facility. The Walnut Street credit facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.
Under the Walnut Street credit facility, the Company contributes cash or debt securities to Walnut Street from time to time and retains a residual interest in any assets contributed through its ownership of Walnut Street or receives fair market value for any debt securities sold to Walnut Street. The obligations of Walnut Street under the Walnut Street credit facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of the Companys investment in Walnut Street.
Borrowings under the Walnut Street credit facility accrue interest at a rate equal to three-month LIBOR, plus a spread ranging between 1.50% and 2.75% per annum, depending on the composition of the portfolio of debt securities for the relevant period. Beginning on September 17, 2012, Walnut Street became subject to a non-usage fee to the extent the aggregate principal amount available under the Walnut Street credit facility is not borrowed. Any amounts borrowed under the Walnut Street credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 17, 2017.
As of December 31, 2013 and 2012, $225,000 and $235,364, respectively, was outstanding under the Walnut Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $3,761 in connection with obtaining the Walnut 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 December 31, 2013, $2,537 of such deferred financing costs had yet to be amortized to interest expense.
The effective interest rate on the borrowings under the Walnut Street credit facility was 2.89% per annum as of December 31, 2013. Interest is payable quarterly in arrears and commenced October 15, 2012. The Company recorded interest expense of $7,906 and $2,662 for the years ended December 31, 2013 and 2012, respectively, of which $755 and $469, respectively, related to the amortization of deferred financing costs and $33 and $205, respectively, related to commitment fees on the unused portion of the credit facility. The Company paid $6,959
F-104
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
and $684 in interest expense during the years ended December 31, 2013 and 2012, respectively. The average borrowings under the Walnut Street credit facility for the year ended December 31, 2013 were $243,583, with a weighted average interest rate (including the effect of non-usage fees) of 2.90%. The average borrowings under the Walnut Street credit facility for the period from June 27, 2012 to December 31, 2012 were $139,274, with a weighted average interest rate (including the effect of non-usage fees) of 3.07%.
Borrowings under the Walnut Street credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Walnut Street varies depending upon the types of debt securities in Walnut Streets portfolio.
The occurrence of certain events described as Collateral Control Events, or collateral control events, in the credit agreement which governs the Walnut Street credit facility triggers (i) a requirement that Walnut Street obtain the consent of Wells Fargo prior to entering into any transaction with respect to portfolio assets and (ii) the right of Wells Fargo to direct Walnut Street to enter into transactions with respect to any portfolio assets, in each case in Wells Fargos sole discretion. Collateral control events include non-performance of any obligation under the transaction documents by Walnut Street, the Company, FB Advisor or GDFM, and other events with respect to such entities that are adverse to Wells Fargo and the secured parties under the Walnut Street credit facility.
In connection with the Walnut Street credit facility, Walnut Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the Walnut Street credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) a borrowing base deficiency that is not cured in accordance with the terms of the facility; (c) the insolvency or bankruptcy of Walnut Street or the Company; (d) the resignation or removal of the Company as collateral manager; (e) the failure of the Company to maintain an asset coverage ratio of greater than or equal to 2:1; (f) the failure of the Company to have a net asset value of at least $200,000; and (g) the failure of Walnut Street to qualify as a bankruptcy-remote entity. Upon the occurrence and during the continuation of an event of default, Wells Fargo may declare the outstanding advances and all other obligations under the Walnut Street credit facility immediately due and payable. During the continuation of an event of default, Walnut Street must pay interest at a default rate.
Borrowings of Walnut Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
F-105
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financial Highlights
The following is a schedule of financial highlights of the Company for the years ended December 31, 2013, 2012, 2011, 2010 and 2009:
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Per Share Data(1): |
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Net asset value, beginning of period |
$ | 9.97 | $ | 9.35 | $ | 9.42 | $ | 9.10 | $ | 7.33 | ||||||||||
Results of operations(2) |
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Net investment income (loss) |
0.96 | 0.59 | 0.76 | 0.40 | 0.48 | |||||||||||||||
Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency |
0.08 | 0.86 | (0.19 | ) | 0.81 | 2.09 | ||||||||||||||
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Net increase (decrease) in net assets resulting from operations |
1.04 | 1.45 | 0.57 | 1.21 | 2.57 | |||||||||||||||
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|
|
|
|
|
|
|
|||||||||||
Stockholder distributions(3) |
||||||||||||||||||||
Distributions from net investment income |
(0.83 | ) | (0.63 | ) | (0.78 | ) | (0.55 | ) | (0.46 | ) | ||||||||||
Distributions from net realized gain on investments |
| (0.23 | ) | (0.13 | ) | (0.32 | ) | (0.21 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net decrease in net assets resulting from stockholder distributions |
(0.83 | ) | (0.86 | ) | (0.91 | ) | (0.87 | ) | (0.67 | ) | ||||||||||
|
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|||||||||||
Capital share transactions |
||||||||||||||||||||
Issuance of common stock(4) |
| 0.04 | 0.34 | 0.10 | 0.19 | |||||||||||||||
Repurchases of common stock(5) |
| | | | | |||||||||||||||
Offering costs(2) |
| (0.01 | ) | (0.07 | ) | (0.07 | ) | (0.09 | ) | |||||||||||
Reimbursement to investment adviser(2) |
| | | (0.10 | ) | (0.32 | ) | |||||||||||||
Capital contributions of investment adviser(2) |
| | | 0.05 | 0.09 | |||||||||||||||
|
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|
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|
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|
|||||||||||
Net increase (decrease) in net assets resulting from capital share transactions |
| 0.03 | 0.27 | (0.02 | ) | (0.13 | ) | |||||||||||||
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Net asset value, end of period |
$ | 10.18 | $ | 9.97 | $ | 9.35 | $ | 9.42 | $ | 9.10 | ||||||||||
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Shares outstanding, end of period |
259,320,161 | 251,890,821 | 160,390,540 | 41,332,661 | 10,241,544 | |||||||||||||||
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|
|||||||||||
Total return(6) |
10.43 | % | 15.83 | % | 8.93 | % | 13.08 | % | 33.33 | % | ||||||||||
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Ratio/Supplemental Data: |
||||||||||||||||||||
Net assets, end of period |
$ | 2,640,992 | $ | 2,511,738 | $ | 1,498,892 | $ | 389,232 | $ | 93,197 | ||||||||||
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Ratio of net investment income to average net assets(7) |
9.50 | % | 6.07 | % | 8.10 | % | 4.37 | % | 5.60 | % | ||||||||||
Ratio of total expenses to average net assets(7) |
8.90 | % | 7.67 | % | 5.01 | % | 9.89 | % | 5.91 | % | ||||||||||
Portfolio turnover |
61.18 | % | 65.70 | % | 72.28 | % | 67.48 | % | 46.45 | % |
(1) | The share information utilized to determine per share data has been retroactively adjusted to reflect stock distributions declared in 2009 and 2010. |
(2) | The per share data was derived by using the weighted average shares outstanding during the applicable period. |
F-106
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financial Highlights (continued)
(3) | The per share data for distributions reflects 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 in the Companys continuous public offering and pursuant to the Companys distribution reinvestment plan. The issuance of common stock at an offering price, net of sales commissions and dealer manager fees, that is greater than the net asset value per share results in an increase in net asset value per share. |
(5) | The per share impact of the Companys repurchases of common stock is a reduction to net asset value of less than $0.01 per share during the applicable period. |
(6) | The total return for each year presented was calculated by taking the net asset value per share as of the end of the applicable year, adding the cash distributions per share which were declared during the applicable calendar year and dividing the total by the net asset value per share at the beginning of the applicable year. The total return does not consider the effect of the sales load from the sale of the Companys common stock. The total return includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of the Companys future total return, 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 rate 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 as calculated above represents the total return on the Companys investment portfolio during the applicable period and is calculated in accordance with GAAP. These return figures do not represent an actual return to stockholders. |
(7) | Weighted average net assets during the period are used for this calculation. The following is a schedule of supplemental ratios for the years ended December 31, 2013, 2012, 2011, 2010 and 2009: |
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Ratio of accrued capital gains incentive fees to average net assets |
0.16 | % | 1.80 | % | (0.46 | )% | 2.54 | % | 0.45 | % | ||||||||||
Ratio of subordinated income incentive fees to average net assets |
2.41 | % | 0.61 | % | | | | |||||||||||||
Ratio of interest expense to average net assets |
1.97 | % | 1.37 | % | 1.29 | % | 1.81 | % | | |||||||||||
Ratio of excise taxes to average net assets |
0.22 | % | 0.02 | % | | | |
F-107
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Selected Quarterly Financial Data (Unaudited)
The following is the quarterly results of operations for the years ended December 31, 2013 and 2012. The following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended | ||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
|||||||||||||
Investment income |
$ | 116,866 | $ | 123,307 | $ | 124,349 | $ | 110,044 | ||||||||
Operating expenses |
||||||||||||||||
Total expenses |
64,446 | 55,535 | 50,294 | 59,315 | ||||||||||||
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|
|||||||||
Net investment income |
52,420 | 67,772 | 74,055 | 50,729 | ||||||||||||
Realized and unrealized gain (loss) |
24,388 | (8,155 | ) | (27,116 | ) | 31,747 | ||||||||||
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|
|
|
|
|||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 76,808 | $ | 59,617 | $ | 46,939 | $ | 82,476 | ||||||||
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Per share information-basic and diluted |
||||||||||||||||
Net investment income |
$ | 0.20 | $ | 0.26 | $ | 0.29 | $ | 0.20 | ||||||||
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|
|
|||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 0.30 | $ | 0.23 | $ | 0.18 | $ | 0.33 | ||||||||
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|||||||||
Weighted average shares outstanding |
258,262,842 | 256,108,444 | 254,213,036 | 252,606,873 | ||||||||||||
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Quarter Ended | ||||||||||||||||
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
|||||||||||||
Investment income |
$ | 105,618 | $ | 84,015 | $ | 63,054 | $ | 50,535 | ||||||||
Operating expenses |
||||||||||||||||
Total expenses |
57,882 | 49,259 | 26,531 | 35,643 | ||||||||||||
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|
|||||||||
Net investment income |
47,736 | 34,756 | 36,523 | 14,892 | ||||||||||||
Realized and unrealized gain (loss) |
33,218 | 87,011 | 8,545 | 67,518 | ||||||||||||
|
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|
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|
|
|||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 80,954 | $ | 121,767 | $ | 45,068 | $ | 82,410 | ||||||||
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Per share information-basic and diluted |
||||||||||||||||
Net investment income |
$ | 0.19 | $ | 0.14 | $ | 0.16 | $ | 0.08 | ||||||||
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|
|
|||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 0.32 | $ | 0.49 | $ | 0.20 | $ | 0.45 | ||||||||
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|
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|
|
|||||||||
Weighted average shares outstanding |
250,840,624 | 248,310,640 | 230,531,738 | 180,149,424 | ||||||||||||
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|
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|
|
The sum of quarterly per share amounts does not necessarily equal per share amounts reported for the years ended December 31, 2013 and 2012. This is due to changes in the number of weighted-average shares outstanding and the effects of rounding for each period.
F-108
FS Investment Corporation
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 11. Subsequent Events
Although shares of the Companys common stock are not currently listed for trading on a national securities exchange, the Company has applied to list its shares on the NYSE and, subject to NYSE approval, the Company expects trading to commence in April 2014, or at such earlier or later time as the Companys board of directors may determine, taking into consideration market conditions and other factors. However, there can be no assurance that the Company will be able to list its shares for trading on the NYSE within its intended time frame or at all.
The Company anticipates that it will conduct a tender offer, or the tender offer, to purchase up to $250,000 in shares of its common stock in connection with the Companys listing, pursuant to which the Companys stockholders will be permitted to tender their shares of common stock to the Company for cash, subject to the terms and conditions of the tender offer. The Company expects that any such tender offer will commence at the time of the listing and will remain open for a period of at least 20 business days following the date of the listing. The terms of the tender offer, including the size thereof, will be determined by the Companys board of directors prior to commencement of the tender offer.
The Tender Offer described in this annual report on Form 10-K has not yet commenced, and this annual report on Form 10-K is neither an offer to purchase nor a solicitation of an offer to sell any shares of the common stock of the Company or any other securities. On the commencement date of the Tender Offer, if any, the Company will file a tender offer statement on Schedule TO, including an offer to purchase, a letter of transmittal and related documents, with the SEC. The offer to purchase shares of common stock of the Company will only be made pursuant to the offer to purchase, the letter of transmittal and related documents filed with such Schedule TO. Stockholders are urged to read the tender offer statement (including an offer to purchase, a related letter of transmittal and the other offer documents), as they may be amended from time to time, when they become available because they will contain important information that should be read carefully before making any decision with respect to the tender offer. Stockholders may obtain a free copy of these statements (when available) at the website maintained by the SEC at www.sec.gov or by directing such requests to the information agent for the tender offer. In addition, the tender offer statement and related documentation (when available) may be obtained by directing such requests to the Company at (877) 628-8575.
F-109
$1,500,000,000
Common Stock
Preferred Stock
Warrants
Subscription Rights
Debt Securities
PRELIMINARY PROSPECTUS
, 2014
PART C
Other Information
Item 25. Financial Statements and Exhibits
(1) Financial Statements
The following financial statements of FS Investment Corporation, or the Registrant, are included in Part A of this Registration Statement:
Page | ||||
Financial Statements for the three months ended March 31, 2014 and 2013 |
||||
Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013 |
F-2 | |||
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 |
F-3 | |||
F-4 | ||||
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 |
F-5 | |||
F-6 | ||||
F-25 | ||||
Financial Statements for the fiscal years ended December 31, 2013, 2012 and 2011 |
||||
Managements Report on Internal Control over Financial Reporting |
F-53 | |||
F-54 | ||||
F-55 | ||||
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule |
F-56 | |||
Consolidated Balance Sheets as of December 31, 2013 and 2012 |
F-57 | |||
Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 |
F-58 | |||
F-59 | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 |
F-60 | |||
Consolidated Schedules of Investments as of December 31, 2013 and 2012 |
F-61 | |||
F-81 |
(2) Exhibits
(a)(1) |
Second Articles of Amendment and Restatement of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(b)(1) |
Second Amended and Restated Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(d)(1) |
Form of Stock Certificate.* | |
(d)(2) |
Form of Indenture. | |
(d)(3) |
Form T-1 Statement of Eligibility with respect to the Form of Indenture. |
C-1
(e) |
Distribution Reinvestment Plan, effective as of June 2, 2014. (Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on May 23, 2014.) | |
(g)(1) |
Amended and Restated Investment Advisory Agreement, dated as of April 16, 2014, by and between the Registrant and FB Income Advisor, LLC. (Incorporated by reference to Exhibit 3.3 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(g)(2) |
Investment Sub-advisory Agreement, dated as of April 13, 2008, by and between FB Income Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 2 to the Registrants registration statement on Form N-2 (File No. 333-149374) filed on June 19, 2008.) | |
(h)(1) |
Underwriting Agreement.** | |
(j) |
Custodian Agreement, dated as of November 14, 2011, by and between the Registrant and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.9 filed with the Registrants Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 filed on November 14, 2011.) | |
(k)(1) |
Amended and Restated Credit Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on February 1, 2011.) | |
(k)(2) |
Fourth Amendment to Credit Agreement, dated as of March 23, 2012, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on March 27, 2012.) | |
(k)(3) |
Fifth Amendment to Credit Agreement, dated as of March 22, 2013, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.12 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 28, 2013.) | |
(k)(4) |
Sixth Amendment to Credit Agreement, dated as of December 20, 2013, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on December 24, 2013.) | |
(k)(5) |
Asset Contribution Agreement, dated as of March 10, 2010, by and between the Registrant and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on March 16, 2010.) | |
(k)(6) |
First Amendment to Asset Contribution Agreement, dated as of June 17, 2010, by and between the Registrant and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on July 19, 2010.) | |
(k)(7) |
Investment Management Agreement, dated as of March 10, 2010, by and between the Registrant and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on March 16, 2010.) | |
(k)(8) |
Amended and Restated Security Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on February 1, 2011.) | |
(k)(9) |
Termination Acknowledgement (TRS), dated as of August 29, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.6 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) |
C-2
(k)(10) |
Amended and Restated Investment Management Agreement, dated as of August 29, 2012, by and between the Registrant and Arch Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(11) |
Amended and Restated Asset Transfer Agreement, dated as of September 26, 2012, by and between the Registrant and Locust Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(12) |
Loan Agreement, dated as of August 29, 2012, as amended and restated as of March 31, 2014, by and between Arch Street Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on April 4, 2014.) | |
(k)(13) |
Account Control Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(14) |
Security Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(15) |
Agreement and Plan of Merger, dated as of August 29, 2012, by and among Arch Street Funding LLC, Benjamin Loan Funding LLC, Benjamin 2 Loan Funding LLC, Citibank, N.A. and Citibank Financial Products Inc. (Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(16) |
Amended and Restated Indenture, dated as of September 26, 2012, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(17) |
Supplemental Indenture No. 1, dated as of April 23, 2013, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on April 26, 2013.) | |
(k)(18) |
Locust Street Funding LLC Class A Floating Rate Secured Note, due 2021. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on February 21, 2012.) | |
(k)(19) |
Locust Street Funding LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(20) |
Locust Street Funding LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on April 26, 2013.) | |
(k)(21) |
TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of April 23, 2013. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on April 26, 2013.) | |
(k)(22) |
Amendment Agreement, dated as of October 24, 2013, by and between JPMorgan Chase Bank, N.A., London Branch, and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on October 28, 2013.) | |
(k)(23) |
Amended and Restated Confirmation, dated as of February 15, 2012, by and between Race Street Funding LLC and JPMorgan Chase Bank, N.A., London Branch. (Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on February 21, 2012.) |
C-3
(k)(24) |
Revolving Credit Agreement, dated as of July 21, 2011, by and between the Registrant and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on July 27, 2011.) | |
(k)(25) |
Amendment to Credit Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Registrant. (Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(26) |
Asset Transfer Amendment, dated as of September 26, 2012, by and between the Registrant and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.6 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(27) |
Amended and Restated Collateral Management Agreement, dated as of September 26, 2012, by and between Locust Street Funding LLC and the Registrant. (Incorporated by reference to Exhibit 10.7 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(28) |
Amended and Restated Collateral Administration Agreement, dated as of September 26, 2012, by and among Locust Street Funding LLC, the Registrant and Virtus Group, LP. (Incorporated by reference to Exhibit 10.8 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(29) |
Loan and Servicing Agreement, dated as of May 17, 2012, by and among Walnut Street Funding LLC, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association, and the other lender parties thereto. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(30) |
Amendment No. 1 to Loan and Servicing Agreement, dated as of March 11, 2014, by and among Walnut Street Funding LLC, Wells Fargo Securities, LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on March 12, 2014.) | |
(k)(31) |
Purchase and Sale Agreement, dated as of May 17, 2012, by and between the Registrant and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(32) |
Collateral Management Agreement, dated as of May 17, 2012, by and between the Registrant and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(33) |
Securities Account Control Agreement, dated as of May 17, 2012, by and between Walnut Street Funding LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(34) |
Collateral Management Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Registrant. (Incorporated by reference to Exhibit 10.9 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(35) |
Senior Secured Revolving Credit Agreement, dated as of April 3, 2014, by and among the Registrant, ING Capital LLC, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on April 4, 2014.) | |
(k)(36) |
Guarantee, Pledge and Security Agreement, dated as of April 3, 2014, by and among the Registrant, ING Capital LLC, as revolving administrative agent and collateral agent, the subsidiary guarantors party thereto and each financing agent and designated indebtedness holder party thereto. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on April 4, 2014.) | |
(k)(37) |
Control Agreement, dated as of April 3, 2014, by and among the Registrant, ING Capital LLC, as collateral agent, and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on April 4, 2014.) |
C-4
(k)(38) |
Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated May 16, 2013, by and between the Registrant and Franklin Square Holdings, L.P. (Incorporated by reference to Exhibit 99.1 to the Registrants Current Report on Form 8-K filed on May 16, 2013.) | |
(k)(39) |
Administration Agreement, dated as of April 16, 2014, by and between the Registrant and FB Income Advisor, LLC. (Incorporated by reference to Exhibit 3.4 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(k)(40) |
Trademark License Agreement, dated as of April 16, 2014, by and between the Registrant and Franklin Square Holdings, L.P. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(l)(1) |
Opinion of Miles & Stockbridge P.C. | |
(l)(2) |
Opinion of Dechert LLP. | |
(n)(1) |
Consent of Miles & Stockbridge P.C. (Incorporated by reference to Exhibit (l)(1) hereto). | |
(n)(2) |
Consent of Dechert LLP (Incorporated by reference to Exhibit (l)(2) hereto). | |
(n)(3) |
Consent of McGladrey LLP. | |
(r)(1) |
Code of Ethics of the Registrant. (Incorporated by reference to Exhibit 14.1 to the Registrants Current Report on Form 8-K filed on March 12, 2014.) | |
(r)(2) |
Code of Ethics of FB Income Advisor, LLC. |
* | Previously filed as part of the Registrants Registration Statement on Form N-2 (File No. 333-195863) filed on May 12, 2014. |
** | To be filed by amendment. |
Item 26. Marketing Arrangements
The information contained under the heading Plan of Distribution in this Registration Statement is incorporated herein by reference.
In connection with the listing of the Registrants common stock on the New York Stock Exchange, LLC, each of the Registrants directors and executive officers, and the members of management of Franklin Square Holdings, L.P. entered into a lock-up agreement with the Registrant pursuant to which such persons agreed not to sell any of the shares of common stock beneficially owned by them, subject to certain exceptions, for a period of 180 days after the date of the listing.
Item 27. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred by the Registrant in connection with the offering described in this registration statement:
SEC registration fee |
$ | 193,200 | ||
FINRA filing fee |
225,500 | |||
NYSE listing fee |
170,000 | |||
Accounting fees and expenses |
400,000 | |||
Legal fees and expenses |
800,000 | |||
Printing |
400,000 | |||
Miscellaneous fees and expenses |
125,000 | |||
|
|
|||
Total |
$ | 2,313,700 |
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All of the expenses set forth above shall be borne by the Registrant.
Item 28. Persons Controlled by or Under Common Control
The Registrant directly or indirectly owns 100% of the voting securities of the following:
Name |
State of Incorporation or Organization | |
Arch Street Funding LLC |
Delaware | |
Broad Street Funding LLC |
Delaware | |
FSIC Investments, Inc. |
Delaware | |
IC American Energy Investments, Inc. |
Delaware | |
Locust Street Funding LLC |
Delaware | |
Race Street Funding LLC |
Delaware | |
Walnut Street Funding LLC |
Delaware |
Item 29. Number of Holders of Securities
The following table sets forth the number of record holders of the Registrants capital stock at June 10, 2014:
Title of Class |
Number of Record Holders |
|||
Common stock, $0.001 par value |
5,186 |
Item 30. Indemnification
Limitation on Liability
The Registrants charter limits the personal liability of the Registrants directors and officers to the corporation and its stockholders for money damages to the maximum extent permitted by Maryland law. Maryland law permits a Maryland corporation to include in its charter a provision expanding or limiting the liability of its directors and officers to the corporation and its stockholders for money damages, but a corporation may not include any provision that restricts or limits the liability of directors or officers to the corporation or its stockholders:
(a) | to the extent that it is proved that the person actually received an improper benefit or profit in money, property or services; or |
(b) | to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the persons action, or failure to act, was the request of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. |
The Registrants charter providing that the limitation of directors and officers liability, is subject to any applicable limitations of the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, the Registrant maintains directors and officers liability insurance.
Indemnification
Under the Maryland General Corporate Law, a Maryland corporation may indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service to the corporation or at its request, unless it is established that the act or omission of the indemnified party was material to the matter giving rise to the proceeding and (i) the act or omission was committed in bad faith or was the result of active and deliberate dishonesty, or (ii) in the case of any criminal proceeding, the
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indemnified party had reasonable cause to believe that the act or omission was unlawful. Maryland law does not permit indemnification in respect of any proceeding in which the party seeking indemnification shall have been adjudged to be liable to the corporation. Further, a party may not be indemnified for a proceeding brought by that party against the corporation, except (i) for a proceeding brought to enforce indemnification or (ii) if the charter or bylaws, a resolution of the corporations board of directors or an agreement approved by the corporations board of directors to which the corporation is a party expressly provides otherwise.
The Registrants charter permits the Registrant to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual who (a) is a present or former director or officer of the Registrant and who is made or threatened to be made a party to a proceeding by reason of his or her service in that capacity, or (b) while a director or officer of the Registrant and at the request of the Registrant, serves or has served as a director, officer, partner, member, manager or trustee of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to a proceeding by reason of his or her service in such capacity and from and against any claim or liability to which such person may become subject or such person may incur, in each case to the fullest extent permitted by Maryland law and the 1940 Act. The Registrants charter provides that the provision of indemnification is subject to any applicable limitations of the 1940 Act.
The Registrants bylaws obligate the Registrant to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual who (a) is a present or former director or officer of the Registrant and who is made or threatened to be made a party to a proceeding by reason of his or her service in that capacity, or (b) while a director or officer of the Registrant and at the request of the Registrant, serves or has served as a director, officer, partner, member, manager or trustee of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to a proceeding by reason of his or her service in such capacity and from and against any claim or liability to which such person may become subject or such person may incur, in each case to the fullest extent permitted by Maryland law and the 1940 Act. The Registrants charter and bylaws also permit the Registrant to provide such indemnification and advancement for expenses to a person who served a predecessor of the Registrant in any of the capacities described in (a) or (b) above and to any employee or agent of the Registrant or a predecessor of the Registrant. In accordance with the 1940 Act, the Registrant will not indemnify any person for any liability to which such person would be subject by reason of such persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The investment advisory agreement provides that FB Advisor (and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FB Advisor) shall be entitled to indemnification (including reasonable attorneys fees and amounts reasonably paid in settlement) for any liability or loss suffered by FB Advisor, and FB Advisor shall be held harmless for any loss or liability suffered by us, arising out of the performance of any of its duties or obligations under the investment advisory agreement or otherwise as our investment adviser; provided, however, that FB Advisor cannot be indemnified for any liability arising out of willful misfeasance, bad faith, or negligence in the performance of FB Advisors duties or by reason of the reckless disregard of FB Advisors duties and obligations under the investment advisory agreement.
The administration agreement provides that FB Advisor (and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FB Advisor) shall be entitled to indemnification (including reasonable attorneys fees and amounts reasonably paid in settlement) for any liability or loss suffered by FB Advisor, and FB Advisor shall be held harmless for any loss or liability suffered by us, arising out of the performance of any of its duties or obligations under the administration agreement or otherwise as our administrator; provided, however, that FB Advisor cannot be indemnified for any liability arising out of willful misfeasance, bad faith, or negligence in the performance of FB Advisors duties or by reason of the reckless disregard of FB Advisors duties and obligations under the administration agreement.
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Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Item 31. Business and Other Connections of Investment Advisers
A description of any other business, profession, vocation, or employment of a substantial nature in which FB Advisor and each manager or executive officer of FB Advisor, is or has been during the past two fiscal years, engaged in for his or her own account or in the capacity of director, officer, employee, partner or trustee, is set forth in Part A of this Registration Statement in the sections entitled ManagementBoard of Directors and Executive Officers and Investment Advisory Agreement. Additional information regarding FB Advisor and certain of its officers and managers is set forth in its Form ADV, as filed with the Securities and Exchange Commission, or the SEC, (SEC File No. 801-69111) and is incorporated herein by reference.
A description of any other business, profession, vocation, or employment of a substantial nature in which GDFM and each director or executive officer of GDFM who performs a policy-making function for GDFM in connection with the performance of its services under the Investment Sub-Advisory Agreement between GDFM and FB Advisor, is or has been during the past two fiscal years, engaged in for his or her own account or in the capacity of director, officer, employee, partner or trustee, is set forth in Part A of this Registration Statement in the sections entitled Portfolio Management and Investment Advisory Agreement. Additional information regarding GDFM and its officers and directors is set forth in its Form ADV, as filed with the SEC (SEC File No. 801-68243), and is incorporated herein by reference.
Item 32. Location of Accounts and Records
All accounts, books and other documents required to be maintained by Section 31(a) of the Act, and the rules thereunder, are maintained at the offices of:
(1) | the Registrant, FS Investment Corporation, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104; |
(2) | the Transfer Agent and co-administrator, DST Systems, Inc., 430 W. 7th Street, Kansas City, Missouri 64105-1594; |
(3) | the Custodian, State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02111; |
(4) | the investment adviser, FB Income Advisor, LLC, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104; and |
(5) | the administrator, FB Income Advisor, LLC, Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104. |
Item 33. Management Services
Not Applicable.
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Item 34. Undertakings
The Registrant hereby undertakes:
(1) | to suspend the offering of shares until the prospectus is amended if (i) subsequent to the effective date of this registration statement, the Registrants net asset value declines more than 10% from the Registrants net asset value as of the effective date of this registration statement, or (ii) the Registrants net asset value increases to an amount greater than the Registrants net proceeds as stated in the prospectus; |
(2) | Not applicable |
(3) | if the securities being registered are to be offered to existing stockholders pursuant to warrants or rights, and any securities not taken by stockholders are to be reoffered to the public, to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by underwriters during the subscription period, the amount of unsubscribed securities to be purchased by underwriters, and the terms of any subsequent reoffering thereof, and further, if any public offering by the underwriters of the securities being registered is to be made on terms differing from those set forth on the cover page of the prospectus, to file a post-effective amendment to set forth the terms of such offering |
(4) | (a) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
(1) | to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended, or the Securities Act; |
(2) | to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and |
(3) | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
(b) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof;
(c) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;
(d) that, for the purpose of determining liability under the Securities Act to any purchaser, if the Registrant is subject to Rule 430C [17 CFR 230.430C]: Each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the Securities Act [17 CFR 230.497(b), (c), (d) or (e)] as part of a registration statement relating to an offering, other than prospectuses filed in reliance on Rule 430A under the Securities Act [17 CFR 230.430A], shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use; and
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(e) that for the purpose of determining liability of the Registrant under the Securities Act to any purchaser in the initial distribution of securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
(1) | any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the Securities Act [17 CFR 230.497]; |
(2) | the portion of any advertisement pursuant to Rule 482 under the Securities Act [17 CFR 230.482] relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and |
(3) | any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
(5) | (a) for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act [17 CFR 230.497(h)] shall be deemed to be part of this registration statement as of the time it was declared effective; and |
(b) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
(6) | Not applicable |
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Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia and Commonwealth of Pennsylvania, on the 16th day of June 2014.
FS INVESTMENT CORPORATION | ||
By: | /s/ Michael C. Forman | |
Name: Michael C. Forman | ||
Title: Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 has been signed below by the following persons in the capacities and on the dates indicated:
Signature |
Title |
Date | ||
/s/ Michael C. Forman Michael C. Forman |
Chief Executive Officer and Director (Principal executive officer) |
June 16, 2014 | ||
/s/ William Goebel William Goebel |
Chief Financial Officer (Principal financial and accounting officer) |
June 16, 2014 | ||
* David J. Adelman |
Director |
June 16, 2014 | ||
* Gregory Chandler |
Director |
June 16, 2014 | ||
* Barry H. Frank |
Director |
June 16, 2014 | ||
* Thomas J. Gravina |
Director |
June 16, 2014 | ||
* Michael J. Hagan |
Director |
June 16, 2014 | ||
* Jeffrey K. Harrow |
Director |
June 16, 2014 | ||
* Michael Heller |
Director |
June 16, 2014 |
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Signature |
Title |
Date | ||
* Paul Mendelson |
Director |
June 16, 2014 | ||
* Pedro A. Ramos |
Director |
June 16, 2014 |
* | By: | /s/ Michael C. Forman |
||||
Attorney-in-Fact |
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EXHIBIT INDEX
(a)(1) |
Second Articles of Amendment and Restatement of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(b)(1) |
Second Amended and Restated Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(d)(1) |
Form of Stock Certificate.* | |
(d)(2) |
Form of Indenture. | |
(d)(3) |
Form T-1 Statement of Eligibility with respect to the Form of Indenture. | |
(e) |
Distribution Reinvestment Plan effective as of June 2, 2014. (Incorporated by reference to Exhibit 4.1 to the Companys Current Report of Form 8-K filed on May 23, 2014.) | |
(g)(1) |
Amended and Restated Investment Advisory Agreement, dated as of April 16, 2014, by and between the Registrant and FB Income Advisor, LLC. (Incorporated by reference to Exhibit 3.3 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(g)(2) |
Investment Sub-advisory Agreement, dated as of April 13, 2008, by and between FB Income Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 2 to the Registrants registration statement on Form N-2 (File No. 333-149374) filed on June 19, 2008.) | |
(h)(1) |
Underwriting Agreement.** | |
(j) |
Custodian Agreement, dated as of November 14, 2011, by and between the Registrant and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.9 filed with the Registrants Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 filed on November 14, 2011.) | |
(k)(1) |
Amended and Restated Credit Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on February 1, 2011.) | |
(k)(2) |
Fourth Amendment to Credit Agreement, dated as of March 23, 2012, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on March 27, 2012.) | |
(k)(3) |
Fifth Amendment to Credit Agreement, dated as of March 22, 2013, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.12 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 28, 2013.) | |
(k)(4) |
Sixth Amendment to Credit Agreement, dated as of December 20, 2013, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on December 24, 2013.) | |
(k)(5) |
Asset Contribution Agreement, dated as of March 10, 2010, by and between the Registrant and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on March 16, 2010.) | |
(k)(6) |
First Amendment to Asset Contribution Agreement, dated as of June 17, 2010, by and between the Registrant and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on July 19, 2010.) |
(k)(7) |
Investment Management Agreement, dated as of March 10, 2010, by and between the Registrant and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on March 16, 2010.) | |
(k)(8) |
Amended and Restated Security Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on February 1, 2011.) | |
(k)(9) |
Termination Acknowledgement (TRS), dated as of August 29, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.6 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(10) |
Amended and Restated Investment Management Agreement, dated as of August 29, 2012, by and between the Registrant and Arch Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(11) |
Amended and Restated Asset Transfer Agreement, dated as of September 26, 2012, by and between the Registrant and Locust Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(12) |
Loan Agreement, dated as of August 29, 2012, as amended and restated as of March 31, 2014, by and between Arch Street Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on April 4, 2014.) | |
(k)(13) |
Account Control Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(14) |
Security Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(15) |
Agreement and Plan of Merger, dated as of August 29, 2012, by and among Arch Street Funding LLC, Benjamin Loan Funding LLC, Benjamin 2 Loan Funding LLC, Citibank, N.A. and Citibank Financial Products Inc. (Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on August 31, 2012.) | |
(k)(16) |
Amended and Restated Indenture, dated as of September 26, 2012, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(17) |
Supplemental Indenture No. 1, dated as of April 23, 2013, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on April 26, 2013.) | |
(k)(18) |
Locust Street Funding LLC Class A Floating Rate Secured Note, due 2021. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on February 21, 2012.) | |
(k)(19) |
Locust Street Funding LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(20) |
Locust Street Funding LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on April 26, 2013.) | |
(k)(21) |
TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of April 23, 2013. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on April 26, 2013.) |
(k)(22) |
Amendment Agreement, dated as of October 24, 2013, by and between JPMorgan Chase Bank, N.A., London Branch, and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on October 28, 2013.) | |
(k)(23) |
Amended and Restated Confirmation, dated as of February 15, 2012, by and between Race Street Funding LLC and JPMorgan Chase Bank, N.A., London Branch. (Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on February 21, 2012.) | |
(k)(24) |
Revolving Credit Agreement, dated as of July 21, 2011, by and between the Registrant and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on July 27, 2011.) | |
(k)(25) |
Amendment to Credit Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Registrant. (Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(26) |
Asset Transfer Amendment, dated as of September 26, 2012, by and between the Registrant and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.6 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(27) |
Amended and Restated Collateral Management Agreement, dated as of September 26, 2012, by and between Locust Street Funding LLC and the Registrant. (Incorporated by reference to Exhibit 10.7 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(28) |
Amended and Restated Collateral Administration Agreement, dated as of September 26, 2012, by and among Locust Street Funding LLC, the Registrant and Virtus Group, LP. (Incorporated by reference to Exhibit 10.8 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(29) |
Loan and Servicing Agreement, dated as of May 17, 2012, by and among Walnut Street Funding LLC, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association, and the other lender parties thereto. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(30) |
Amendment No. 1 to Loan and Servicing Agreement, dated as of March 11, 2014, by and among Walnut Street Funding LLC, Wells Fargo Securities, LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on March 12, 2014.) | |
(k)(31) |
Purchase and Sale Agreement, dated as of May 17, 2012, by and between the Registrant and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(32) |
Collateral Management Agreement, dated as of May 17, 2012, by and between the Registrant and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(33) |
Securities Account Control Agreement, dated as of May 17, 2012, by and between Walnut Street Funding LLC and Wells Fargo Bank, National Association. (Incorporated by
reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on May 18, 2012.) | |
(k)(34) |
Collateral Management Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Registrant. (Incorporated by reference to Exhibit 10.9 to the Registrants Current Report on Form 8-K filed on October 1, 2012.) | |
(k)(35) |
Senior Secured Revolving Credit Agreement, dated as of April 3, 2014, by and among the Registrant, ING Capital LLC, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on April 4, 2014.) |
(k)(36) |
Guarantee, Pledge and Security Agreement, dated as of April 3, 2014, by and among the Registrant, ING Capital LLC, as revolving administrative agent and collateral agent, the subsidiary guarantors party thereto and each financing agent and designated indebtedness holder party thereto. (Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on April 4, 2014.) | |
(k)(37) |
Control Agreement, dated as of April 3, 2014, by and among the Registrant, ING Capital LLC, as collateral agent, and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on April 4, 2014.) | |
(k)(38) |
Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated May 16, 2013, by and between the Registrant and Franklin Square Holdings, L.P. (Incorporated by reference to Exhibit 99.1 to the Registrants Current Report on Form 8-K filed on May 16, 2013.) | |
(k)(39) |
Administration Agreement, dated as of April 16, 2014, by and between the Registrant and FB Income Advisor, LLC. (Incorporated by reference to Exhibit 3.4 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(k)(40) |
Trademark License Agreement, dated as of April 16, 2014, by and between the Registrant and Franklin Square Holdings, L.P. (Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on April 16, 2014.) | |
(l)(1) |
Opinion of Miles & Stockbridge P.C. | |
(l)(2) |
Opinion of Dechert LLP. | |
(n)(1) |
Consent of Miles & Stockbridge P.C. (Incorporated by reference to Exhibit (l)(1) hereto). | |
(n)(2) |
Consent of Dechert LLP (Incorporated by reference to Exhibit (l)(2) hereto). | |
(n)(3) |
Consent of McGladrey LLP. | |
(r)(1) |
Code of Ethics of the Registrant. (Incorporated by reference to Exhibit 14.1 to the Registrants Current Report on Form 8-K filed on March 12, 2014.) | |
(r)(2) |
Code of Ethics of FB Income Advisor, LLC. |
* | Previously filed as part of the Registrants Registration Statement on Form N-2 (File No. 333-195863) filed on May 12, 2014. |
** | To be filed by amendment. |
Exhibit (d)(2)
[Form of Indenture]
FS INVESTMENT CORPORATION
Issuer
and
U.S. BANK NATIONAL ASSOCIATION
Trustee
Indenture
Dated as of [ ], 20[ ]
Providing for the Issuance
Of
Debt Securities
FS Investment Corporation
Reconciliation and tie between Trust Indenture Act of 1939
and Indenture, dated as of [ ], 20[ ]
Trust Indenture Act Section |
Indenture Section | |||
§ 310 | (a)(1) | 607 | ||
(a)(2) | 607 | |||
(b) | 609 | |||
§ 312 | (c) | 701 | ||
§ 314 | (a) | 704 | ||
(a)(4) | 1005 | |||
(c)(1) | 102 | |||
(c)(2) | 102 | |||
(e) | 102 | |||
§ 315 | (b) | 601 | ||
§ 316 | (a) (last sentence) | 101 (Outstanding) | ||
(a)(1)(A) | 502,512 | |||
(a)(1)(B) | 513 | |||
(b) | 508 | |||
§ 317 | (a)(1) | 503 | ||
(a)(2) | 504 | |||
§ 318 | (a) | 111 | ||
(c) | 111 |
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.
TABLE OF CONTENTS
Page | ||||||
ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION |
||||||
SECTION 101. | Definitions | 1 | ||||
SECTION 102. | Compliance Certificates and Opinions | 10 | ||||
SECTION 103. | Form of Documents Delivered to Trustee | 11 | ||||
SECTION 104. | Acts of Holders | 11 | ||||
SECTION 105. | Notices, Etc., to Trustee and Company | 13 | ||||
SECTION 106. | Notice to Holders; Waiver | 13 | ||||
SECTION 107. | Conflict with TIA | 14 | ||||
SECTION 108. | Effect of Headings and Table of Contents | 14 | ||||
SECTION 109. | Successors and Assigns | 14 | ||||
SECTION 110. | Separability Clause | 14 | ||||
SECTION 111. | Benefits of Indenture | 14 | ||||
SECTION 112. | Governing Law | 14 | ||||
SECTION 113. | Legal Holidays | 14 | ||||
SECTION 114. | Submission to Jurisdiction | 15 | ||||
ARTICLE TWO SECURITIES FORMS |
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SECTION 201. | Forms of Securities | 15 | ||||
SECTION 202. | Form of Trustees Certificate of Authentication | 15 | ||||
SECTION 203. | Securities Issuable in Global Form | 16 | ||||
ARTICLE THREE THE SECURITIES |
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SECTION 301. | Amount Unlimited; Issuable in Series | 17 | ||||
SECTION 302. | Denominations | 21 | ||||
SECTION 303. | Execution, Authentication, Delivery and Dating | 21 | ||||
SECTION 304. | Temporary Securities | 23 | ||||
SECTION 305. | Registration, Registration of Transfer and Exchange | 23 | ||||
SECTION 306. | Mutilated, Destroyed, Lost and Stolen Securities | 26 | ||||
SECTION 307. | Payment of Interest; Interest Rights Preserved; Optional Interest Reset | 26 | ||||
SECTION 308. | Optional Extension of Maturity | 29 | ||||
SECTION 309. | Persons Deemed Owners | 30 | ||||
SECTION 310. | Cancellation | 30 | ||||
SECTION 311. | Computation of Interest | 31 | ||||
SECTION 312. | Currency and Manner of Payments in Respect of Securities | 31 | ||||
SECTION 313. | Appointment and Resignation of Successor Exchange Rate Agent | 34 | ||||
SECTION 314. | CUSIP Numbers | 35 |
ARTICLE FOUR SATISFACTION AND DISCHARGE |
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SECTION 401. | Satisfaction and Discharge of Indenture | 35 | ||||
SECTION 402. | Application of Trust Funds | 36 | ||||
ARTICLE FIVE REMEDIES |
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SECTION 501. | Events of Default | 36 | ||||
SECTION 502. | Acceleration of Maturity; Rescission and Annulment | 38 | ||||
SECTION 503. | Collection of Indebtedness and Suits for Enforcement by Trustee | 39 | ||||
SECTION 504. | Trustee May File Proofs of Claim | 40 | ||||
SECTION 505. | Trustee May Enforce Claims Without Possession of Securities | 41 | ||||
SECTION 506. | Application of Money Collected | 41 | ||||
SECTION 507. | Limitation on Suits | 42 | ||||
SECTION 508. | Unconditional Right of Holders to Receive Principal, Premium and Interest | 42 | ||||
SECTION 509. | Restoration of Rights and Remedies | 42 | ||||
SECTION 510. | Rights and Remedies Cumulative | 43 | ||||
SECTION 511. | Delay or Omission Not Waiver | 43 | ||||
SECTION 512. | Control by Holders of Securities | 43 | ||||
SECTION 513. | Waiver of Past Defaults | 43 | ||||
SECTION 514. | Waiver of Stay or Extension Laws | 44 | ||||
ARTICLE SIX THE TRUSTEE |
||||||
SECTION 601. | Notice of Defaults | 44 | ||||
SECTION 602. | Certain Rights of Trustee | 45 | ||||
SECTION 603. | Not Responsible for Recitals or Issuance of Securities | 48 | ||||
SECTION 604. | May Hold Securities | 48 | ||||
SECTION 605. | Money Held in Trust | 48 | ||||
SECTION 606. | Compensation and Reimbursement and Indemnification of Trustee | 48 | ||||
SECTION 607. | Corporate Trustee Required; Eligibility | 49 | ||||
SECTION 608. | Disqualification; Conflicting Interests | 50 | ||||
SECTION 609. | Resignation and Removal; Appointment of Successor | 50 | ||||
SECTION 610. | Acceptance of Appointment by Successor | 51 | ||||
SECTION 611. | Merger, Conversion, Consolidation or Succession to Business | 52 | ||||
SECTION 612. | Appointment of Authenticating Agent | 53 | ||||
ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY |
||||||
SECTION 701. | Company to Furnish Trustee Names and Addresses of Holders | 55 | ||||
SECTION 702. | Preservation of Information; Communications to Holders | 55 | ||||
SECTION 703. | Reports by Trustee | 55 |
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SECTION 704. | Reports by Company | 56 | ||
SECTION 705. | Calculation of Original Issue Discount | 57 | ||
ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER |
||||
SECTION 801. | Company May Consolidate, Etc., Only on Certain Terms | 57 | ||
SECTION 802. | Successor Person Substituted | 57 | ||
ARTICLE NINE SUPPLEMENTAL INDENTURES |
||||
SECTION 901. | Supplemental Indentures Without Consent of Holders | 58 | ||
SECTION 902. | Supplemental Indentures with Consent of Holders | 59 | ||
SECTION 903. | Execution of Supplemental Indentures | 60 | ||
SECTION 904. | Effect of Supplemental Indentures | 60 | ||
SECTION 905. | Conformity with Trust Indenture Act | 61 | ||
SECTION 906. | Reference in Securities to Supplemental Indentures | 61 | ||
ARTICLE TEN COVENANTS |
||||
SECTION 1001. | Payment of Principal, Premium, if any, and Interest | 61 | ||
SECTION 1002. | Maintenance of Office or Agency | 61 | ||
SECTION 1003. | Money for Securities Payments to Be Held in Trust | 62 | ||
SECTION 1004. | Additional Amounts | 63 | ||
SECTION 1005. | Statement as to Compliance | 64 | ||
SECTION 1006. | Waiver of Certain Covenants | 64 | ||
ARTICLE ELEVEN REDEMPTION OF SECURITIES |
||||
SECTION 1101. | Applicability of Article | 64 | ||
SECTION 1102. | Election to Redeem; Notice to Trustee | 65 | ||
SECTION 1103. | Selection by Trustee of Securities to Be Redeemed | 65 | ||
SECTION 1104. | Notice of Redemption | 66 | ||
SECTION 1105. | Deposit of Redemption Price | 67 | ||
SECTION 1106. | Securities Payable on Redemption Date | 67 | ||
SECTION 1107. | Securities Redeemed in Part | 67 | ||
ARTICLE TWELVE SINKING FUNDS |
||||
SECTION 1201. | Applicability of Article | 68 | ||
SECTION 1202. | Satisfaction of Sinking Fund Payments with Securities | 68 | ||
SECTION 1203. | Redemption of Securities for Sinking Fund | 68 |
iii
ARTICLE THIRTEEN REPAYMENT AT THE OPTION OF HOLDERS |
||||||
SECTION 1301. | Applicability of Article | 69 | ||||
SECTION 1302. | Repayment of Securities | 69 | ||||
SECTION 1303. | Exercise of Option | 70 | ||||
SECTION 1304. | When Securities Presented for Repayment Become Due and Payable | 70 | ||||
SECTION 1305. | Securities Repaid in Part | 71 | ||||
ARTICLE FOURTEEN DEFEASANCE AND COVENANT DEFEASANCE |
||||||
SECTION 1401. | Applicability of Article; Companys Option to Effect Defeasance or Covenant Defeasance | 71 | ||||
SECTION 1402. | Defeasance and Discharge | 71 | ||||
SECTION 1403. | Covenant Defeasance | 72 | ||||
SECTION 1404. | Conditions to Defeasance or Covenant Defeasance | 72 | ||||
SECTION 1405. | Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions | 73 | ||||
ARTICLE FIFTEEN MEETINGS OF HOLDERS OF SECURITIES |
||||||
SECTION 1501. | Purposes for Which Meetings May Be Called | 74 | ||||
SECTION 1502. | Call, Notice and Place of Meetings | 75 | ||||
SECTION 1503. | Persons Entitled to Vote at Meetings | 75 | ||||
SECTION 1504. | Quorum; Action | 75 | ||||
SECTION 1505. | Determination of Voting Rights; Conduct and Adjournment of Meetings | 76 | ||||
SECTION 1506. | Counting Votes and Recording Action of Meetings | 77 | ||||
ARTICLE SIXTEEN SUBORDINATION OF SECURITIES |
||||||
SECTION 1601. | Agreement to Subordinate | 78 | ||||
SECTION 1602. | Distribution on Dissolution, Liquidation and Reorganization; Subrogation of Subordinated Securities | 78 | ||||
SECTION 1603. | No Payment on Subordinated Securities in Event of Default on Senior Indebtedness | 80 | ||||
SECTION 1604. | Payments on Subordinated Securities Permitted | 80 | ||||
SECTION 1605. | Authorization of Holders to Trustee to Effect Subordination | 80 | ||||
SECTION 1606. | Notices to Trustee | 80 | ||||
SECTION 1607. | Trustee as Holder of Senior Indebtedness | 81 | ||||
SECTION 1608. | Modifications of Terms of Senior Indebtedness | 81 | ||||
SECTION 1609. | Reliance on Judicial Order or Certificate of Liquidating Agent | 82 |
iv
INDENTURE, dated as of [ ], 20[ ], between FS INVESTMENT CORPORATION, a Maryland corporation (hereinafter called the Company), having its principal office at Cira Centre, 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104, and U.S. BANK NATIONAL ASSOCIATION, a national banking association, as Trustee (hereinafter called the Trustee), having its office at One Federal Street, 3rd Floor, Boston, Massachusetts 02110.
RECITALS OF THE COMPANY
The Company deems it necessary to issue from time to time for its lawful purposes debt securities (hereinafter called the Securities) evidencing its secured or unsecured indebtedness, which may or may not be convertible into or exchangeable for any securities of any Person (as defined herein) (including the Company), and has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of the Securities, to be issued in one or more series, unlimited as to principal amount, to bear such rates of interest, to mature at such times and to have such other provisions as shall be fixed as hereinafter provided.
This Indenture (as defined herein) is subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions.
All things necessary to make this Indenture a valid and legally binding agreement of the Company, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities by the Holders (as defined herein) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, or of a series thereof, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular and, pursuant to Section 301, any such item may, with respect to any particular series of Securities, be amended or modified or specified as being inapplicable;
(2) all other terms used herein that are defined in the Trust Indenture Act (as defined herein), either directly or by reference therein, have the meanings assigned to them therein, and the terms cash transaction and self-liquidating paper, as used in Section 311 of the Trust Indenture Act, shall have the meanings assigned to them in the rules of the Commission (as defined herein) adopted under the Trust Indenture Act;
(3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles in the United States of America; and
(4) the words herein, hereof and hereunder and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.
Certain terms, used in other Articles herein, are defined in those Articles.
Act, when used with respect to any Holder of a Security, has the meaning specified in Section 104.
Additional Amounts means any additional amounts that are required by a Security or by or pursuant to a Board Resolution, under circumstances specified therein, to be paid by the Company in respect of certain taxes imposed on certain Holders and that are owing to such Holders.
Affiliate of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, control when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing.
Authenticating Agent means any authenticating agent appointed by the Trustee pursuant to Section 612 to act on behalf of the Trustee to authenticate Securities of one or more series.
Authorized Newspaper means a newspaper, in the English language or in an official language of the country of publication, customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays, and of general circulation in each place in connection with which the term is used or in the financial community of each such place. Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any Business Day.
Board of Directors means the board of directors of the Company, the executive committee or any committee of that board duly authorized to act hereunder.
Board Resolution means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors (or by a committee of the Board of Directors, to the extent that any such other committee has been authorized by the Board of Directors to establish or approve the matters contemplated) and to be in full force and effect on the date of such certification, and delivered to the Trustee.
2
Business Day, when used with respect to any Place of Payment or any other particular location referred to in this Indenture or in the Securities, means, unless otherwise specified with respect to any Securities pursuant to Section 301, each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in that Place of Payment or particular location are authorized or obligated by law or executive order to close.
Commission means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date.
Company means the Person named as the Company in the first paragraph of this Indenture until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter Company shall mean such successor Person.
Company Request and Company Order mean, respectively, a written request or order signed in the name of the Company by the Chief Executive Officer, President, an Executive Vice President or a Vice President of the Company, and by the Chief Financial Officer, Chief Compliance Officer, Treasurer, Secretary or an Assistant Secretary of the Company, and delivered to the Trustee.
Conversion Date has the meaning specified in Section 312(d).
Conversion Event means the cessation of use of (i) a Foreign Currency both by the government of the country which issued such currency and for the settlement of transactions by a central bank or other public institutions of or within the international banking community, (ii) the Euro within the Economic and Monetary Union of the European Union or (iii) any currency unit (or composite currency) other than the Euro for the purposes for which it was established.
Corporate Trust Office means the principal office of the Trustee at which at any time its corporate trust business shall be administered, which office at the date hereof for purposes of Section 1002 only is located at 111 Fillmore Ave., St. Paul, MN 55107, Attention: FS Investment Corporation, and for all other purposes is located at One Federal Street, 10th Floor, Boston, Massachusetts 02110, Attention: FS Investment Corporation, or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor Trustee (or such other address as such successor Trustee may designate from time to time by notice to the Holders and the Company).
Corporation includes corporations, associations, companies and business trusts.
Currency means any currency or currencies, composite currency or currency unit or currency units issued by the government of one or more countries or by any reorganized confederation or association of such governments.
Default means any event that is, or after notice or passage of time or both would be, an Event of Default.
Defaulted Interest has the meaning specified in Section 307.
3
Depository means the clearing agency registered under the Exchange Act that is designated to act as the Depository for global Securities. DTC shall be the initial Depository, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, Depository shall mean or include such successor.
Dollar or $ means a dollar or other equivalent unit in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts.
DTC means The Depository Trust Company.
Election Date has the meaning specified in Section 312(h).
Euro means the euro or other equivalent unit in such official coin or currency of the European Union.
Event of Default has the meaning specified in Article Five.
Exchange Act means the United States Securities Exchange Act of 1934, and the rules and regulations promulgated by the Commission thereunder and any statute successor thereto, in each case as amended from time to time.
Exchange Rate Agent, with respect to Securities of or within any series, means, unless otherwise specified with respect to any Securities pursuant to Section 301, a bank that is a member of the New York Clearing House Association, designated pursuant to Section 301 or Section 313.
Exchange Rate Officers Certificate means a certificate setting forth (i) the applicable Market Exchange Rate or the applicable bid quotation and (ii) the Dollar or Foreign Currency amounts of principal (and premium, if any) and interest, if any (on an aggregate basis and on the basis of a Security having the lowest denomination principal amount determined in accordance with Section 302 in the relevant Currency), payable with respect to a Security of any series on the basis of such Market Exchange Rate or the applicable bid quotation signed by the Chief Financial Officer or any Vice President of the Company.
Foreign Currency means any Currency, including, without limitation, the Euro issued by the government of one or more countries other than the United States of America or by any recognized confederation or association of such governments.
Government Obligations means securities that are (i) direct obligations of the United States of America or the government that issued the Foreign Currency in which the Securities of a particular series are payable, for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such government that issued the Foreign Currency in which the Securities of such series are payable, the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or such other government, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to
4
any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt.
Holder means the Person in whose name a Security is registered in the Security Register.
Indenture means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, and shall include the terms of particular series of Securities established as contemplated by Section 301; provided, however, that, if at any time more than one Person is acting as Trustee under this instrument, Indenture shall mean, with respect to any one or more series of Securities for which such Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of the or those particular series of Securities for which such Person is Trustee established as contemplated by Section 301, exclusive, however, of any provisions or terms that relate solely to other series of Securities for which such Person is not Trustee, regardless of when such terms or provisions were adopted, and exclusive of any provisions or terms adopted by means of one or more indentures supplemental hereto executed and delivered after such Person had become such Trustee but to which such Person, as such Trustee, was not a party.
Indexed Security means a Security as to which all or certain interest payments and/or the principal amount payable at Maturity are determined by reference to prices, changes in prices, or differences between prices, of securities, Currencies, intangibles, goods, articles or commodities or by such other objective price, economic or other measures as are specified in or pursuant to Section 301 hereof.
Interest, when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity, and, when used with respect to a Security which provides for the payment of Additional Amounts pursuant to Section 1004, includes such Additional Amounts.
Interest Payment Date, when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security.
Market Exchange Rate means, unless otherwise specified with respect to any Securities pursuant to Section 301, (i) for any conversion involving a currency unit on the one hand and Dollars or any Foreign Currency on the other, the exchange rate between the relevant currency unit and Dollars or such Foreign Currency calculated by the method specified pursuant to Section 301 for the Securities of the relevant series, (ii) for any conversion of Dollars into any Foreign Currency, the noon buying rate for such Foreign Currency for cable transfers quoted in New York City as certified for customs purposes by the Federal Reserve Bank of New York and
5
(iii) for any conversion of one Foreign Currency into Dollars or another Foreign Currency, the spot rate at noon local time in the relevant market at which, in accordance with normal banking procedures, the Dollars or Foreign Currency into which conversion is being made could be purchased with the Foreign Currency from which conversion is being made from major banks located in either New York City, London or any other principal market for Dollars or such purchased Foreign Currency, in each case determined by the Exchange Rate Agent. Unless otherwise specified with respect to any Securities pursuant to Section 301, in the event of the unavailability of any of the exchange rates provided for in the foregoing clauses (i), (ii) and (iii), the Exchange Rate Agent shall use, in its sole discretion and without liability on its part, such quotation of the Federal Reserve Bank of New York as of the most recent available date, or quotations from one or more major banks in New York City, London or other principal market for such currency or currency unit in question, or such other quotations as the Exchange Rate Agent shall deem appropriate. Unless otherwise specified by the Exchange Rate Agent, if there is more than one market for dealing in any currency or currency unit by reason of foreign exchange regulations or otherwise, the market to be used in respect of such currency or currency unit shall be that upon which a nonresident issuer of securities designated in such currency or currency unit would purchase such currency or currency unit in order to make payments in respect of such securities as determined by the Exchange Rate Agent, in its sole discretion.
Maturity, when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption, notice of option to elect repayment, notice of exchange or conversion or otherwise.
Notice of Default has the meaning provided in Section 501.
Officers Certificate means a certificate signed by the Chief Executive Officer, President, an Executive Vice President or a Vice President of the Company, and by the Chief Financial Officer, Chief Compliance Officer, Treasurer, Secretary or an Assistant Secretary of the Company, and delivered to the Trustee.
Opinion of Counsel means a written opinion of counsel, who may be counsel for the Company or who may be an employee of or other counsel for the Company and who shall be reasonably satisfactory to the Trustee.
Original Issue Discount Security means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502.
Outstanding, when used with respect to Securities or any series of Securities, means, as of the date of determination, all Securities or all Securities of such series, as the case may be, theretofore authenticated and delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation;
(ii) Securities, or portions thereof, for whose payment or redemption or repayment at the option of the Holder money in the necessary amount has been
6
theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities, provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made;
(iii) Securities, except to the extent provided in Sections 1402 and 1403, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Fourteen;
(iv) Securities that have been changed into any other securities of the Company or any other Person in accordance with this Indenture if the terms of such Securities provide for convertibility or exchangeability pursuant to Section 301; and
(v) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a protected purchaser in whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or are present at a meeting of Holders for quorum purposes, and for the purpose of making the calculations required by TIA Section 313, (i) the principal amount of an Original Issue Discount Security that may be counted in making such determination or calculation and that shall be deemed to be Outstanding for such purpose shall be equal to the amount of principal thereof that would be (or shall have been declared to be) due and payable, at the time of such determination, upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, (ii) the principal amount of any Security denominated in a Foreign Currency that may be counted in making such determination or calculation and that shall be deemed Outstanding for such purpose shall be equal to the Dollar equivalent, determined as of the date such Security is originally issued by the Company as set forth in an Exchange Rate Officers Certificate delivered to the Trustee, of the principal amount (or, in the case of an Original Issue Discount Security or Indexed Security, the Dollar equivalent as of such date of original issuance of the amount determined as provided in clause (i) above or (iii) below, respectively) of such Security, (iii) the principal amount of any Indexed Security that may be counted in making such determination or calculation and that shall be deemed outstanding for such purpose shall be equal to the principal face amount of such Indexed Security at original issuance, unless otherwise provided with respect to such Security pursuant to Section 301, and (iv) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver or upon any such determination as to the presence of a quorum, only Securities which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgees right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.
7
Paying Agent means any Person authorized by the Company to pay the principal of (or premium, if any) or interest, if any, on any Securities on behalf of the Company.
Person means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof, or any other entity.
Place of Payment, when used with respect to the Securities of or within any series, means the place or places where the principal of (and premium, if any) and interest, if any, on such Securities are payable as specified and as contemplated by Sections 301 and 1002.
Predecessor Security of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.
Redemption Date, when used with respect to any Security to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture.
Redemption Price, when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.
Registered Security means any Security that is registered in the Security Register.
Regular Record Date for the interest payable on any Interest Payment Date on the Registered Securities of or within any series means the date specified for that purpose as contemplated by Section 301, whether or not a Business Day.
Repayment Date, when used with respect to any Security to be repaid at the option of the Holder, means the date fixed for such repayment by or pursuant to this Indenture.
Repayment Price, when used with respect to any Security to be repaid at the option of the Holder, means the price at which it is to be repaid by or pursuant to this Indenture.
Responsible Officer, when used with respect to the Trustee, means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters and who shall have direct responsibility for the administration of this Indenture.
Security or Securities has the meaning stated in the first recital of this Indenture and, more particularly, means any Security or Securities authenticated and delivered under this Indenture; provided, however, that, if at any time there is more than one Person acting as Trustee under this Indenture, Securities with respect to the Indenture as to which such Person is Trustee shall have the meaning stated in the first recital of this Indenture and shall more particularly mean Securities authenticated and delivered under this Indenture, exclusive, however, of Securities of any series as to which such Person is not Trustee.
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Security Register and Security Registrar have the respective meanings specified in Section 305.
Senior Indebtedness means the principal of (and premium, if any) and unpaid interest on (a) indebtedness of the Company (including indebtedness of others guaranteed by the Company), whether outstanding on the date hereof or thereafter created, incurred, assumed or guaranteed, for money borrowed, that has been designated by the Company as Senior Indebtedness for purposes of this Indenture by a Company Order delivered to the Trustee, (b) Senior Securities, and (c) renewals, extensions, modifications and refinancings of any such indebtedness.
Senior Security or Senior Securities means any Security or Securities designated pursuant to Section 301 as a Senior Security.
Special Record Date for the payment of any Defaulted Interest on the Registered Securities of or within any series means a date fixed by the Trustee pursuant to Section 307.
Stated Maturity, when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable, as such date may be extended pursuant to the provisions of Section 308.
Subordinated Indebtedness means the principal of (and premium, if any) and unpaid interest on (a) indebtedness of the Company (including indebtedness of others guaranteed by the Company), whether outstanding on the date hereof or thereafter created, incurred, assumed or guaranteed, for money borrowed, which in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided that such indebtedness ranks junior in right of payment to the Companys Senior Indebtedness, equally and pari passu in right of payment with all other Subordinated Indebtedness, (b) Subordinated Securities, and (c) renewals, extensions, modifications and refinancings of any such Subordinated Indebtedness.
Subordinated Security or Subordinated Securities means any Security or Securities designated pursuant to Section 301 as a Subordinated Security.
Subsidiary means (1) any corporation a majority of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries of the Company, (2) any other Person (other than a corporation) in which such Person, one or more Subsidiaries of such Person, or such Person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof has a majority ownership interest, or (3) a partnership in which such Person or a Subsidiary of such Person is, at the time, a general partner and in which such Person, directly or indirectly, at the date of determination thereof has a majority ownership interest. For the purposes of this definition, voting stock means stock having voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.
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Trust Indenture Act or TIA means the Trust Indenture Act of 1939, as amended, as in force at the date as of which this Indenture was executed, except as provided in Section 905.
Trustee means the Person named as the Trustee in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter Trustee shall mean or include each Person who is then a Trustee hereunder; provided, however, that if at any time there is more than one such Person, Trustee as used with respect to the Securities of any series shall mean only the Trustee with respect to Securities of that series.
United States means, unless otherwise specified with respect to any Securities pursuant to Section 301, the United States of America (including the states and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction.
United States person means, unless otherwise specified with respect to any Securities pursuant to Section 301, any individual who is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States, any state thereof or the District of Columbia (other than a partnership that is not treated as a United States person under any applicable Treasury regulations), any estate the income of which is subject to United States federal income taxation regardless of its source, or any trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in the Treasury regulations, certain trusts in existence on August 20, 1996, and treated as United States persons prior to such date that elect to continue to be treated as United States persons, will also be United States persons.
Valuation Date has the meaning specified in Section 312(c).
Yield to Maturity means the yield to maturity, computed at the time of issuance of a Security (or, if applicable, at the most recent redetermination of interest on such Security) and as set forth in such Security in accordance with generally accepted United States bond yield computation principles.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.
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Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 1005) shall include:
(1) a statement that each individual signing such certificate or opinion has read such condition or covenant and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such condition or covenant has been complied with; and
(4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion as to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, or a certificate or representations by counsel, unless such officer knows, or in the exercise of reasonable care should know, that the opinion, certificate or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such Opinion of Counsel or certificate or representations may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information as to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations as to such matters are erroneous.
Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.
SECTION 104. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of the Outstanding Securities of all series or one or more series, as the case may be, may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of Securities of such series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities of such series duly called and held in accordance with the
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provisions of Article Fifteen, or a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the Act of the Holders signing such instrument or instruments or so voting at any such meeting. Proof of execution of any such instrument or of a writing appointing any such agent, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company and any agent of the Trustee or the Company, if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 1506.
(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing or the authority of the Person executing the same may also be proved in any other reasonable manner that the Trustee deems sufficient.
(c) The ownership of Registered Securities shall be proved by the Security Register.
(d) If the Company shall solicit from the Holders of Registered Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, in or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Such record date shall be the record date specified in or pursuant to such Board Resolution. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date.
(e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee, any Security Registrar, any Paying Agent, any Authenticating Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Security.
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SECTION 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished, filed or mailed, first-class postage prepaid in writing to or with the Trustee at its Corporate Trust Office, Attention: FS Investment Corporation (Karen R. Beard), or at any other address previously furnished in writing to the Company by the Trustee, or
(2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this Indenture, to the attention of its Secretary or at any other address previously furnished in writing to the Trustee by the Company, or if in writing and sent by facsimile transmission or email to the facsimile number or email address designated by the Trustee, followed by delivery of original documentation within one Business Day.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice of any event to Holders of Registered Securities by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, by overnight courier guaranteeing next day delivery, or by facsimile transmission or email, followed by delivery of original documentation within one Business Day, to each such Holder affected by such event, at his address, facsimile number or email address, as applicable, as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders of Registered Securities is given by mail or by overnight courier guaranteeing next day delivery, or where notice is given by facsimile or email with the original documentation to follow, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders of Registered Securities. Any notice mailed or sent to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice.
If by reason of the suspension of or irregularities in regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, facsimile or email, then such notification to Holders of Registered Securities as shall be made with the approval of the Trustee shall constitute a sufficient notification to such Holders for every purpose hereunder.
Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication.
Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such
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waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.
SECTION 107. Conflict with TIA.
If any provision of this Indenture limits, qualifies or conflicts with a provision of the TIA that is required under the TIA to be a part of and govern this Indenture, the provision of the TIA shall control. If any provision of this Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to this Indenture as so modified or only to the extent not so excluded, as the case may be.
SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in any Security shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto, any Security Registrar, any Paying Agent, any Authenticating Agent and their successors hereunder and the Holders any benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York without regard to principles of conflicts of laws. This Indenture is subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, Repayment Date, sinking fund payment date, Stated Maturity or Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or any Security other than a provision in the Securities of any series which specifically states that such
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provision shall apply in lieu of this Section), payment of principal (or premium, if any) or interest, if any, need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, Redemption Date, Repayment Date or sinking fund payment date, or at the Stated Maturity or Maturity; provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Redemption Date, Repayment Date, sinking fund payment date, Stated Maturity or Maturity, as the case may be.
SECTION 114. Submission to Jurisdiction.
The Company hereby irrevocably submits to the non-exclusive jurisdiction of any New York state or federal court sitting in The City of New York in any action or proceeding arising out of or relating to the Indenture and the Securities of any series, and the Company hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such New York state or federal court. The Company hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding.
ARTICLE TWO
SECURITIES FORMS
SECTION 201. Forms of Securities.
The Registered Securities of each series, the temporary global Securities of each series, if any, and the permanent global Securities of each series, if any, shall be in substantially the forms as shall be established in one or more indentures supplemental hereto or approved from time to time by or pursuant to a Board Resolution in accordance with Section 301, shall have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture or any indenture supplemental hereto, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements placed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Securities may be listed, or to conform to usage.
The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on a steel engraved border or steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.
SECTION 202. Form of Trustees Certificate of Authentication.
Subject to Section 611, the Trustees certificate of authentication shall be in substantially the following form:
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
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U.S. Bank National Association, as Trustee | ||
By |
| |
Authorized Officer |
SECTION 203. Securities Issuable in Global Form.
If Securities of or within a series are issuable in global form, as specified as contemplated by Section 301, then, notwithstanding clause (8) of Section 301 and the provisions of Section 302, any such Security shall represent such of the Outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggregate amount of Outstanding Securities of such series from time to time endorsed thereon and that the aggregate amount of Outstanding Securities of such series represented thereby may from time to time be increased or decreased to reflect exchanges. Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the amount, of Outstanding Securities represented thereby shall be made by the Trustee or the Security Registrar in such manner and upon instructions given by such Person or Persons as shall be specified therein or in the Company Order to be delivered to the Trustee pursuant to Section 303 or 304. Subject to the provisions of Section 303 and, if applicable, Section 304, the Trustee or the Security Registrar shall deliver and redeliver any Security in permanent global form in the manner and upon instructions given by the Person or Persons specified therein or in the applicable Company Order. If a Company Order pursuant to Section 303 or 304 has been, or simultaneously is, delivered, any instructions by the Company with respect to endorsement, delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 102 and need not be accompanied by an Opinion of Counsel.
The provisions of the last sentence of Section 303 shall apply to any Security represented by a Security in global form if such Security was never issued and sold by the Company and the Company delivers to the Trustee or the Security Registrar the Security in global form together with written instructions (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) with regard to the reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of Section 303.
Notwithstanding the provisions of Section 307, unless otherwise specified as contemplated by Section 301, payment of principal of (and premium, if any) and interest, if any, on any Security in permanent global form shall be made to the Person or Persons specified therein.
Notwithstanding the provisions of Section 309 and except as provided in the preceding paragraph, the Company, the Trustee and any agent of the Company and the Trustee shall treat as the Holder of such principal amount of Outstanding Securities represented by a permanent global Security, the Holder of such permanent global Security.
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Unless otherwise specified as contemplated by Section 301 for the Securities evidenced thereby, every global Security authenticated and delivered hereunder shall bear a legend in substantially the following form:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITORY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series as Registered Securities and shall be designated as Senior Securities or Subordinated Securities. Senior Securities are unsubordinated, shall rank equally and pari passu with all of the Companys other Senior Indebtedness and senior to all of the Companys Subordinated Indebtedness. Subordinated Securities shall rank junior to the Companys Senior Indebtedness and equally and pari passu with all of the Companys other Subordinated Indebtedness. There shall be established in one or more Board Resolutions or pursuant to authority granted by one or more Board Resolutions and, subject to Section 303, set forth, or determined in the manner provided, in an Officers Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, any or all of the following, as applicable (each of which (except for the matters set forth in clauses (1), (2) and (15) below), if so provided, may be determined from time to time by the Company with respect to unissued Securities of the series when issued from time to time):
(1) the title of the Securities of the series including CUSIP numbers (which shall distinguish the Securities of such series from all other series of Securities);
(2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906, 1107 or 1305, and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder);
(3) the date or dates, or the method by which such date or dates will be determined or extended, on which the principal of the Securities of the series shall be payable;
(4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate or rates shall be determined, the date or dates from which such interest shall accrue or the method by which such date or dates shall be determined, the Interest Payment Dates on which such interest will be payable and the Regular Record Date, if any, for
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the interest payable on any Registered Security on any Interest Payment Date, or the method by which such date shall be determined, the basis upon which such interest shall be calculated if other than that of a 360-day year of twelve 30-day months;
(5) the place or places, if any, other than or in addition to the Borough of Manhattan, The City of New York, where the principal of (and premium, if any) and interest, if any, on Securities of the series shall be payable, any Registered Securities of the series may be surrendered for registration of transfer, Securities of the series may be surrendered for exchange, where Securities of that series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable, and where notices or demands to or upon the Company in respect of the Securities of the series and this Indenture may be served;
(6) the period or periods within which, or the date or dates on which, the price or prices at which, the Currency or Currencies in which, and other terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company, if the Company is to have the option;
(7) the obligation, if any, of the Company to redeem, repay or purchase Securities of the series pursuant to any sinking fund or analogous provision or at the option of a Holder thereof, and the period or periods within which or the date or dates on which, the price or prices at which, the Currency or Currencies in which, and other terms and conditions upon which Securities of the series shall be redeemed, repaid or purchased, in whole or in part, pursuant to such obligation;
(8) if other than denominations of $1,000 and any integral multiple thereof, the denomination or denominations in which any Registered Securities of the series shall be issuable;
(9) if other than the Trustee, the identity of each Security Registrar and/or Paying Agent;
(10) if other than the principal amount thereof, the portion of the principal amount of Securities of the series that shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502, upon redemption of the Securities of the series which are redeemable before their Stated Maturity, upon surrender for repayment at the option of the Holder, or which the Trustee shall be entitled to claim pursuant to Section 504 or the method by which such portion shall be determined;
(11) if other than Dollars, the Currency or Currencies in which payment of the principal of (or premium, if any) or interest, if any, on the Securities of the series shall be made or in which the Securities of the series shall be denominated and the particular provisions applicable thereto in accordance with, in addition to or in lieu of any of the provisions of Section 312;
(12) whether the amount of payments of principal of (or premium, if any) or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method (which index, formula or method may be based, without limitation, on one or more Currencies, commodities, equity indices or other indices), and the manner in which such amounts shall be determined;
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(13) whether the principal of (or premium, if any) or interest, if any, on the Securities of the series are to be payable, at the election of the Company or a Holder thereof, in one or more Currencies other than that in which such Securities are denominated or stated to be payable, the period or periods within which (including the Election Date), and the terms and conditions upon which, such election may be made, and the time and manner of determining the exchange rate between the Currency or Currencies in which such Securities are denominated or stated to be payable and the Currency or Currencies in which such Securities are to be paid, in each case in accordance with, in addition to or in lieu of any of the provisions of Section 312;
(14) provisions, if any, granting special rights to the Holders of Securities of the series upon the occurrence of such events as may be specified;
(15) any deletions from, modifications of or additions to the Events of Default or covenants (including any deletions from, modifications of or additions to any of the provisions of Section 1006) of the Company with respect to Securities of the series, whether or not such Events of Default or covenants are consistent with the Events of Default or covenants set forth herein;
(16) whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to be issuable in permanent global form and, if so, whether beneficial owners of interests in any such permanent global Security may exchange such interests for Securities of such series in certificated form and of like tenor of any authorized form and denomination and the circumstances under which any such exchanges may occur, if other than in the manner provided in Section 305, and the circumstances under which and the place or places where such exchanges may be made and if Securities of the series are to be issuable as a global Security, the identity of the depository for such series;
(17) the date as of which any temporary global Security representing Outstanding Securities of the series shall be dated if other than the date of original issuance of the first Security of the series to be issued;
(18) the Person to whom any interest on any Registered Security of the series shall be payable, if other than the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, and the extent to which, or the manner in which, any interest payable on a temporary global Security on an Interest Payment Date will be paid; and the extent to which, or the manner in which, any interest payable on a permanent global Security on an Interest Payment Date will be paid if other than in the manner provided in Section 307;
(19) the applicability, if any, of Sections 1402 and/or 1403 to the Securities of the series and any provisions in modification of, in addition to or in lieu of any of the provisions of Article Fourteen;
(20) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions, then the form and/or terms of such certificates, documents or conditions;
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(21) whether, under what circumstances and the Currency in which, the Company will pay Additional Amounts as contemplated by Section 1004 on the Securities of the series to any Holder who is not a United States person (including any modification to the definition of such term) in respect of any tax, assessment or governmental charge and, if so, whether the Company will have the option to redeem such Securities rather than pay such Additional Amounts (and the terms of any such option);
(22) the designation of the initial Exchange Rate Agent, if any;
(23) if the Securities of the series are to be issued upon the exercise of warrants, the time, manner and place for such Securities to be authenticated and delivered;
(24) if the Securities of the series are to be convertible into or exchangeable for any securities of any Person (including the Company), the terms and conditions upon which such Securities will be so convertible or exchangeable;
(25) if the Securities of the series are to be secured, the terms and conditions upon which such Securities will be so secured;
(26) the appointment of any calculation agent, foreign currency exchange agent or other additional agents;
(27) if the Securities of the series are to be listed on a securities exchange, the name of such exchange may be indicated;
(28) the guarantees, if any, of the Securities of the series, and the extent of the guarantees (including provisions relating to seniority, subordination and the release of the guarantors), if any, and any additions or changes to permit or facilitate guarantees of such Securities; and
(29) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture or the requirements of the Trust Indenture Act).
All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above (subject to Section 303) and set forth in the Officers Certificate referred to above or in any such indenture supplemental hereto. All Securities of any one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the Holders, for issuances of additional Securities of such series.
If any of the terms of the Securities of any series are established by action taken pursuant to one or more Board Resolutions, a copy of an appropriate record of such action(s) shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers Certificate setting forth the terms of the Securities of such series.
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SECTION 302. Denominations.
The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 301. With respect to Securities of any series denominated in Dollars, in the absence of any such provisions with respect to the Securities of any series, the Registered Securities of such series, other than Registered Securities issued in global form (which may be of any denomination) shall be issuable in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its Chief Executive Officer, its President, its Chief Financial Officer or any of its Executive Vice Presidents or Vice Presidents and attested by its Secretary or any of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or by facsimile, .pdf attachment or other electronically transmitted signature (with an original manual signature to be sent to the Trustee via overnight mail immediately thereafter) of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Securities.
Securities bearing the signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company, to the Trustee for authentication, together with a Company Order and an Officers Certificate and Opinion of Counsel in accordance with Section 102 for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If all the Securities of any series are not to be issued at one time and if the Board Resolution or supplemental indenture establishing such series shall so permit, such Company Order may set forth procedures acceptable to the Trustee for the issuance of such Securities and determining the terms of particular Securities of such series, such as interest rate, maturity date, date of issuance and date from which interest shall accrue. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to TIA Section 315(a) through 315(d)) shall be fully protected in relying upon,
(i) an Opinion of Counsel stating,
(a) that the form or forms of such Securities have been established in conformity with the provisions of this Indenture;
(b) that the terms of such Securities have been established in conformity with the provisions of this Indenture; and
(c) that such Securities, when completed by appropriate insertions and executed and delivered by the Company to the Trustee for authentication in
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accordance with this Indenture, authenticated and delivered by the Trustee in accordance with this Indenture and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute legal, valid and binding obligations of the Company, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting the enforcement of creditors rights, to general equitable principles and to such other qualifications as such counsel shall conclude do not materially affect the rights of Holders of such Securities; and
(ii) an Officers Certificate stating, to the best of the knowledge of the signers of such certificate, that no Event of Default with respect to any of the Securities shall have occurred and be continuing.
Notwithstanding the provisions of Section 301 and of this Section 303, if all the Securities of any series are not to be issued at one time, it shall not be necessary to deliver an Officers Certificate otherwise required pursuant to Section 301 or the Company Order, Opinion of Counsel or Officers Certificate otherwise required pursuant to the preceding paragraph at the time of issuance of each Security of such series, but such order, opinion and certificates, with appropriate modifications to cover such future issuances, shall be delivered at or before the time of issuance of the first Security of such series.
If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustees own rights, duties, obligations or immunities under the Securities and this Indenture or otherwise in a manner that is not reasonably acceptable to the Trustee. Notwithstanding the generality of the foregoing, the Trustee will not be required to authenticate Securities denominated in a Foreign Currency if the Trustee reasonably believes that it would be unable to perform its duties with respect to such Securities.
Each Registered Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee or an Authenticating Agent by manual signature of an authorized signatory, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 310 together with a written statement (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.
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SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued, in registered form and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. In the case of Securities of any series, such temporary Securities may be in global form.
Except in the case of temporary Securities in global form (which shall be exchanged as provided in or pursuant to a Board Resolution), if temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount and like tenor of definitive Securities of the same series of authorized denominations. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series.
SECTION 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the Trustee or in any office or agency of the Company in a Place of Payment a register for each series of Securities (the registers maintained in such office or in any such office or agency of the Company in a Place of Payment being herein sometimes referred to collectively as the Security Register) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Registered Securities and of transfers of Registered Securities. The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. The Trustee, at its Corporate Trust Office, is hereby initially appointed Security Registrar for the purpose of registering Registered Securities and transfers of Registered Securities on such Security Register as herein provided, and for facilitating exchanges of temporary global Securities for permanent global Securities or definitive Securities, or both, or of permanent global Securities for definitive Securities, or both, as herein provided. In the event that the Trustee shall cease to be Security Registrar, it shall have the right to examine the Security Register at all reasonable times. In acting hereunder and in connection with the Securities, the Security Registrar shall act solely as an agent of the Company, and will not thereby assume any obligations towards or relationship of agency or trust for or with any Holder.
Upon surrender for registration of transfer of any Registered Security of any series at any office or agency of the Company in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Registered Securities of the same series, of any authorized denominations and of a like aggregate principal amount, bearing a number not contemporaneously outstanding and containing identical terms and provisions.
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At the option of the Holder, Registered Securities of any series may be exchanged for other Registered Securities of the same series, of any authorized denomination or denominations and of a like aggregate principal amount, containing identical terms and provisions, upon surrender of the Registered Securities to be exchanged at any such office or agency. Whenever any Registered Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Registered Securities that the Holder making the exchange is entitled to receive.
Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange is entitled to receive.
Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 301, any permanent global Security shall be exchangeable only as provided in this paragraph. If any beneficial owner of an interest in a permanent global Security is entitled to exchange such interest for Securities of such series and of like tenor and principal amount of another authorized form and denomination, as specified as contemplated by Section 301 and provided that any applicable notice provided in the permanent global Security shall have been given, then without unnecessary delay but in any event not later than the earliest date on which such interest may be so exchanged, the Company shall deliver to the Trustee definitive Securities in aggregate principal amount equal to the principal amount of such beneficial owners interest in such permanent global Security, executed by the Company. On or after the earliest date on which such interests may be so exchanged, such permanent global Security shall be surrendered by the depository specified as contemplated by Section 3.01 or such other depository as shall be specified in the Company Order with respect thereto to the Trustee, as the Companys agent for such purpose, or to the Security Registrar, to be exchanged, in whole or from time to time in part, for definitive Securities of the same series without charge and the Trustee shall authenticate and deliver, in exchange for each portion of such permanent global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such permanent global Security to be exchanged; provided, however, that no such exchanges may occur during a period beginning at the opening of business 15 days before any selection of Securities to be redeemed and ending on the relevant Redemption Date if the Security for which exchange is requested may be among those selected for redemption. If a Registered Security is issued in exchange for any portion of a permanent global Security after the close of business at the office or agency where such exchange occurs on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest or interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of such Registered Security, but will be payable on such Interest Payment Date or proposed date for payment, as the case may be, only to the Person to whom interest in respect of such portion of such permanent global Security is payable in accordance with the provisions of this Indenture.
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All Securities issued upon any registration of transfer or exchange of Securities shall be valid obligations of the Company, evidencing the same debt and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Security Registrar or any transfer agent) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney or any transfer agent duly authorized in writing.
No service charge shall be made for any registration of transfer or exchange of Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, 1107 or 1305 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer of or exchange any Security if such Security may be among those selected for redemption during a period beginning at the opening of business 15 days before selection of the Securities to be redeemed under Section 1103 and ending at the close of business on the day of the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Registered Security so selected for redemption in whole or in part, except, in the case of any Registered Security to be redeemed in part, the portion thereof not to be redeemed or (iii) to issue, register the transfer of or exchange any Security that has been surrendered for repayment at the option of the Holder, except the portion, if any, of such Security not to be so repaid.
The Trustee shall have no responsibility or obligation to any beneficial owner of a global Security, a member of, or a participant in, DTC or other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Securities or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice (including any notice of redemption or purchase) or the payment of any amount or delivery of any Securities (or other security or property) under or with respect to such Securities. All notices and communications to be given to the Holders and all payments to be made to Holders in respect of the Securities shall be given or made only to or upon the order of the registered Holders (which shall be DTC or its nominee in the case of a global Security). The rights of beneficial owners in any global Security shall be exercised only through DTC subject to the applicable rules and procedures of DTC. The Trustee may rely and shall be fully protected in relying upon information furnished by DTC with respect to its members, participants and any beneficial owners.
The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among DTC participants, members or beneficial owners in any global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Neither the Trustee nor any of its agents shall have any responsibility for any actions taken or not taken by DTC.
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SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee or the Company, together with, in proper cases, such security or indemnity as may be required by the Company or the Trustee to save each of them or any agent of either of them harmless, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and principal amount, containing identical terms and provisions and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and to the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security, and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a protected purchaser, the Company shall, subject to the following paragraph, execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and principal amount, containing identical terms and provisions and bearing a number not contemporaneously outstanding.
Notwithstanding the provisions of the previous two paragraphs, in case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company, the Paying Agent, or the Security Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the reasonable and documented fees and expenses of the Trustee, the Paying Agent, or the Security Registrar) connected therewith.
Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved; Optional Interest Reset.
(a) Except as otherwise specified with respect to a series of Securities in accordance with the provisions of Section 301, interest, if any, on any Registered Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the
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close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that each installment of interest, if any, on any Registered Security may at the Companys option be paid by (i) mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 309, to the address of such Person as it appears on the Security Register or (ii) transfer to an account maintained by the payee located in the United States.
Except as otherwise specified with respect to a series of Securities in accordance with the provisions of Section 301, any interest on any Registered Security of any series that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called Defaulted Interest) shall forthwith cease to be payable to the registered Holder thereof on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Registered Security of such series and the date of the proposed payment (which shall not be less than 20 days after such notice is received by the Trustee), and at the same time the Company shall deposit with the Trustee an amount of money in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except, if applicable, as provided in Sections 312(b), 312(d) and 312(e)) equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Registered Securities of such series at his address as it appears in the Security Register not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest on the Registered Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee.
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(b) The provisions of this Section 307(b) may be made applicable to any series of Securities pursuant to Section 301 (with such modifications, additions or substitutions as may be specified pursuant to such Section 301). The interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) on any Security of such series may be reset by the Company on the date or dates specified on the face of such Security (each an Optional Reset Date). The Company may exercise such option with respect to such Security by notifying the Trustee of such exercise at least 45 but not more than 60 days prior to an Optional Reset Date for such Security. Not later than 35 days prior to each Optional Reset Date, the Trustee shall transmit, in the manner provided for in Section 106, to the Holder of any such Security a notice (the Reset Notice) indicating whether the Company has elected to reset the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable), and if so (i) such new interest rate (or such new spread or spread multiplier, if applicable) and (ii) the provisions, if any, for redemption during the period from such Optional Reset Date to the next Optional Reset Date or if there is no such next Optional Reset Date, to the Stated Maturity of such Security (each such period a Subsequent Interest Period), including the date or dates on which or the period or periods during which and the price or prices at which such redemption may occur during the Subsequent Interest Period.
Notwithstanding the foregoing, not later than 20 days prior to the Optional Reset Date (or if 20 days does not fall on a Business Day, the next succeeding Business Day), the Company may, at its option, revoke the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) provided for in the Reset Notice and establish a higher interest rate (or a spread or spread multiplier providing for a higher interest rate, if applicable) for the Subsequent Interest Period by causing the Trustee to transmit, in the manner provided for in Section 106, notice of such higher interest rate (or such higher spread or spread multiplier providing for a higher interest rate, if applicable) to the Holder of such Security. Such notice shall be irrevocable. All Securities with respect to which the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) is reset on an Optional Reset Date, and with respect to which the Holders of such Securities have not tendered such Securities for repayment (or have validly revoked any such tender) pursuant to the next succeeding paragraph, will bear such higher interest rate (or such higher spread or spread multiplier providing for a higher interest rate, if applicable).
The Holder of any such Security will have the option to elect repayment by the Company of the principal of such Security on each Optional Reset Date at a price equal to the principal amount thereof plus interest accrued to such Optional Reset Date. In order to obtain repayment on an Optional Reset Date, the Holder must follow the procedures set forth in Article Thirteen for repayment at the option of Holders except that the period for delivery or notification to the Trustee shall be at least 25 but not more than 35 days prior to such Optional Reset Date and except that, if the Holder has tendered any Security for repayment pursuant to the Reset Notice, the Holder may, by written notice to the Trustee, revoke such tender or repayment until the close of business on the tenth day before such Optional Reset Date.
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Subject to the foregoing provisions of this Section and Section 305, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security.
SECTION 308. Optional Extension of Maturity.
The provisions of this Section 308 may be made applicable to any series of Securities pursuant to Section 301 (with such modifications, additions or substitutions as may be specified pursuant to such Section 301). The Stated Maturity of any Security of such series may be extended at the option of the Company for the period or periods specified on the face of such Security (each an Extension Period) up to but not beyond the date (the Final Maturity) set forth on the face of such Security. The Company may exercise such option with respect to any Security by notifying the Trustee of such exercise at least 45 but not more than 60 days prior to the Stated Maturity of such Security in effect prior to the exercise of such option (the Original Stated Maturity). If the Company exercises such option, the Trustee shall transmit, in the manner provided for in Section 106, to the Holder of such Security not later than 35 days prior to the Original Stated Maturity a notice (the Extension Notice), prepared by the Company, indicating (i) the election of the Company to extend the Stated Maturity, (ii) the new Stated Maturity, (iii) the interest rate (or spread, spread multiplier or other formula to calculate such interest rate, if applicable), if any, applicable to the Extension Period and (iv) the provisions, if any, for redemption during such Extension Period. Upon the Trustees transmittal of the Extension Notice, the Stated Maturity of such Security shall be extended automatically and, except as modified by the Extension Notice and as described in the next paragraph, such Security will have the same terms as prior to the transmittal of such Extension Notice.
Notwithstanding the foregoing, not later than 20 days before the Original Stated Maturity (or if 20 days does not fall on a Business Day, the next succeeding Business Day) of such Security, the Company may, at its option, revoke the interest rate (or spread, spread multiplier or other formula to calculate such interest rate, if applicable) provided for in the Extension Notice and establish a higher interest rate (or spread, spread multiplier or other formula to calculate such higher interest rate, if applicable) for the Extension Period by causing the Trustee to transmit, in the manner provided for in Section 106, notice of such higher interest rate (or spread, spread multiplier or other formula to calculate such interest rate, if applicable) to the Holder of such Security. Such notice shall be irrevocable. All Securities with respect to which the Stated Maturity is extended will bear such higher interest rate.
If the Company extends the Stated Maturity of any Security, the Holder will have the option to elect repayment of such Security by the Company on the Original Stated Maturity at a price equal to the principal amount thereof, plus interest accrued to such date. In order to obtain repayment on the Original Stated Maturity once the Company has extended the Stated Maturity thereof, the Holder must follow the procedures set forth in Article Thirteen for repayment at the option of Holders, except that the period for delivery or notification to the Trustee shall be at least 25 but not more than 35 days prior to the Original Stated Maturity and except that, if the Holder has tendered any Security for repayment pursuant to an Extension Notice, the Holder may by written notice to the Trustee revoke such tender for repayment until the close of business on the tenth day before the Original Stated Maturity.
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SECTION 309. Persons Deemed Owners.
Prior to due presentment of a Registered Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee shall treat the Person in whose name such Registered Security is registered as the owner of such Registered Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 307) interest, if any, on such Registered Security and for all other purposes whatsoever, whether or not such Registered Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.
None of the Company, the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Security in global form or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
Notwithstanding the foregoing, with respect to any global temporary or permanent Security, nothing herein shall prevent the Company, the Trustee, or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by any depository, as a Holder, with respect to such global Security or impair, as between such depository and owners of beneficial interests in such global Security, the operation of customary practices governing the exercise of the rights of such depository (or its nominee) as Holder of such global Security.
SECTION 310. Cancellation.
All Securities surrendered for payment, redemption, repayment at the option of the Holder, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Securities surrendered directly to the Trustee for any such purpose shall be promptly cancelled by the Trustee. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. If the Company shall so acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. Cancelled Securities held by the Trustee shall be destroyed by the Trustee in accordance with its customary procedures, unless by a Company Order the Company directs the Trustee to deliver a certificate of such destruction to the Company or to return them to the Company.
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SECTION 311. Computation of Interest.
Except as otherwise specified as contemplated by Section 301 with respect to Securities of any series, interest, if any, on the Securities of each series shall be computed on the basis of a 360-day year consisting of twelve 30-day months.
SECTION 312. Currency and Manner of Payments in Respect of Securities.
(a) Unless otherwise specified with respect to any Securities pursuant to Section 301, with respect to Registered Securities of any series not permitting the election provided for in paragraph (b) below or the Holders of which have not made the election provided for in paragraph (b) below, payment of the principal of (and premium, if any, on) and interest, if any, on any Registered Security of such series will be made in the Currency in which such Registered Security is payable. The provisions of this Section 312 may be modified or superseded with respect to any Securities pursuant to Section 301.
(b) It may be provided pursuant to Section 301 with respect to Registered Securities of any series that Holders shall have the option, subject to paragraphs (d) and (e) below, to receive payments of principal of (or premium, if any, on) or interest, if any, on such Registered Securities in any of the Currencies which may be designated for such election by delivering to the Trustee for such series of Registered Securities a written election with signature guarantees and in the applicable form established pursuant to Section 301, not later than the close of business on the Election Date immediately preceding the applicable payment date. If a Holder so elects to receive such payments in any such Currency, such election will remain in effect for such Holder or any transferee of such Holder until changed by such Holder or such transferee by written notice to the Trustee for such series of Registered Securities (but any such change must be made not later than the close of business on the Election Date immediately preceding the next payment date to be effective for the payment to be made on such payment date and no such change of election may be made with respect to payments to be made on any Registered Security of such series with respect to which an Event of Default has occurred or with respect to which the Company has deposited funds pursuant to Article Four or Fourteen or with respect to which a notice of redemption has been given by the Company or a notice of option to elect repayment has been sent by such Holder or such transferee). Any Holder of any such Registered Security who shall not have delivered any such election to the Trustee of such series of Registered Securities not later than the close of business on the applicable Election Date will be paid the amount due on the applicable payment date in the relevant Currency as provided in Section 312(a). The Trustee for each such series of Registered Securities shall notify the Exchange Rate Agent as soon as practicable after the Election Date of the aggregate principal amount of Registered Securities for which Holders have made such written election.
(c) Unless otherwise specified pursuant to Section 301, if the election referred to in paragraph (b) above has been provided for pursuant to Section 301, then, not later than the fourth Business Day after the Election Date for each payment date for Registered Securities of any series, the Exchange Rate Agent will deliver to the Company a written notice specifying the Currency in which Registered Securities of such series are payable, the respective aggregate amounts of principal of (and premium, if any, on) and interest, if any, on the Registered Securities to be paid on such payment date, specifying the amounts in such Currency so payable
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in respect of the Registered Securities as to which the Holders of Registered Securities denominated in any Currency shall have elected to be paid in another Currency as provided in paragraph (b) above. Unless the Trustee is acting as the Exchange Rate Agent, the Trustee shall have no obligation to complete the actual exchange of distribution amounts from one Currency to another Currency. If the election referred to in paragraph (b) above has been provided for pursuant to Section 301 and if at least one Holder has made such election, then, unless otherwise specified pursuant to Section 301, on the second Business Day preceding such payment date the Company will deliver to the Trustee for such series of Registered Securities an Exchange Rate Officers Certificate in respect of the Dollar or Foreign Currency or Currencies payments to be made on such payment date. Unless otherwise specified pursuant to Section 301, the Dollar or Foreign Currency or Currencies amount receivable by Holders of Registered Securities who have elected payment in a Currency as provided in paragraph (b) above shall be determined by the Company on the basis of the applicable Market Exchange Rate in effect on the second Business Day (the Valuation Date) immediately preceding each payment date, and such determination shall be conclusive and binding for all purposes, absent manifest error.
(d) If a Conversion Event occurs with respect to a Foreign Currency in which any of the Securities are denominated or payable other than pursuant to an election provided for pursuant to paragraph (b) above, then with respect to each date for the payment of principal of (and premium, if any) and interest, if any, on the applicable Securities denominated or payable in such Foreign Currency occurring after the last date on which such Foreign Currency was used (the Conversion Date), the Dollar shall be the currency of payment for use on each such payment date. Unless otherwise specified pursuant to Section 301, the Dollar amount to be paid by the Company to the Trustee of each such series of Securities and by such Trustee or any Paying Agent to the Holders of such Securities with respect to such payment date shall be, in the case of a Foreign Currency other than a currency unit, the Dollar Equivalent of the Foreign Currency or, in the case of a currency unit, the Dollar Equivalent of the Currency Unit, in each case as determined by the Exchange Rate Agent in the manner provided in paragraph (f) or (g) below.
(e) Unless otherwise specified pursuant to Section 301, if the Holder of a Registered Security denominated in any Currency shall have elected to be paid in another Currency as provided in paragraph (b) above, and a Conversion Event occurs with respect to such elected Currency, such Holder shall receive payment in the Currency in which payment would have been made in the absence of such election; and if a Conversion Event occurs with respect to the Currency in which payment would have been made in the absence of such election, such Holder shall receive payment in Dollars as provided in paragraph (d) of this Section 312.
(f) The Dollar Equivalent of the Foreign Currency shall be determined by the Exchange Rate Agent and shall be obtained for each subsequent payment date by converting the specified Foreign Currency into Dollars at the Market Exchange Rate on the Conversion Date.
(g) The Dollar Equivalent of the Currency Unit shall be determined by the Exchange Rate Agent and subject to the provisions of paragraph (h) below shall be the sum of each amount obtained by converting the Specified Amount of each Component Currency into Dollars at the Market Exchange Rate for such Component Currency on the Valuation Date with respect to each payment.
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(h) For purposes of this Section 312, the following terms shall have the following meanings:
A Component Currency shall mean any currency which, on the Conversion Date, was a component currency of the relevant currency unit.
A Specified Amount of a Component Currency shall mean the number of units of such Component Currency or fractions thereof which were represented in the relevant currency unit on the Conversion Date. If after the Conversion Date the official unit of any Component Currency is altered by way of combination or subdivision, the Specified Amount of such Component Currency shall be divided or multiplied in the same proportion. If after the Conversion Date two or more Component Currencies are consolidated into a single currency, the respective Specified Amounts of such Component Currencies shall be replaced by an amount in such single currency equal to the sum of the respective Specified Amounts of such consolidated Component Currencies expressed in such single currency, and such amount shall thereafter be a Specified Amount and such single currency shall thereafter be a Component Currency. If after the Conversion Date any Component Currency shall be divided into two or more currencies, the Specified Amount of such Component Currency shall be replaced by amounts of such two or more currencies, having an aggregate Dollar Equivalent value at the Market Exchange Rate on the date of such replacement equal to the Dollar Equivalent of the Specified Amount of such former Component Currency at the Market Exchange Rate immediately before such division, and such amounts shall thereafter be Specified Amounts and such currencies shall thereafter be Component Currencies. If, after the Conversion Date of the relevant currency unit, a Conversion Event (other than any event referred to above in this definition of Specified Amount) occurs with respect to any Component Currency of such currency unit and is continuing on the applicable Valuation Date, the Specified Amount of such Component Currency shall, for purposes of calculating the Dollar Equivalent of the Currency Unit, be converted into Dollars at the Market Exchange Rate in effect on the Conversion Date of such Component Currency.
An Election Date shall mean the Regular Record Date for the applicable series of Registered Securities or at least 16 days prior to Maturity, as the case may be, or such other prior date for any series of Registered Securities as specified pursuant to clause 13 of Section 301 by which the written election referred to in Section 312(b) may be made.
All decisions and determinations of the Exchange Rate Agent regarding the Dollar Equivalent of the Foreign Currency, the Dollar Equivalent of the Currency Unit, the Market Exchange Rate and changes in the Specified Amounts as specified above shall be in its sole discretion and shall, in the absence of manifest error, be conclusive for all purposes and irrevocably binding upon the Company, the Trustee for the appropriate series of Securities and all Holders of such Securities denominated or payable in the relevant Currency. The Exchange Rate Agent shall promptly give written notice to the Company and the Trustee for the appropriate series of Securities of any such decision or determination.
In the event that the Company determines in good faith that a Conversion Event has occurred with respect to a Foreign Currency, the Company will immediately give written notice
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thereof to the Trustee of the appropriate series of Securities and to the Exchange Rate Agent (and such Trustee will promptly thereafter give notice in the manner provided in Section 106 to the affected Holders) specifying the Conversion Date. In the event the Company so determines that a Conversion Event has occurred with respect to any other currency unit in which Securities are denominated or payable, the Company will immediately give written notice thereof to the Trustee of the appropriate series of Securities and to the Exchange Rate Agent (and such Trustee will promptly thereafter give notice in the manner provided in Section 106 to the affected Holders) specifying the Conversion Date and the Specified Amount of each Component Currency on the Conversion Date. In the event the Company determines in good faith that any subsequent change in any Component Currency as set forth in the definition of Specified Amount above has occurred, the Company will similarly give written notice to the Trustee of the appropriate series of Securities and to the Exchange Rate Agent.
The Trustee of the appropriate series of Securities shall be fully justified and protected in relying and acting upon information received by it from the Company and the Exchange Rate Agent and shall not otherwise have any duty or obligation to determine the accuracy or validity of such information independent of the Company or the Exchange Rate Agent.
SECTION 313. Appointment and Resignation of Successor Exchange Rate Agent.
(a) Unless otherwise specified pursuant to Section 301, if and so long as the Securities of any series (i) are denominated in a Foreign Currency or (ii) may be payable in a Foreign Currency, or so long as it is required under any other provision of this Indenture, then the Company will engage and maintain with respect to each such series of Securities, or as so required, at least one Exchange Rate Agent. The Company will cause the Exchange Rate Agent to make the necessary foreign exchange determinations at the time and in the manner specified pursuant to Section 301 for the purpose of determining the applicable rate of exchange and, if applicable, for the purpose of converting the issued Foreign Currency into the applicable payment Currency for the payment of principal (and premium, if any) and interest, if any, pursuant to Section 312.
(b) No resignation of the Exchange Rate Agent and no appointment of a successor Exchange Rate Agent pursuant to this Section shall become effective until the acceptance of appointment by the successor Exchange Rate Agent as evidenced by a written instrument delivered to the Company and the Trustee of the appropriate series of Securities accepting such appointment executed by the successor Exchange Rate Agent.
(c) If the Exchange Rate Agent shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Exchange Rate Agent for any cause, with respect to the Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Exchange Rate Agent or Exchange Rate Agents with respect to the Securities of that or those series (it being understood that any such successor Exchange Rate Agent may be appointed with respect to the Securities of one or more or all of such series and that, unless otherwise specified pursuant to Section 301, at any time there shall only be one Exchange Rate Agent with respect to the Securities of any particular series that are originally issued by the Company on the same date and that are initially denominated and/or payable in the same Currency).
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SECTION 314. CUSIP Numbers.
The Company in issuing the Securities may use CUSIP numbers (if then generally in use), and, if so, the Trustee shall indicate the respective CUSIP numbers of the Securities in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company shall advise the Trustee as promptly as practicable in writing of any change in the CUSIP numbers.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.
Except as set forth below, this Indenture shall upon Company Request cease to be of further effect with respect to any series of Securities specified in such Company Request (except as to any surviving rights of registration of transfer or exchange of Securities of such series expressly provided for herein or pursuant hereto, any surviving rights of tender for repayment at the option of the Holders and any right to receive Additional Amounts, as provided in Section 1004), and the Trustee, upon receipt of a Company Order, and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture as to such series when
(1) either
(A) all Securities of such series theretofore authenticated and delivered (other than (i) Securities of such series which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities of such series for whose payment money has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or
(B) all Securities of such series
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within one year, or
(iii) if redeemable at the option of the Company, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,
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and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose, solely for the benefit of the Holders, an amount in the Currency in which the Securities of such series are payable, sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest, if any, to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;
(2) the Company has irrevocably paid or caused to be irrevocably paid all other sums payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee and any predecessor Trustee under Section 606, the obligations of the Company to any Authenticating Agent under Section 612 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive any termination of this Indenture.
SECTION 402. Application of Trust Funds.
Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest, if any, for whose payment such money has been deposited with or received by the Trustee, but such money need not be segregated from other funds except to the extent required by law. In acting under this Indenture and in connection with the Securities, the Paying Agent shall act solely as an agent of the Company, and will not thereby assume any obligations towards or relationship of agency or trust for or with any Holder.
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
Event of Default, wherever used herein with respect to any particular series of Securities, means any one of the following events (whatever the reason for such Event of Default and whether or not it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), unless it is either inapplicable to a particular series or is specifically deleted or modified in or pursuant to the supplemental indenture or a Board Resolution establishing such series of Securities or is in the form of Security for such series:
(1) default in the payment of any interest upon any Security of that series when such interest becomes due and payable, and continuance of such default for a period of 30 days; or
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(2) default in the payment of the principal of (or premium, if any, on) any Security of that series when it becomes due and payable at its Maturity, and continuance of such default for a period of 5 days; or
(3) default in the deposit of any sinking fund payment, when and as due by the terms of any Security of that series, and continuance of such default for a period of 5 days; or
(4) default in the performance, or breach, of any covenant or agreement of the Company in this Indenture with respect to any Security of that series (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of a series of Securities other than that series), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a Notice of Default hereunder;
(5) the Company, pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding under any Bankruptcy Law,
(B) consents to the commencement of any bankruptcy or insolvency case or proceeding against it, or files a petition or answer or consent seeking reorganization or relief against it,
(C) consents to the entry of a decree or order for relief against it in an involuntary case or proceeding,
(D) consents to the filing of such petition or to the appointment of or taking possession by a Custodian of the Company or for all or substantially all of its property, or
(E) makes an assignment for the benefit of creditors, or admits in writing of its inability to pay its debts generally as they become due or takes any corporate action in furtherance of any such action; or
(6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case or proceeding, or
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(B) adjudges the Company bankrupt or insolvent, or approves as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company, or
(C) appoints a Custodian of the Company or for all or substantially all of its property, or
(D) orders the winding up or liquidation of the Company,
and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or
(7) if, pursuant to Sections 18(a)(1)(c)(ii) and 61 of the Investment Company Act of 1940, as amended, on the last business day of each of twenty-four consecutive calendar months Securities of that series shall have an asset coverage (as such term is used in the Investment Company Act of 1940) of less than 100 per centum, giving effect to any exemptive relief granted to the Company by the Commission;
(8) any other Event of Default provided with respect to Securities of that series.
The term Bankruptcy Law means title 11, U.S. Code or any applicable federal or state bankruptcy, insolvency, reorganization or other similar law. The term Custodian means any custodian, receiver, trustee, assignee, liquidator, sequestrator or other similar official under any Bankruptcy Law.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may (and the Trustee shall at the request of such Holders) declare the principal (or, if any Securities are Original Issue Discount Securities or Indexed Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the Holders), and upon any such declaration such principal or specified portion thereof shall become immediately due and payable.
Any application by the Trustee for written instructions from the requisite amount of Holders (as determined pursuant to this Indenture) may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application unless prior to taking any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions from the requisite amount of Holders (as determined pursuant to this Indenture) in response to such application specifying the action to be taken or omitted.
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At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient to pay in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except, if applicable, as provided in Sections 312(b), 312(d) and 312(e)):
(A) all overdue installments of interest, if any, on all Outstanding Securities of that series,
(B) the principal of (and premium, if any, on) all Outstanding Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates borne by or provided for in such Securities,
(C) to the extent that payment of such interest is lawful, interest upon overdue installments of interest at the rate or rates borne by or provided for in such Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and
(2) all Events of Default with respect to Securities of that series, other than the nonpayment of the principal of (or premium, if any) or interest on Securities of that series that have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if:
(1) default is made in the payment of any installment of interest on any Security of any series when such interest becomes due and payable and such default continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or premium, if any, on) any Security of any series at its Maturity,
then the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of Securities of such series, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, if any, with interest upon any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installments of interest, if any, at the rate or rates borne by or
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provided for in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the reasonable and documented costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee and its agents and counsel, the Paying Agent and the Security Registrar.
If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon Securities of such series and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities of such series, wherever situated.
If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities of any series shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of any overdue principal, premium or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise:
(i) to file and prove a claim for the whole amount of principal (or in the case of Original Issue Discount Securities or Indexed Securities, such portion of the principal as may be provided for in the terms thereof) (and premium, if any) and interest, if any, owing and unpaid in respect of the Securities and to file such other papers or documents, and take such other actions, including serving on a committee of creditors, as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Holder of Securities of such series to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee and any predecessor Trustee, their agents and counsel, and any other amounts due the Trustee or any predecessor Trustee under Section 606.
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Subject to Article Eight and Section 902 and unless otherwise provided as contemplated by Section 301, nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of a Security any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder of a Security in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or any of the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.
The Trustee shall be entitled to participate, in its capacity as Trustee, on behalf of (and at the request of) the Holders, as a member of any official committee of creditors in the matters it deems advisable.
SECTION 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, if any, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee and any predecessor Trustee under Section 606 and any other agent hereunder;
SECOND: To the payment of the amounts then due and unpaid upon the Securities for principal (and premium, if any) and interest, if any, in respect of which or for the benefit of which such money has been collected, giving effect to Article XVI, if applicable, but otherwise ratably, without preference or priority of any kind, according to the aggregate amounts due and payable on such Securities for principal (and premium, if any) and interest, if any, respectively; and
THIRD: To the payment of the remainder, if any, to the Company or any other Person or Persons entitled thereto.
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SECTION 507. Limitation on Suits.
No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series;
(2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee indemnity, security, or both, satisfactory to the Trustee, against the costs, expenses and liabilities to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity and/or security has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right which is absolute and unconditional to receive payment of the principal of (and premium, if any) and (subject to Sections 305 and 307) interest, if any, on such Security on the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date or, in the case of repayment at the option of the Holders on the Repayment Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder of a Security has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders of Securities shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.
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SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders of Securities, as the case may be.
SECTION 512. Control by Holders of Securities.
Subject to Section 602, the Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Securities of such series, provided that
(1) such direction shall not be in conflict with any rule of law or with this Indenture,
(2) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction,
(3) the Trustee need not take any action that might involve it in personal liability or be unjustly prejudicial to the Holders of Securities of such series not consenting; and
(4) Prior to taking any such action hereunder, the Trustee may demand security or indemnity satisfactory to it in accordance with Section 602.
SECTION 513. Waiver of Past Defaults.
Subject to Section 502, the Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to Securities of such series and its consequences, except a default
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(1) in the payment of the principal of (or premium, if any) or interest, if any, on any Security of such series, or
(2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected.
Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon.
SECTION 514. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
SECTION 515. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 515 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 508 hereof, or a suit by Holders of more than 10% in principal amount of the then Outstanding Securities, or to any action, suit or proceeding instituted by any Holder of Securities of any series for the enforcement of the payment of the principal or premium, if any, or the interest on, any of the Securities of such series, on or after the respective due dates expressed in such Securities.
ARTICLE SIX
THE TRUSTEE
SECTION 601. Notice of Defaults.
Within 90 days after the occurrence of any Default hereunder with respect to the Securities of any series, the Trustee shall transmit in the manner and to the extent provided in TIA Section 313(c), notice of such Default hereunder known to a Responsible Officer of the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of (or premium, if any) or interest, if any, on
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any Security of such series, or in the payment of any sinking or purchase fund installment with respect to the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders of the Securities of such series; and provided further that in the case of any Default or breach of the character specified in Section 501 (4) with respect to the Securities of such series, no such notice to Holders shall be given until at least 90 days after the occurrence thereof.
SECTION 602. Certain Rights and Duties of Trustee.
(1) Prior to the time when the occurrence of an Event of Default becomes known to a Responsible Officer of the Trustee and after the curing or waiving of all such Events of Default with respect to a series of Securities that may have occurred:
(a) the duties and obligations of the Trustee hereunder and with respect to the Securities of any series shall be determined solely by the express provisions of this Indenture, including without limitation Section 107 of this Indenture, and the Trustee shall not be liable with respect to the Securities except for the performance of such duties and obligations as are specifically set forth in this Indenture, including without limitation Section 107 of this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and
(b) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture (but need not confirm or investigate the accuracy of any mathematical calculations or other facts stated therein).
(2) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise as a prudent Person would exercise or use under the circumstances in the conduct of such persons own affairs.
(3) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct, except that the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts.
(4) The Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.
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(5) Any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order (other than delivery of any Security, to the Trustee for authentication and delivery pursuant to Section 303 which shall be sufficiently evidenced as provided therein) and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution.
(6) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may require and, in the absence of bad faith on its part, rely upon a Board Resolution, an Opinion of Counsel or an Officers Certificate.
(7) The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon.
(8) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Securities of any series pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities (including the reasonable and documented fees and expenses of its agents and counsel) which might be incurred by it in compliance with such request or direction.
(9) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled upon reasonable notice and at reasonable times during normal business hours to examine the books, records and premises of the Company, personally or by agent or attorney.
(10) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any willful misconduct or gross negligence on the part of any agent or attorney appointed with due care by it hereunder.
(11) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Securities and this Indenture.
(12) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person retained to act hereunder.
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(13) The permissive rights of the Trustee enumerated herein shall not be construed as duties and the Trustee shall not be answerable for other than its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct with respect to such permissive rights.
(14) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in principal amount of the Outstanding Securities of a series relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture with respect to such Securities.
(15) The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture.
(16) The Trustee may request that the Company deliver an Officers Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers Certificate may be signed by any person authorized to sign an Officers Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded.
(17) Anything in this Indenture notwithstanding, in no event shall the Trustee be liable for special, indirect, punitive or consequential loss or damage of any kind (including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.
(18) The Trustee shall not be responsible or liable for any failure or delay in the performance of its obligations under this Indenture arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including without limitation, acts of God; earthquakes; fire; flood; terrorism; wars and other military disturbances; sabotage; epidemics; riots; interruptions; loss or malfunctions of utilities, computer (hardware or software) or communications services; accidents; labor disputes; acts of civil or military authorities and governmental action.
Every provision of this Indenture relating to the conduct of, or affecting the liability of, or affording protection to, the Trustee shall be subject to the relevant provisions of this Section 602 and the TIA.
The Trustee shall not be required to expend or risk its own funds, give any bond or surety in respect of the performance of its powers and duties hereunder, or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.
The parties hereto acknowledge that in order to help the United States government fight the funding of terrorism and money laundering activities, pursuant to Federal regulations that became effective on October 1, 2003 (Section 326 of the USA PATRIOT Act) all financial
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institutions are required to obtain, verify, record and update information that identifies each person establishing a relationship or opening an account. The parties to this Indenture agree that they will provide to the Trustee such information as it may request, from time to time, in order for the Trustee to satisfy the requirements of the USA PATRIOT Act, including but not limited to the name, address, tax identification number and other information that will allow it to identify the individual or entity who is establishing the relationship or opening the account and may also ask for formation documents such as articles of incorporation or other identifying documents to be provided.
SECTION 603. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustees certificate of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof.
SECTION 604. May Hold Securities.
The Trustee, any Paying Agent, Security Registrar, Authenticating Agent or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar, Authenticating Agent or such other agent.
SECTION 605. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company.
SECTION 606. Compensation and Reimbursement and Indemnification of Trustee.
The Company agrees:
(1) To pay to the Trustee or any predecessor Trustee from time to time such reasonable compensation for all services rendered by it hereunder as has been agreed upon from time to time in writing (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust).
(2) Except as otherwise expressly provided herein, to reimburse each of the Trustee and any predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee or any predecessor Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents, counsel, accountants and experts), except any such expense, disbursement or advance as may be attributable to its gross negligence or willful misconduct.
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(3) To indemnify each of the Trustee or any predecessor Trustee and their respective officers, directors, employees, representatives and agents, for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence or willful misconduct on its own part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the reasonable and documented costs and expenses (including reasonable and documented fees and expenses of its agents and counsel) of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder (whether asserted by any Holder, the Company or other Person). The Trustee shall notify the Company promptly of any third-party claim for which it may seek indemnity of which it has received written notice. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder unless, and solely to the extent that, such failure prejudices the Companys defense of such claim. The Company shall defend the claim, with counsel satisfactory to the Trustee, and the Trustee shall provide reasonable cooperation at the Companys expense in the defense; provided that if the defendants in any such claim include both the Company and the Trustee and the Trustee shall have concluded that there may be legal defenses available to it which are different from or additional to those available to the Company, or the Trustee has concluded that there may be any other actual or potential conflicting interests between the Company and the Trustee, the Trustee shall have the right to select separate counsel and the Company shall be required to pay the reasonable and documented fees and expenses of such separate counsel. Any settlement which affects the Trustee may not be entered into without the written consent of the Trustee, unless the Trustee is given a full and unconditional release from liability with respect to the claims covered thereby and such settlement does not include a statement or admission of fault, culpability or failure to act by or on behalf of the Trustee. Any settlement by the Trustee which affects the Company may not be entered into without the written consent of the Company.
As security for the performance of the obligations of the Company under this Section, the Trustee shall have a claim prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (or premium, if any) or interest, if any, on particular Securities.
When the Trustee incurs expenses or renders services after an Event of Default specified in Section 501 occurs, the expenses and compensation for such services are intended to constitute expenses of administration under Title 11, U.S. Code, or any similar Federal, State or analogous foreign law for the relief of debtors.
The provisions of this Section 606 shall survive the resignation or removal of the Trustee and the satisfaction, termination or discharge of this Indenture.
SECTION 607. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder that shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law
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or to the requirements of Federal, State, Territorial or the District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture.
SECTION 609. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 610. All outstanding fees, expenses and indemnities of the Trustee shall be satisfied by the Company upon resignation or removal.
(b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company.
(c) The Trustee may be removed at any time with respect to the Securities of any series by (i) the Company, by an Officers Certificate delivered to the Trustee, provided that contemporaneously therewith (x) the Company immediately appoints a successor Trustee with respect to the Securities of such series meeting the requirements of Section 607 hereof and (y) the terms of Section 610 hereof are complied with in respect of such appointment (the Trustee being removed hereby agreeing to execute the instrument contemplated by Section 610(b) hereof, if applicable, under such circumstances) and provided further that no Default with respect to such Securities shall have occurred and then be continuing at such time, or (ii) Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 607 and shall fail to resign after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or
(3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of
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rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by or pursuant to a Board Resolution may remove the Trustee and appoint a successor Trustee with respect to all Securities, or (ii) subject to TIA Section 315(e), any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.
(e) If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of a notice of resignation or the delivery of an Act of removal, the Trustee resigning or being removed may petition any court of competent jurisdiction for the appointment of a successor Trustee.
(f) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause with respect to the Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series). If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders of Securities and accepted appointment in the manner hereinafter provided, any Holder of a Security who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to Securities of such series.
(g) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series in the manner provided for notices to the Holders of Securities in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.
SECTION 610. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee, and
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shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject nevertheless to its claim, if any, provided for in Section 606.
(b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and that (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. Whenever there is a successor Trustee with respect to one or more (but less than all) series of securities issued pursuant to this Indenture, the terms Indenture and Securities shall have the meanings specified in the provisos to the respective definition of those terms in Section 101 which contemplate such situation.
(c) Upon request of any such successor Trustee, the Company shall execute any and all instruments necessary to more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.
SECTION 611. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder,
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provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. In case any Securities shall not have been authenticated by such predecessor Trustee, any such successor Trustee may authenticate and deliver such Securities, in either its own name or that of its predecessor Trustee, with the full force and effect which this Indenture provides for the certificate of authentication of the Trustee; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.
SECTION 612. Appointment of Authenticating Agent.
At any time when any of the Securities remain Outstanding, the Trustee may appoint an Authenticating Agent or Agents (which may be an Affiliate or Affiliates of the Company) with respect to one or more series of Securities that shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue or upon exchange, registration of transfer or partial redemption thereof, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Any such appointment shall be evidenced by an instrument in writing signed by a Responsible Officer of the Trustee, a copy of which instrument shall be promptly furnished to the Company. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustees certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and, except as may otherwise be provided pursuant to Section 301, shall at all times be a bank or trust company or corporation organized and doing business and in good standing under the laws of the United States of America or of any State or the District of Columbia, authorized under such laws to act as Authenticating Agent, eligible to serve as trustee hereunder pursuant to Section 607. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or further act on the part of the Trustee or the Authenticating Agent.
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An Authenticating Agent for any series of Securities may at any time resign by giving written notice of resignation to the Trustee for such series and to the Company. The Trustee for any series of Securities may at any time terminate the agency of an Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee for such series may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall promptly give written notice of such appointment to all Holders of Securities of the series with respect to which such Authenticating Agent will serve in the manner set forth in Section 106. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.
The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation including reimbursement of its reasonable expenses for its services under this Section.
If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to or in lieu of the Trustees certificate of authentication, an alternate certificate of authentication substantially in the following form:
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
U.S. Bank National Association, as Trustee | ||
By: |
| |
as Authenticating Agent | ||
By: |
| |
Authorized Officer |
If all of the Securities of a series may not be originally issued at one time, and the Trustee does not have an office capable of authenticating Securities upon original issuance located in a Place of Payment where the Company wishes to have Securities of such series authenticated upon original issuance, the Trustee, if so requested by the Company in writing (which writing need not comply with Section 102 and need not be accompanied by an Opinion of Counsel), shall appoint in accordance with this Section an Authenticating Agent (which, if so requested by the Company, shall be an Affiliate of the Company) having an office in a Place of Payment designated by the Company with respect to such series of Securities, provided that the terms and conditions of such appointment are acceptable to the Trustee.
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ARTICLE SEVEN
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee:
(a) Semi-annually, not later than March 15 and September 15 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of each series as of the preceding March 1 or September 1, as the case may be; and
(b) At such other times as the Trustee may request in writing, within thirty (30) calendar days after receipt by the Company of any such request, a list of similar form and content as of a date not more than fifteen (15) calendar days prior to the time such list is furnished;
Excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar.
SECTION 702. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any Authenticating Agent nor any Paying Agent nor any Security Registrar nor any agent of any of them shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders of Securities in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b).
SECTION 703. Reports by Trustee.
Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Securities pursuant to this Indenture, the Trustee shall transmit by mail (at the expense of the Company) to all Holders of Securities in the manner and to the extent provided in TIA Section 313(c) a brief report dated as of such May 15 which meets the requirements of TIA Section 313(a).
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A copy of each such report shall, at the time of such transmission to such Holders, be filed by the Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee of the listing of the Securities on any stock exchange. In the event that, on any such reporting date, no events have occurred under the applicable sections of the TIA within the 12 months preceding such reporting date, the Trustee shall be under no duty or obligation to provide such reports.
SECTION 704. Reports by Company.
The Company will:
(1) deliver to the Trustee, within 30 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such Sections, then it will file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; and
(2) deliver to the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations.
Delivery of such reports, information, and documents to the Trustee is for informational purposes only and the Trustees receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Companys compliance with any of its covenants hereunder (as to which the Trustee is entitled to conclusively rely exclusively on Officers Certificates). Notwithstanding anything to the contrary set forth herein, for the purposes of this Section, any information, documents or reports filed electronically with the Commission and made publicly available shall be deemed filed with and delivered to the Trustee at the same time as filed with the Commission.
The Trustee shall transmit by mail to the Holders of Securities (at the expense of the Company), within 30 days after the filing thereof with the Trustee, in the manner and to the extent provided in TIA Section 313(c), such summaries of any information, documents and reports required to be filed by the Company pursuant to subparagraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. In no event shall the Trustee be obligated to determine whether or not any report, information or document shall have been filed with the Commission.
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SECTION 705. Calculation of Original Issue Discount.
The Company shall file with the Trustee promptly at the end of each calendar year a written notice specifying the amount of original issue discount (including daily rates and accrual periods), if any, accrued on Outstanding Securities as of the end of such year.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
Unless otherwise provided in the terms of such Securities, the Company shall not consolidate with or merge with or into any other entity or convey or transfer all or substantially all of its properties and assets to any Person, unless:
(1) either the Company shall be the continuing entity, or the entity (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest, if any, on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing; and
(3) the Company and the successor Person have delivered to the Trustee an Officers Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance or transfer and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with.
SECTION 802. Successor Person Substituted.
Upon any consolidation or merger, or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor entity formed by such consolidation or into which the Company is merged or the successor Person to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor had been named as the Company herein; and in the event of any such conveyance or transfer, the Company shall be discharged from all obligations and covenants under this Indenture and the Securities and may be dissolved and liquidated.
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ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders of Securities, the Company, when authorized by or pursuant to a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form reasonably satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities contained; or
(2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or
(3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such Events of Default are to be for the benefit of less than all series of Securities, stating that such Events of Default are expressly being included solely for the benefit of such series); provided, however, that in respect of any such additional Events of Default such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default or may limit the right of the Holders of a majority in aggregate principal amount of that or those series of Securities to which such additional Events of Default apply to waive such default; or
(4) to change or eliminate any of the provisions of this Indenture; provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture that is entitled to the benefit of such provision; or
(5) to secure the Securities; or
(6) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301, including the provisions and procedures relating to Securities convertible into or exchangeable for any securities of any Person (including the Company); or
(7) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; or
(8) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided that such action shall not adversely affect the interests of the Holders of Securities of any series in any material respect; or
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(9) to add guarantors or co-obligors with respect to any series of Securities or to release guarantors from their guarantees of Securities in accordance with the terms of the applicable series of Securities; or
(10) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Sections 401, 1402 and 1403; provided that any such action shall not adversely affect the interests of the Holders of Securities of such series or any other series of Securities in any material respect.
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in aggregate principal amount of all Outstanding Securities affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by or pursuant to a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture that affects such series of Securities or of modifying in any manner the rights of the Holders of such series of Securities under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby:
(1) change the Stated Maturity of the principal of (or premium, if any) or any installment of principal of or interest on, any Security, subject to the provisions of Section 308; or the terms of any sinking fund with respect to any Security; or reduce the principal amount thereof or the rate of interest (or change the manner of calculating the rate of interest, thereon, or any premium payable upon the redemption thereof, or change any obligation of the Company to pay Additional Amounts pursuant to Section 1004 (except as contemplated by Section 801(1) and permitted by Section 901(1)), or reduce the portion of the principal of an Original Issue Discount Security or Indexed Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, or upon the redemption thereof or the amount thereof provable in bankruptcy pursuant to Section 504, or adversely affect any right of repayment at the option of the Holder of any Security, or change any Place of Payment where, or the Currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or repayment at the option of the Holder, on or after the Redemption Date or the Repayment Date, as the case may be), or adversely affect any right to convert or exchange any Security as may be provided pursuant to Section 301 herein, or modify the subordination provisions set forth in Article Sixteen in a manner that is adverse to the Holder of any Outstanding Security, or
(2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver with respect to such series (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or reduce the requirements of Section 1504 for quorum or voting, or
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(3) modify any of the provisions of this Section, Section 513 or Section 1006, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder of a Security with respect to changes in the references to the Trustee and concomitant changes in this Section, or the deletion of this proviso, in accordance with the requirements of Sections 610(b) and 901(8).
It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.
A supplemental indenture that changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or that modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.
The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture, whether or not such Holders remain Holders after such record date; provided, that unless such consent shall have become effective by virtue of the requisite percentage having been obtained prior to the date that is eleven months after such record date, any such consent previously given shall automatically and without further action by any Holder be cancelled and of no further effect.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modification thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, in addition to the documents required by Section 102 of this Indenture, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Trustees own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.
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SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall, if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if any, and Interest.
The Company covenants and agrees for the benefit of the Holders of each series of Securities that it will duly and punctually pay the principal of (and premium, if any, on) and interest, if any, on the Securities of that series in accordance with the terms of such series of Securities and this Indenture. Unless otherwise specified with respect to Securities of any series pursuant to Section 301, at the option of the Company, all payments of principal may be paid by check to the registered Holder of the Registered Security or other person entitled thereto against surrender of such Security.
SECTION 1002. Maintenance of Office or Agency.
The Company shall maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange, where Securities of that series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable, and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of each such office or agency. If at any time the Company shall fail to maintain any such required office or agency in respect of any series of Securities or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee at its Corporate Trust Office as its agent to receive such respective presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all of such purposes, and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain
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an office or agency in accordance with the requirements set forth above for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Unless otherwise specified with respect to any Securities pursuant to Section 301 with respect to a series of Securities, the Company hereby designates as a Place of Payment for each series of Securities the office or agency of the Company in the Borough of Manhattan, The City of New York, and initially appoints the Trustee at its Corporate Trust Office in the Borough of Manhattan, The City of New York as its agent to receive all such presentations, surrenders, notices and demands.
Unless otherwise specified with respect to any Securities pursuant to Section 301, if and so long as the Securities of any series (i) are denominated in a currency other than Dollars or (ii) may be payable in a currency other than Dollars, or so long as it is required under any other provision of the Indenture, then the Company will maintain with respect to each such series of Securities, or as so required, at least one Exchange Rate Agent.
SECTION 1003. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect to any series of any Securities, it will, on or before each due date of the principal of (or premium, if any) or interest, if any, on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except, if applicable, as provided in Sections 312(b), 312(d) and 312(e)), sufficient to pay the principal (and premium, if any) and interest, if any, on Securities of such series so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, on or before each due date of the principal of (or premium, if any) or interest, if any, on any Securities of that series, deposit with a Paying Agent a sum (in the Currency or Currencies described in the preceding paragraph) sufficient to pay the principal (or premium, if any) or interest, if any, so becoming due, such sum of money to be held in trust for the benefit of the Persons entitled to such principal, premium or interest and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.
The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums of money held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums.
Except as otherwise provided in the Securities of any series, any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest, if any, on any Security of any series and remaining
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unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company upon Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such money held in trust, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.
SECTION 1004. Additional Amounts.
If the Securities of a series provide for the payment of Additional Amounts, the Company will pay to the Holder of any Security of such series such Additional Amounts as may be specified as contemplated by Section 301. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of (or premium, if any) or interest, if any, on any Security of any series or the net proceeds received on the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of Additional Amounts provided for by the terms of such series established pursuant to Section 301 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to such terms and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made.
Except as otherwise specified as contemplated by Section 301, if the Securities of a series provide for the payment of Additional Amounts, at least 10 days prior to the first Interest Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal premium is made), and at least 10 days prior to each date of payment of principal, premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers Certificate, the Company will furnish the Trustee and the Companys principal Paying Agent or Paying Agents, if other than the Trustee, with an Officers Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal, premium or interest on the Securities of that series shall be made to Holders of Securities of that series who are not United States persons without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of that series. If any such withholding shall be required, then such Officers Certificate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securities of that series and the Company will pay to the Trustee or such Paying Agent the Additional Amounts required by the terms of such Securities. In the event that the Trustee or any Paying Agent, as the case may be, shall not so receive the above-mentioned certificate, then the Trustee or such Paying Agent shall be entitled (i) to assume that no such withholding or deduction is required with respect to any payment of principal or interest with respect to any Securities of a series until it shall have received a certificate advising otherwise and (ii) to make all payments of principal and interest with respect to the Securities of a series without withholding or deductions until otherwise advised. The
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Company covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against, any loss, liability or expense reasonably incurred without gross negligence or willful misconduct on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officers Certificate furnished pursuant to this Section or in reliance on the Companys not furnishing such an Officers Certificate.
SECTION 1005. Statement as to Compliance.
(1) The Company will deliver to the Trustee, within 120 days after the end of each fiscal year ending after the date hereof (which fiscal year ends on December 31), so long as any Security is Outstanding hereunder, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer of the Company as to his or her knowledge of the Companys compliance with all conditions and covenants under this Indenture. For purposes of this Section 1005, such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture.
(2) The Company will, so long as any series of Securities are Outstanding, deliver to the Trustee, within 5 Business Days of any officer listed in (1) above becoming aware of any Default, Event of Default or default in the performance of any covenant, agreement or condition contained in this Indenture, an Officers Certificate specifying such Default, Event of Default, default or event of default and what action the Company is taking or proposes to take with respect thereto and the status thereof.
SECTION 1006. Waiver of Certain Covenants.
As specified pursuant to Section 301(15), for Securities of any series, the Company may omit in any particular instance to comply with any covenant or condition set forth in any covenants of the Company added to Article Ten pursuant to Section 301(14) or Section 301 (15) in connection with the Securities of a series, if before or after the time for such compliance the Holders of at least a majority in aggregate principal amount of all Outstanding Securities of such series, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Applicability of Article.
Securities of any series that are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article.
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SECTION 1102. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Company of less than all of the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), an Officers Certificate notifying the Trustee in writing of such Redemption Date and of the principal amount of Securities of such series to be redeemed, and, if applicable, of the tenor of the Securities to be redeemed, and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Securities to be redeemed pursuant to Section 1103. In the case of any redemption of Securities of any series prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers Certificate evidencing compliance with such restriction.
SECTION 1103. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities of any series issued on the same day with the same terms are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee in compliance with the requirements of DTC, from the Outstanding Securities of such series issued on such date with the same terms not previously called for redemption, in compliance with the requirements of the principal national securities exchange on which the Securities are listed (if the Securities are listed on any national securities exchange), or if the Securities are not held through DTC or listed on any national securities exchange, or DTC prescribed no method of selection, on a pro rata basis, or by such method as the Trustee shall deem fair and appropriate and subject to and otherwise in accordance with the procedures of the applicable Depository; provided that such method complies with the rules of any national securities exchange or quotation system on which the Securities are listed, and may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Security not redeemed to less than the minimum authorized denomination for Securities of such series.
The Trustee shall promptly notify the Company and the Security Registrar (if other than itself) in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed.
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SECTION 1104. Notice of Redemption.
Notice of redemption shall be given in the manner provided in Section 106, not less than 30 days nor more than 60 days prior to the Redemption Date, unless a shorter period is specified by the terms of such series established pursuant to Section 301, to each Holder of Securities to be redeemed, but failure to give such notice in the manner herein provided to the Holder of any Security designated for redemption as a whole or in part, or any defect in the notice to any such Holder, shall not affect the validity of the proceedings for the redemption of any other such Security or portion thereof.
Any notice that is mailed to the Holders of Registered Securities in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price and accrued interest, if any, to the Redemption Date payable as provided in Section 1106,
(3) if less than all Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amount) of the particular Security or Securities to be redeemed,
(4) in case any Security is to be redeemed in part only, the notice that relates to such Security shall state that on and after the Redemption Date, upon surrender of such Security, the Holder will receive, without a charge, a new Security or Securities of authorized denominations for the principal amount thereof remaining unredeemed,
(5) that on the Redemption Date, the Redemption Price and accrued interest, if any, to the Redemption Date payable as provided in Section 1106 will become due and payable upon each such Security, or the portion thereof, to be redeemed and, if applicable, that interest thereon shall cease to accrue on and after said date,
(6) the Place or Places of Payment where such Securities, are to be surrendered for payment of the Redemption Price and accrued interest, if any,
(7) that the redemption is for a sinking fund, if such is the case, and
(8) the CUSIP number of such Security, if any.
A notice of redemption published as contemplated by Section 106 need not identify particular Registered Securities to be redeemed. Notice of redemption of Securities to be redeemed shall be given by the Company or, at the Companys request, by the Trustee in the name and at the expense of the Company.
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SECTION 1105. Deposit of Redemption Price.
On or prior to 12:00 p.m., New York City time, on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, which it may not do in the case of a sinking fund payment under Article Twelve, segregate and hold in trust as provided in Section 1003) an amount of money in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except, if applicable, as provided in Sections 312(b), 312(d) and 312(e)) sufficient to pay on the Redemption Date the Redemption Price of, and (unless otherwise specified pursuant to Section 301) accrued interest on, all the Securities or portions thereof which are to be redeemed on that date; provided, however, that to the extent any such funds are received by the Trustee or a Paying Agent from the Company after 12:00 p.m., New York City time, on the due date, such funds will be deemed deposited within one Business Day of receipt thereof.
SECTION 1106. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except, if applicable, as provided in Sections 312(b), 312(d) and 312(e)) (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest, if any) such Securities shall if the same were interest-bearing cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that unless otherwise specified as contemplated by Section 301, installments of interest on Registered Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307.
If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the Redemption Price shall, until paid, bear interest from the Redemption Date at the rate of interest set forth in such Security or, in the case of an Original Issue Discount Security, at the Yield to Maturity of such Security.
SECTION 1107. Securities Redeemed in Part.
Any Registered Security that is to be redeemed only in part (pursuant to the provisions of this Article or of Article Twelve) shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holders attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security at the expense of the Company and without service charge a new Security or Securities of the same series and of like tenor, of any
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authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. If a temporary global Security or permanent global Security is so surrendered, such new Security so issued shall be a new temporary global Security or permanent global Security, respectively. However, if less than all the Securities of any series with differing issue dates, interest rates and stated maturities are to be redeemed, the Company in its sole discretion shall select the particular Securities to be redeemed and shall notify the Trustee in writing thereof at least 45 days prior to the relevant redemption date.
ARTICLE TWELVE
SINKING FUNDS
SECTION 1201. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 301 for Securities of such series.
The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a mandatory sinking fund payment, and any payment in excess of such minimum amount provided for by the terms of such Securities of any series is herein referred to as an optional sinking fund payment. If provided for by the terms of any Securities of any series, the cash amount of any mandatory sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series.
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities.
The Company may, at its option, in satisfaction of all or any part of any mandatory sinking fund payment with respect to the Securities of a series, (1) deliver Outstanding Securities of such series (other than any previously called for redemption) and (2) apply as a credit Securities of such series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, as provided for by the terms of such Securities; provided that such Securities so delivered or applied as a credit have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the applicable Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such mandatory sinking fund payment shall be reduced accordingly.
SECTION 1203. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for Securities of any series, the Company will deliver to the Trustee an Officers Certificate specifying the amount of the next ensuing mandatory sinking fund payment for that series pursuant to the terms of that series,
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the portion thereof, if any, which is to be satisfied by payment of cash in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except, if applicable, as provided in Sections 312(b), 312(d) and 312(e)) and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 1202, and the optional amount, if any, to be added in cash to the next ensuing mandatory sinking fund payment, and will also deliver to the Trustee any Securities to be so delivered and credited. If such Officers Certificate shall specify an optional amount to be added in cash to the next ensuing mandatory sinking fund payment, the Company shall thereupon be obligated to pay the amount therein specified. Not less than 30 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107.
ARTICLE THIRTEEN
REPAYMENT AT THE OPTION OF HOLDERS
SECTION 1301. Applicability of Article.
Repayment of Securities of any series before their Stated Maturity at the option of Holders thereof shall be made in accordance with the terms of such Securities and (except as otherwise specified by the terms of such series established pursuant to Section 301) in accordance with this Article.
SECTION 1302. Repayment of Securities.
Securities of any series subject to repayment in whole or in part at the option of the Holders thereof will, unless otherwise provided in the terms of such Securities, be repaid at the Repayment Price thereof, together with interest, if any, thereon accrued to the Repayment Date specified in or pursuant to the terms of such Securities. The Company covenants that on or before 12:00 p.m., New York City time, on the Repayment Date it will deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series and except, if applicable, as provided in Sections 312(b), 312(d) and 312(e)) sufficient to pay the Repayment Price of, and (unless otherwise specified pursuant to Section 301) accrued interest on, all the Securities or portions thereof, as the case may be, to be repaid on such date; provided, however, that to the extent any such funds are received by the Trustee or a Paying Agent from the Company after 12:00 p.m., New York City time, on the due date, such funds will be distributed to the Holders within one Business Day of receipt thereof.
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SECTION 1303. Exercise of Option.
Securities of any series subject to repayment at the option of the Holders thereof will contain an Option to Elect Repayment form on the reverse of such Securities. To be repaid at the option of the Holder, any Security so providing for such repayment, with the Option to Elect Repayment form on the reverse of such Security duly completed by the Holder (or by the Holders attorney duly authorized in writing), must be received by the Company at the Place of Payment therefor specified in the terms of such Security (or at such other place or places of which the Company shall from time to time notify the Holders of such Securities) not earlier than 45 days nor later than 30 days prior to the Repayment Date. If less than the entire Repayment Price of such Security is to be repaid in accordance with the terms of such Security, the portion of the Repayment Price of such Security to be repaid, in increments of the minimum denomination for Securities of such series, and the denomination or denominations of the Security or Securities to be issued to the Holder for the portion of such Security surrendered that is not to be repaid, must be specified. Any Security providing for repayment at the option of the Holder thereof may not be repaid in part if, following such repayment, the unpaid principal amount of such Security would be less than the minimum authorized denomination of Securities of the series of which such Security to be repaid is a part. Except as otherwise may be provided by the terms of any Security providing for repayment at the option of the Holder thereof, exercise of the repayment option by the Holder shall be irrevocable unless waived by the Company.
SECTION 1304. When Securities Presented for Repayment Become Due and Payable.
If Securities of any series providing for repayment at the option of the Holders thereof shall have been surrendered as provided in this Article and as provided by or pursuant to the terms of such Securities, such Securities or the portions thereof, as the case may be, to be repaid shall become due and payable and shall be paid by the Company on the Repayment Date therein specified, and on and after such Repayment Date (unless the Company shall default in the payment of such Securities on such Repayment Date) such Securities shall, if the same were interest-bearing, cease to bear interest. Upon surrender of any such Security for repayment in accordance with such provisions, the Repayment Price of such Security so to be repaid shall be paid by the Company, together with accrued interest, if any, to the Repayment Date; provided, however, that installments of interest on Registered Securities, whose Stated Maturity is prior to (or, if specified pursuant to Section 301, on) the Repayment Date shall be payable (but without interest thereon, unless the Company shall default in the payment thereof) to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307.
If any Security surrendered for repayment shall not be so repaid upon surrender thereof, the Repayment Price shall, until paid, bear interest from the Repayment Date at the rate of interest set forth in such Security or, in the case of an Original Issue Discount Security, at the Yield to Maturity of such Security.
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SECTION 1305. Securities Repaid in Part.
Upon surrender of any Registered Security that is to be repaid in part only, the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge and at the expense of the Company, a new Registered Security or Securities of the same series, and of like tenor, of any authorized denomination specified by the Holder, in an aggregate principal amount equal to and in exchange for the portion of the principal of such Security so surrendered that is not to be repaid. If a temporary global Security or permanent global Security is so surrendered, such new Security so issued shall be a new temporary global Security or a new permanent global Security, respectively.
ARTICLE FOURTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1401. Applicability of Article; Companys Option to Effect Defeasance or Covenant Defeasance.
If pursuant to Section 301 provision is made for either or both of (a) defeasance of the Securities of or within a series under Section 1402 or (b) covenant defeasance of the Securities of or within a series under Section 1403, then the provisions of such Section or Sections, as the case may be, together with the other provisions of this Article (with such modifications thereto as may be specified pursuant to Section 301 with respect to any Securities), shall be applicable to such Securities, and the Company may at its option by Board Resolution, at any time, with respect to such Securities, elect to have either Section 1402 (if applicable) or Section 1403 (if applicable) be applied to such Outstanding Securities upon compliance with the conditions set forth below in this Article.
SECTION 1402. Defeasance and Discharge.
Upon the Companys exercise of the above option applicable to this Section with respect to any Securities of or within a series, the Company shall be deemed to have been discharged from its obligations with respect to such Outstanding Securities on and after the date the conditions set forth in Section 1404 are satisfied (hereinafter, defeasance). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Outstanding Securities, which shall thereafter be deemed to be Outstanding only for the purposes of Section 1405 and the other Sections of this Indenture referred to in clauses (A) and (B) of this Section, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of such Outstanding Securities to receive, solely from the trust fund described in Section 1404 and as more fully set forth in such Section, payments in respect of the principal of (and premium, if any, on) and interest, if any, on such Securities when such payments are due, (B) the Companys obligations with respect to such Securities under Sections 305, 306, 1002 and 1003 and with respect to the payment of Additional Amounts, if any, on such Securities as contemplated by Section 1004, (C) the rights, powers, trusts, duties
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and immunities of the Trustee hereunder and (D) this Article. Subject to compliance with this Article Fourteen, the Company may exercise its option under this Section notwithstanding the prior exercise of its option under Section 1403 with respect to such Securities. Following a defeasance, payment of such Securities may not be accelerated because of an Event of Default.
SECTION 1403. Covenant Defeasance.
Upon the Companys exercise of the above option applicable to this Section with respect to any Securities of or within a series, if specified pursuant to Section 301, the Company shall be released from its obligations under any covenant, with respect to such Outstanding Securities on and after the date the conditions set forth in Section 1404 are satisfied (hereinafter, covenant defeasance), and such Securities shall thereafter be deemed to be not Outstanding for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenant, but shall continue to be deemed Outstanding for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to such Outstanding Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(4) or 501(8) or otherwise, as the case may be, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. Following a covenant defeasance, payment of such Securities may not be accelerated because of an Event of Default solely by reference to such Sections specified above in this Section 1403.
SECTION 1404. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section 1402 or Section 1403 to any Outstanding Securities of or within a series:
(a) The Company shall have irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 607 who shall agree to comply with the provisions of this Article Fourteen applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for the benefit of, and dedicated solely to, the Holders of such Securities, (1) an amount (in such Currency in which such Securities are then specified as payable at Stated Maturity), or (2) Government Obligations applicable to such Securities (determined on the basis of the Currency in which such Securities are then specified as payable at Stated Maturity) which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment of principal of (and premium, if any, on) and interest, if any, on such Securities, money in an amount, or (3) a combination thereof in an amount, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (i) the principal of (and premium, if any, on) and interest, if any, on such Outstanding Securities on the Stated Maturity of such principal or installment of principal or interest and (ii)
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any mandatory sinking fund payments or analogous payments applicable to such Outstanding Securities on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities.
(b) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound.
(c) No Default or Event of Default with respect to such Securities shall have occurred and be continuing on the date of such deposit or, insofar as Sections 501(5) and 501(6) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period).
(d) In the case of an election under Section 1402, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of execution of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of such Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred.
(e) In the case of an election under Section 1403, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred.
(f) The Company shall have delivered to the Trustee an Officers Certificate and an Opinion of Counsel, each stating that all conditions precedent to either the defeasance under Section 1402 or the covenant defeasance under Section 1403 (as the case may be) have been complied with.
(g) Notwithstanding any other provisions of this Section, such defeasance or covenant defeasance shall be effected in compliance with any additional or substitute terms, conditions or limitations which may be imposed on the Company in connection therewith pursuant to Section 301.
SECTION 1405. Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 1003, all money and Government Obligations (or other property as may be provided pursuant to Section 301) (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1405, the Trustee) pursuant to Section 1404 in respect
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of any Outstanding Securities of any series shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, if any, but such money need not be segregated from other funds except to the extent required by law.
Unless otherwise specified with respect to any Security pursuant to Section 301, if, after a deposit referred to in Section 1404(a) has been made, (a) the Holder of a Security in respect of which such deposit was made is entitled to, and does, elect pursuant to Section 312(b) or the terms of such Security to receive payment in a Currency other than that in which the deposit pursuant to Section 1404(a) has been made in respect of such Security, or (b) a Conversion Event occurs as contemplated in Section 312(d) or 312(e) or by the terms of any Security in respect of which the deposit pursuant to Section 1404(a) has been made, the indebtedness represented by such Security shall be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal of (and premium, if any, on) and interest, if any, on such Security as the same becomes due out of the proceeds yielded by converting (from time to time as specified below in the case of any such election) the amount or other property deposited in respect of such Security into the Currency in which such Security becomes payable as a result of such election or Conversion Event based on the applicable Market Exchange Rate for such Currency in effect on the second Business Day prior to each payment date, except, with respect to a Conversion Event, such conversion shall be based on the applicable Market Exchange Rate for such Currency in effect (as nearly as feasible) at the time of the Conversion Event.
The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the money or Government Obligations deposited pursuant to Section 1404 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of such Outstanding Securities.
Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Obligations (or other property and any proceeds therefrom) held by it as provided in Section 1404 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect a defeasance or covenant defeasance, as applicable, in accordance with this Article.
ARTICLE FIFTEEN
MEETINGS OF HOLDERS OF SECURITIES
SECTION 1501. Purposes for Which Meetings May Be Called.
A meeting of Holders of any series of Securities may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities of such series.
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SECTION 1502. Call, Notice and Place of Meetings.
(a) The Trustee may at any time call a meeting of Holders of Securities of any series for any purpose specified in Section 1501, to be held at such time and at such place in the Borough of Manhattan, The City of New York as the Trustee shall determine. Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 106.
(b) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% in principal amount of the Outstanding Securities of any series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 1501, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication or mailing of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York for such meeting and may call such meeting for such purposes by giving notice thereof as provided in subsection (a) of this Section.
SECTION 1503. Persons Entitled to Vote at Meetings.
To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (1) a Holder of one or more Outstanding Securities of such series, or (2) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of such series by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any series shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.
SECTION 1504. Quorum; Action.
The Persons entitled to vote a majority in principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action that this Indenture expressly provides may be made, given or taken by the Holders of not less than a specified percentage in principal amount of the Outstanding Securities of a series, the Persons entitled to vote such specified percentage in principal amount of the Outstanding Securities of such series shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of
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any adjourned meeting shall be given as provided in Section 1502(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of any adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Outstanding Securities of such series which shall constitute a quorum.
Except as limited by the proviso to Section 902, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Securities of that series; provided, however, that, except as limited by the proviso to Section 902, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Securities of that series.
Any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of such series, whether or not present or represented at the meeting.
Notwithstanding the foregoing provisions of this Section 1504, if any action is to be taken at a meeting of Holders of Securities of any series with respect to any consent, waiver, request, demand, notice, authorization, direction or other action that this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal amount of all Outstanding Securities affected thereby, or of the Holders of such series and one or more additional series:
(i) there shall be no minimum quorum requirement for such meeting; and
(ii) the principal amount of the Outstanding Securities of such series that vote in favor of such consent, waiver, request, demand, notice, authorization, direction or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under this Indenture.
SECTION 1505. Determination of Voting Rights; Conduct and Adjournment of Meetings.
(a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 104 and the appointment of any proxy shall be proved in the manner
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specified in Section 104. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 104 or other proof.
(b) The Trustee shall, by an instrument in writing appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 1502(b), in which case the Company or the Holders of Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting.
(c) At any meeting of Holders, each Holder of a Security of such series or proxy shall be entitled to one vote for each $1,000 principal amount of the Outstanding Securities of such series held or represented by such Holder; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy.
(d) Any meeting of Holders of Securities of any series duly called pursuant to Section 1502 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting, and the meeting may be held as so adjourned without further notice.
SECTION 1506. Counting Votes and Recording Action of Meetings.
The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities of any Series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the fact, setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 1502 and, if applicable, Section 1504. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated.
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ARTICLE SIXTEEN
SUBORDINATION OF SECURITIES
SECTION 1601. Agreement to Subordinate.
The Company, for itself, its successors and assigns, covenants and agrees, and each Holder of Subordinated Securities by his acceptance thereof, likewise covenants and agrees, that the payment of the principal of (and premium, if any) and interest, if any, on each and all of the Subordinated Securities is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all Senior Indebtedness.
SECTION 1602. Distribution on Dissolution, Liquidation and Reorganization; Subrogation of Subordinated Securities.
Upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company, whether in bankruptcy, insolvency, reorganization or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of the Company or otherwise (subject to the power of a court of competent jurisdiction to make other equitable provision reflecting the rights conferred in this Indenture upon the
Senior Indebtedness and the holders thereof with respect to the Securities and the holders thereof by a lawful plan of reorganization under applicable bankruptcy law):
(a) the holders of all Senior Indebtedness shall be entitled to receive payment in full of the principal thereof (and premium, if any) and interest due thereon (including post-petition interest) before the Holders of the Subordinated Securities are entitled to receive any payment upon the principal (or premium, if any) or interest, if any, on indebtedness evidenced by the Subordinated Securities; and
(b) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article Sixteen shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the principal of (and premium, if any) and interest on the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and
(c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders of the Subordinated Securities before all Senior
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Indebtedness is paid in full, such payment or distribution shall be paid over, upon written notice to the Trustee, to the holder of such Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instrument evidencing any of such Senior Indebtedness may have been issued, ratably as aforesaid, for application to payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the Holders of the Subordinated Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to Senior Indebtedness until the principal of (and premium, if any, on) and interest, if any, on the Subordinated Securities shall be paid in full and no such payments or distributions to the Holders of the Subordinated Securities of cash, property or securities otherwise distributable to the holders of Senior Indebtedness shall, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders of the Subordinated Securities be deemed to be a payment by the Company to or on account of the Subordinated Securities. It is understood that the provisions of this Article Sixteen are and are intended solely for the purpose of defining the relative rights of the Holders of the Subordinated Securities, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing contained in this Article Sixteen or elsewhere in this Indenture or in the Subordinated Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders of the Subordinated Securities, the obligation of the Company, which is unconditional and absolute, to pay to the Holders of the Subordinated Securities the principal of (and premium, if any) and interest, if any, on the Subordinated Securities as and when the same shall become due and payable in accordance with their terms, or to affect the relative rights of the Holders of the Subordinated Securities and creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or in the Subordinated Securities prevent the Trustee or the Holder of any Subordinated Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Sixteen of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article Sixteen, the Trustee, subject to the provisions of Section 601, shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Sixteen.
If the Trustee or any Holder of Subordinated Securities does not file a proper claim or proof of debt in the form required in any proceeding referred to above prior to 30 days before the expiration of the time to file such claim in such proceeding, then the holder of any Senior Indebtedness is hereby authorized, and has the right, to file an appropriate claim or claims for or on behalf of such Holder of Subordinated Securities.
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With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants or obligations as are specifically set forth in this Article and no implied covenants or obligations with respect to holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee does not owe any fiduciary duties to the holders of Senior Indebtedness other than Securities issued under this Indenture.
SECTION 1603. No Payment on Subordinated Securities in Event of Default on Senior Indebtedness.
No payment by the Company on account of principal (or premium, if any), sinking funds or interest, if any, on the Subordinated Securities shall be made unless full payment of amounts then due for principal (premium, if any), sinking funds and interest on Senior Indebtedness has been made or duly provided for in money or moneys worth.
SECTION 1604. Payments on Subordinated Securities Permitted.
Nothing contained in this Indenture or in any of the Subordinated Securities shall (a) affect the obligation of the Company to make, or prevent the Company from making, at any time except as provided in Sections 1602 and 1603, payments of principal of (or premium, if any) or interest, if any, on the Subordinated Securities, (b) without limiting clause (c) of this sentence, prevent the application by the Trustee of any moneys deposited with it hereunder to the payment of or on account of the principal of (or premium, if any) or interest, if any, on the Subordinated Securities, unless the Trustee shall have received at its Corporate Trust Office written notice of any event prohibiting the making of such payment more than three Business Days prior to the date fixed for such payment or (c) prevent the application by the Trustee of any moneys or the proceeds of Government Obligations deposited with it pursuant to Section 1404(a) to the payment of or on account of the principal of (or premium, if any, on) or interest, if any, on the Subordinated Securities if all the conditions specified in Section 1404 to the application of Section 1402 or Section 1403, as applicable, have been satisfied prior to the date the Trustee shall have received at its Corporate Trust Office written notice of any event prohibiting the making of such payment.
SECTION 1605. Authorization of Holders to Trustee to Effect Subordination.
Each Holder of Subordinated Securities by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article Sixteen and appoints the Trustee his attorney-in-fact for any and all such purposes.
SECTION 1606. Notices to Trustee.
Notwithstanding the provisions of this Article or any other provisions of this Indenture, neither the Trustee nor any Paying Agent (other than the Company) shall be charged with knowledge of the existence of any Senior Indebtedness or of any event that would prohibit the making of any payment of moneys to or by the Trustee or such Paying Agent, unless and until the Trustee or such Paying Agent shall have received (in the case of the Trustee, at its Corporate Trust Office) written notice thereof from the Company or from the holder of any Senior Indebtedness or from the trustee for any such holder, together with proof satisfactory to the Trustee of such holding of Senior Indebtedness or of the authority of such trustee; provided, however, that if at least three Business Days prior to the date upon which by the terms hereof any
80
such moneys may become payable for any purpose (including, without limitation, the payment of either the principal (or premium, if any) or interest, if any, on any Subordinated Security) the Trustee shall not have received with respect to such moneys the notice provided for in this Section 1606, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary, which may be received by it within three Business Days prior to such date. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such a notice has been given by a holder of Senior Indebtedness or a trustee on behalf of any such holder. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article Sixteen, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article Sixteen and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.
SECTION 1607. Trustee as Holder of Senior Indebtedness.
The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article Sixteen in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder.
Nothing in this Article Sixteen shall apply to claims of, or payments to, the Trustee under or pursuant to Section 606.
SECTION 1608. Modifications of Terms of Senior Indebtedness.
Any renewal or extension of the time of payment of any Senior Indebtedness or the exercise by the holders of Senior Indebtedness of any of their rights under any instrument creating or evidencing Senior Indebtedness, including, without limitation, the waiver of default thereunder, may be made or done all without notice to or assent from the Holders of the Subordinated Securities or the Trustee.
No compromise, alteration, amendment, modification, extension, renewal or other change of, or waiver, consent or other action in respect of, any liability or obligation under or in respect of, or of any of the terms, covenants or conditions of any indenture or other instrument under which any Senior Indebtedness is outstanding or of such Senior Indebtedness, whether or not any of the foregoing are in accordance with the provisions of any applicable document, shall in any way alter or affect any of the provisions of this Article Sixteen or of the Subordinated Securities relating to the subordination thereof.
81
SECTION 1609. Reliance on Judicial Order or Certificate of Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to in this Article Sixteen, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or to the Holders of Subordinated Securities, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Sixteen.
* * * * *
This Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. The exchange of copies of this Indenture and delivery of signature pages by facsimile, .pdf transmission, e-mail or other electronic means shall constitute effective execution and delivery of this Indenture for all purposes. Signatures of the parties hereto transmitted by facsimile, .pdf transmission, e-mail or other electronic means shall be deemed to be their original signatures for all purposes.
82
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, as of the day and year first above written.
FS INVESTMENT CORPORATION | ||
By: |
| |
Name: | [ ] | |
Title: | [ ] | |
U.S. BANK NATIONAL ASSOCIATION, as Trustee | ||
By: |
| |
Name: | [ ] | |
Title: | [ ] |
Exhibit (d)(3)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility of
a Trustee Pursuant to Section 305(b)(2)
U.S. BANK NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
31-0841368
(I.R.S. Employer Identification No.)
800 Nicollet Mall Minneapolis, Minnesota |
55402 | |
(Address of principal executive offices) | (Zip Code) |
Karen R. Beard
U.S. Bank National Association
One Federal Street 3rd Floor
Boston, MA 02110
(617) 603-6565
(Name, address and telephone number of agent for service)
FS Investment Corporation
(Exact name of obligor as specified in its charter)
Maryland | 26-1630040 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
Cira Centre 2929 Arch Street, Suite 675 Philadelphia, Pennsylvania |
19104 | |
(Address of principal executive offices) | (Zip Code) |
DEBT SECURITIES
(Title of the indenture securities)
Item 1. | GENERAL INFORMATION. Furnish the following information as to the Trustee. |
a) | Name and address of each examining or supervising authority to which it is subject. |
Comptroller of the Currency
Washington, D.C.
b) | Whether it is authorized to exercise corporate trust powers. |
Yes
Item 2. | AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the Trustee, describe each such affiliation. |
None
Items 3-15 | Items 3-15 are not applicable because to the best of the Trustees knowledge, the obligor is not in default under any Indenture for which the Trustee acts as Trustee. |
Item 16. | LIST OF EXHIBITS: List below all exhibits filed as a part of this statement of eligibility and qualification. |
1. | A copy of the Articles of Association of the Trustee.* |
2. | A copy of the certificate of authority of the Trustee to commence business, attached as Exhibit 2. |
3. | A copy of the certificate of authority of the Trustee to exercise corporate trust powers, attached as Exhibit 3. |
4. | A copy of the existing bylaws of the Trustee.** |
5. | A copy of each Indenture referred to in Item 4. Not applicable. |
6. | The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939, attached as Exhibit 6. |
7. | Report of Condition of the Trustee as of March 31, 2014 published pursuant to law or the requirements of its supervising or examining authority, attached as Exhibit 7. |
* | Incorporated by reference to Exhibit 25.1 to Amendment No. 2 to registration statement on Form S-4, Registration Number 333-128217 filed on November 15, 2005. |
** | Incorporated by reference to Exhibit 25.1 to registration statement on Form S-4, Registration Number 333-166527 filed on May 5, 2010. |
2
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston, Commonwealth of Massachusetts on the 13th of June, 2014.
By: | /s/ Karen R. Beard | |
Karen R. Beard | ||
Vice President |
3
Exhibit 2
Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219
CERTIFICATE OF CORPORATE EXISTENCE
I, Thomas J. Curry, Comptroller of the Currency, do hereby certify that:
1. The Comptroller of the Currency, pursuant to Revised Statutes 324, et seq, as amended, and 12 USC 1, et seq, as amended, has possession, custody, and control of all records pertaining to the chartering, regulation, and supervision of all national banking associations.
2. U.S. Bank National Association, Cincinnati, Ohio (Charter No. 24), is a national banking association formed under the laws of the United States and is authorized thereunder to transact the business of banking on the date of this certificate.
|
IN TESTIMONY WHEREOF, today, February 27, 2013, I have hereunto subscribed my name and caused my seal of office to be affixed to these presents at the U.S. Department of the Treasury, in the City of Washington, District of Columbia.
| |||
Comptroller of the Currency |
Exhibit 3
Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219
CERTIFICATION OF FIDUCIARY POWERS
I, Thomas J. Curry, Comptroller of the Currency, do hereby certify that:
1. The Office of the Comptroller of the Currency, pursuant to Revised Statutes 324, et seq, as amended, and 12 USC 1, et seq, as amended, has possession, custody, and control of all records pertaining to the chartering, regulation, and supervision of all national banking associations.
2. U.S. Bank National Association, Cincinnati, Ohio (Charter No. 24), was granted, under the hand and seal of the Comptroller, the right to act in all fiduciary capacities authorized under the provisions of the Act of Congress approved September 28, 1962, 76 Stat. 668, 12 USC 92a, and that the authority so granted remains in full force and effect on the date of this certificate.
|
IN TESTIMONY WHEREOF, today, February 27, 2013, I have hereunto subscribed my name and caused my seal of office to be affixed to these presents at the U.S. Department of the Treasury, in the City of Washington, District of Columbia.
| |||
Comptroller of the Currency |
Exhibit 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, U.S. BANK NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor.
Dated: June 13, 2014
By: | /s/ Karen R. Beard | |
Karen R. Beard | ||
Vice President |
Exhibit 7
U.S. Bank National Association
Statement of Financial Condition
As of 3/31/2014
($000s)
3/31/2014 | ||||
Assets |
||||
Cash and Balances Due From |
$ | 7,390,563 | ||
Depository Institutions |
||||
Securities |
84,977,518 | |||
Federal Funds |
36,998 | |||
Loans & Lease Financing Receivables |
234,549,731 | |||
Fixed Assets |
4,726,552 | |||
Intangible Assets |
13,234,790 | |||
Other Assets |
22,187,278 | |||
|
|
|||
Total Assets |
$ | 367,103,430 | ||
Liabilities |
||||
Deposits |
$ | 270,081,137 | ||
Fed Funds |
3,856,384 | |||
Treasury Demand Notes |
0 | |||
Trading Liabilities |
422,782 | |||
Other Borrowed Money |
35,507,326 | |||
Acceptances |
0 | |||
Subordinated Notes and Debentures |
4,623,000 | |||
Other Liabilities |
11,663,853 | |||
|
|
|||
Total Liabilities |
$ | 326,154,482 | ||
Equity |
||||
Common and Preferred Stock |
18,200 | |||
Surplus |
14,266,409 | |||
Undivided Profits |
25,808,807 | |||
Minority Interest in Subsidiaries |
$ | 855,532 | ||
|
|
|||
Total Equity Capital |
$ | 40,948,948 | ||
Total Liabilities and Equity Capital |
$ | 367,103,430 |
Exhibit (l)(1)
[LETTERHEAD OF MILES & STOCKBRIDGE P.C.]
June 13, 2014
FS Investment Corporation
Cira Centre
2929 Arch Street, Suite 675
Philadelphia, PA 19104
Re: Registration Statement on Form N-2
Ladies and Gentlemen:
We have acted as special Maryland counsel to FS Investment Corporation, a Maryland corporation (the Company) and a business development company under the Investment Company Act of 1940, as amended (the 1940 Act), in connection with certain matters of Maryland law arising out of the registration of certain securities of the Company (the Offered Securities) on its Registration Statement on Form N-2 (including the prospectus that is a part thereof and as amended through the date hereof, the Registration Statement) originally filed by the Company on May 12, 2014 with the Securities and Exchange Commission (the Commission) under the Securities Act of 1933, as amended (the Securities Act), with respect to (a) shares (the Common Shares) of common stock, $0.001 par value per share (the Common Stock); (b) shares (the Preferred Shares) of preferred stock, $0.001 par value per share (the Preferred Stock); (c) warrants (the Warrants) to purchase Common Stock, Preferred Stock or Debt Securities (as defined below); (d) subscription rights (the Subscription Rights) to purchase Common Stock; and (e) debt securities (the Debt Securities), all of which may be offered and sold from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act at an aggregate public offering price not to exceed $1,500,000,000.
In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the Documents):
1. | The Registration Statement in the form transmitted to the Commission for filing pursuant to the Securities Act; |
2. | The charter of the Company (the Charter) certified by the State Department of Assessments and Taxation of the State of Maryland (the SDAT); |
3. | The bylaws of the Company (the Bylaws) certified as of the date hereof by an officer of the Company; |
FS Investment Corporation
June 13, 2014
Page 2
4. | A certificate of the SDAT as to the good standing of the Company, dated as of a recent date; |
5. | Resolutions (the Resolutions) adopted by the Board of Directors (the Board of Directors) of the Company relating to the registration of the Offered Securities, certified as of the date hereof by an officer of the Company; |
6. | A certificate executed by an officer of the Company, dated as of the date hereof; and |
7. | Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein. |
In expressing the opinion set forth below, we have assumed the following:
1. | Each individual executing any of the Documents, whether on behalf of such individual or any other person, is legally competent to do so. |
2. | All Documents submitted to us as originals are authentic. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. |
3. | The issuance of, and certain terms of, the Offered Securities to be issued by the Company from time to time will be authorized and approved by the Board of Directors, or a duly authorized committee thereof, in accordance with the Maryland General Corporation Law, the Charter, the Bylaws and the Resolutions prior to the issuance of such Offered Securities (such approval referred to herein as the Corporate Proceedings). |
4. | Upon the issuance of any Offered Securities that are Common Shares, including Common Shares that may be issued upon the conversion or exercise of any other Offered Securities convertible into or exercisable into Common Shares, the total number of shares of Common Stock issued and outstanding will not exceed the total number of shares of Common Stock that the Company is then authorized to issue under the Charter. |
5. | Articles Supplementary classifying and designating the number of shares and the terms of any class or series of Preferred Shares to be issued by the Company, and otherwise complying with the Maryland General Corporation Law, will be filed with and accepted for record by the SDAT prior to the issuance of such Preferred Shares. |
6. | Upon the issuance of any Offered Securities that are Preferred Shares, including Preferred Shares which may be issued upon the conversion or exercise of any other |
FS Investment Corporation
June 13, 2014
Page 3
Offered Securities convertible into or exercisable for Preferred Shares, the total number of shares of Preferred Stock issued and outstanding, and the total number of issued and outstanding shares of the applicable class or series of Preferred Stock designated pursuant to the Charter, will not exceed the total number of shares of Preferred Stock or the number of shares of such class or series of Preferred Stock that the Company is then authorized to issue under the Charter. |
7. | At the time of issuance of any of the Offered Securities, the Company will be in good standing under the laws of the State of Maryland. |
8. | The aggregate purchase price paid for any Offered Securities, when aggregated with the purchase price paid for other Offered Securities theretofore issued, will not exceed $1,500,000,000. |
9. | At the time of the issue of the Offered Securities, such securities will not violate any law applicable to the Company or result in a default under or breach of any agreement or instrument then-binding upon the Company, and such securities will comply with all requirements and restrictions, if any, applicable to the Company, imposed by any court or governmental or regulatory body having jurisdiction over the Company. |
Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that:
1. | The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT. |
2. | Upon the completion of all Corporate Proceedings relating to the Common Shares, the issuance of the Common Shares will be duly authorized and, when and if issued and delivered against payment therefor in accordance with the Registration Statement, the Resolutions and the Corporate Proceedings, the Common Shares will be validly issued, fully paid and nonassessable. |
3. | Upon the completion of all Corporate Proceedings relating to the Preferred Shares, the issuance of the Preferred Shares will be duly authorized and, when and if issued and delivered against payment therefor in accordance with the Registration Statement, the Resolutions and the Corporate Proceedings, the Preferred Shares will be validly issued, fully paid and nonassessable. |
4. | Upon the completion of all Corporate Proceedings relating to the Warrants, the issuance of the Warrants will be duly authorized. |
FS Investment Corporation
June 13, 2014
Page 4
5. | Upon the completion of all the Corporate Proceedings relating to the Subscription Rights, the issuance of the Subscription Rights will be duly authorized. |
6. | Upon the completion of all Corporate Proceedings relating to the Debt Securities, the issuance of the Debt Securities will be duly authorized. |
The foregoing opinion is limited to the laws of the State of Maryland and we do not express any opinion herein concerning any other law. We express no opinion as to compliance with federal or state securities laws, including the securities laws of the State of Maryland, or the 1940 Act.
The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. This opinion is being furnished to you for submission to the Commission as an exhibit to the Registration Statement. We hereby consent to the use of our name under the heading Legal Matters in the prospectus forming a part of the Registration Statement and the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act.
Very truly yours,
Miles & Stockbridge P.C.
By: | /s/ J.W. Thompson Webb | |
Principal |
Exhibit (l)(2)
|
Cira Centre 2929 Arch Street Philadelphia, PA 19104-2808 +1 215 994 4000 Main +1 215 994 2222 Fax www.dechert.com |
June 13, 2014
FS Investment Corporation
Cira Centre
2929 Arch Street, Suite 675
Philadelphia, PA 19104
Re: Registration Statement on Form N-2
Ladies and Gentlemen:
We have acted as counsel to FS Investment Corporation, a Maryland corporation (the Company), in connection with the preparation and filing of a Registration Statement on Form N-2 (as amended, the Registration Statement), originally filed on May 12, 2014 with the U.S. Securities and Exchange Commission (the Commission) under the Securities Act of 1933, as amended (the Securities Act), relating to possible offerings from time to time of up to an aggregate of $1,500,000,000 of the following securities of the Company: (1) shares of common stock, par value $0.001 per share, of the Company (Common Stock); (2) shares of preferred stock, par value $0.001 per share, of the Company (Preferred Stock); (3) debt securities (Debt Securities) to be issued pursuant to an indenture between the Company and U.S. Bank National Association, as trustee (the Trustee); (4) rights to purchase Common Stock (Subscription Rights); and (5) warrants of the Company to purchase Common Stock, Preferred Stock or Debt Securities (Warrants). The Warrants, Subscription Rights and Debt Securities are collectively referred to herein as the Securities.
The Registration Statement provides that the Securities may be offered separately or together, in separate series, in amounts, at prices and on terms to be set forth in one or more supplements to the prospectus included in the Registration Statement (each, a Prospectus Supplement). This opinion letter is being furnished to the Company in accordance with the requirements of Item 25 of Form N-2 under the Investment Company Act of 1940, as amended, and we express no opinion herein as to any matter other than as to the legality of the Securities.
In rendering the opinions expressed below, we have examined and relied on originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments and such agreements, certificates and receipts of public officials, certificates of officers or other representatives of the Company and others, and such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below, including the following documents:
FS Investment Corporation June 13, 2014 Page 2 |
(i) | the Registration Statement; |
(ii) | the Second Articles of Amendment and Restatement of the Company, as amended (the Articles); |
(iii) | the Second Amended and Restated Bylaws of the Company (the Bylaws); |
(iv) | the form of indenture governing the Debt Securities (as may be amended or supplemented from time to time, the Indenture); |
(v) | a certificate of good standing with respect to the Company issued by the State Department of Assessments and Taxation of Maryland as of a recent date; and |
(vi) | the resolutions of the board of directors of the Company (the Board of Directors), relating to, among other things, the authorization and approval of the preparation and filing of the Registration Statement. |
As to the facts upon which this opinion is based, we have relied upon certificates of public officials and certificates and written statements of agents, officers, directors and representatives of the Company without having independently verified such factual matters.
In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as original documents, the conformity to original documents of all documents submitted to us as copies, the legal capacity of natural persons who are signatories to the documents examined by us and the legal power and authority of all persons signing on behalf of the parties to such documents.
On the basis of the foregoing and subject to the assumptions, qualifications and limitations set forth in this letter, we are of the opinion that:
1. | The Warrants, when (a) duly authorized, executed, authenticated, issued and sold in accordance with the Registration Statement and applicable Prospectus Supplement and the provisions of an applicable, valid and binding warrant agreement and (b) delivered to the purchaser or purchasers thereof against receipt by the Company of such lawful consideration therefor as the Board of Directors (or a duly authorized committee thereof or a duly authorized officer of the Company) may lawfully determine, will be valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms. |
FS Investment Corporation June 13, 2014 Page 3 |
2. | The Subscription Rights, when duly authorized and issued in accordance with the Registration Statement and applicable Prospectus Supplement and the provisions of an applicable subscription certificate and any applicable and valid and binding subscription agreement, will be valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms. |
3. | The Debt Securities, when (a) duly authorized, executed by the Company and authenticated by the Trustee in accordance with the provisions of the Indenture and (x) issued and sold in accordance with the Registration Statement and applicable Prospectus Supplement or (y) issued upon exchange or conversion of Preferred Stock or upon exercise of Warrants as contemplated by the Registration Statement and applicable Prospectus Supplement and (b) delivered to the purchaser or purchasers thereof against receipt by the Company of such lawful consideration therefor as the Board of Directors (or a duly authorized committee thereof or a duly authorized officer of the Company) may lawfully determine, will be valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms. |
The opinions set forth herein are subject to the following assumptions, qualifications, limitations and exceptions being true and correct at or before the time of the delivery of any Securities offered pursuant to the Registration Statement and appropriate Prospectus Supplement:
(i) | the Company is duly incorporated and validly existing in good standing under the laws of the State of Maryland; |
(ii) | the Board of Directors, including any appropriate committee appointed thereby, and/or appropriate officers of the Company shall have duly (x) established the terms of the Securities and (y) authorized and taken any other necessary corporate or other action to approve the creation, if applicable, issuance and sale of the Securities and related matters; |
(iii) | the resolutions establishing the definitive terms of and authorizing the Company to register, offer, sell and issue the Securities shall remain in effect and unchanged at all times during which the Securities are offered, sold or issued by the Company; |
(iv) | the definitive terms of each class and series of the Securities not presently provided for in the Registration Statement or the Articles, and the terms of the issuance and sale of the Securities (x) shall have been duly established in accordance with all applicable laws and the Articles and Bylaws, any Indenture, underwriting agreement, warrant agreement and subscription agreement and any other relevant agreement |
FS Investment Corporation June 13, 2014 Page 4 |
relating to the terms and the offer and sale of the Securities (collectively, the Documents) and the authorizing resolutions of the Board of Directors, and reflected in appropriate documentation reviewed by us, and (y) shall not violate any applicable law or the Documents (subject to the further assumption that such Documents have not been amended from the date hereof in a manner that would affect the validity of any of the opinions rendered herein), or result in a default under or breach of (nor constitute any event which with notice, lapse of time or both would constitute a default under or result in any breach of) any agreement or instrument binding upon the Company and so as to comply with any restriction imposed by any court or governmental body having jurisdiction over the Company; |
(v) | the interest rate on the Debt Securities shall not be higher than the maximum lawful rate permitted from time to time under applicable law; |
(vi) | the Securities (including any Securities issuable upon exercise, conversion or exchange of other Securities), and any certificates representing the relevant Securities (including any Securities issuable upon exercise, conversion or exchange of other Securities), have been duly authenticated, executed, countersigned, registered and delivered upon payment of the agreed-upon legal consideration therefor and have been duly issued and sold in accordance with any relevant agreement and, if applicable, duly authorized, executed and delivered by the Company and any other appropriate party; |
(vii) | each Indenture, warrant agreement and subscription agreement and any other relevant agreement has been duly authorized, executed and delivered by, and will constitute a valid and binding obligation of, each party thereto (other than the Company); |
(viii) | the Registration Statement, as amended (including all necessary post-effective amendments), and any additional registration statement filed under Rule 462, shall be effective under the Securities Act, and such effectiveness shall not have been terminated or rescinded; |
(ix) | an appropriate Prospectus Supplement shall have been prepared, delivered and filed in compliance with the Securities Act and the applicable rules and regulations thereunder describing the Securities offered thereby; |
(x) | the Securities shall be issued and sold in compliance with all U.S. federal and state securities laws and solely in the manner stated in the Registration Statement and the applicable Prospectus Supplement and there shall not have occurred any change in law affecting the validity of the opinions rendered herein; |
FS Investment Corporation June 13, 2014 Page 5 |
(xi) | if the Securities will be sold pursuant to a firm commitment underwritten offering, the underwriting agreement with respect to the Securities in the form filed as an exhibit to the Registration Statement or any post-effective amendment thereto, or incorporated by reference therein, has been duly authorized, executed and delivered by the Company and the other parties thereto; |
(xii) | the Indenture shall have been duly qualified under the Trust Indenture Act of 1939, as amended; and |
(xiii) | in the case of an agreement or instrument pursuant to which any Securities are to be issued, there shall be no terms or provisions contained therein which would affect the validity of any of the opinions rendered herein. |
The opinions set forth herein as to enforceability of obligations of the Company are subject to: (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws now or hereinafter in effect affecting the enforcement of creditors rights generally, and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and the discretion of the court or other body before which any proceeding may be brought; (ii) the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of, or contribution to, a party with respect to a liability where such indemnification or contribution is contrary to public policy; (iii) provisions of law which may require that a judgment for money damages rendered by a court in the United States be expressed only in U.S. dollars; (iv) requirements that a claim with respect to any Debt Securities denominated other than in U.S. dollars (or a judgment denominated other than in U.S. dollars in respect of such claim) be converted into U.S. dollars at a rate of exchange prevailing on a date determined pursuant to applicable law; and (v) governmental authority to limit, delay or prohibit the making of payments outside the United States or in foreign currency or composite currency.
We express no opinion as to the validity, legally binding effect or enforceability of any provision in any agreement or instrument that (i) requires or relates to payment of any interest at a rate or in an amount which a court may determine in the circumstances under applicable law to be commercially unreasonable or a penalty or forfeiture or (ii) relates to governing law and submission by the parties to the jurisdiction of one or more particular courts.
The opinions expressed herein are limited to the laws of the State of New York.
This opinion letter has been prepared for your use solely in connection with the Registration Statement. We assume no obligation to advise you of any changes in the foregoing subsequent to the effectiveness of the Registration Statement.
FS Investment Corporation June 13, 2014 Page 6 |
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption Legal Matters in the prospectus which forms a part of the Registration Statement. We further consent to the incorporation by reference of this letter and consent into any registration statement filed pursuant to Rule 462(b) with respect to the Securities. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Dechert LLP
Exhibit (n)(3)
Consent of Independent Registered Public Accounting Firm
We consent to use in this Pre-Effective Amendment No. 1 to the Registration Statement (No. 333-195863) on Form N-2 of FS Investment Corporation of our report dated February 28, 2014, relating to our audits of the consolidated financial statements and internal control over financial reporting, appearing in the Prospectus, which is a part of this Pre-Effective Amendment No. 1 to the Registration Statement, and of our report dated May 8, 2014, relating to the senior securities table appearing elsewhere in this Pre-Effective Amendment No. 1 to the Registration statement.
We also consent to the reference to our firm under the captions Senior Securities and Independent Registered Public Accounting Firm in such Prospectus.
/s/ McGladrey LLP
Blue Bell, Pennsylvania
June 13, 2014
Exhibit (r)(2)
FB INCOME ADVISOR, LLC
CODE OF BUSINESS CONDUCT, ETHICS AND
STATEMENT ON THE PROHIBITION OF INSIDER
TRADING
December 2012
TABLE OF CONTENTS
Page | ||||
INTRODUCTION |
1 | |||
PURPOSE OF THE CODE |
1 | |||
PRINCIPLES OF BUSINESS CONDUCT |
3 | |||
Conflicts of Interest |
3 | |||
Corporate Opportunities |
3 | |||
Confidentiality |
3 | |||
Fair Dealing |
4 | |||
Protection and Proper Use of Assets |
4 | |||
Compliance with Applicable Laws, Rules and Regulations |
4 | |||
Equal Opportunity, Harassment |
4 | |||
Gifts |
5 | |||
Accuracy of Adviser Records |
5 | |||
Retaining Business Communications |
6 | |||
Outside Employment |
6 | |||
Service as a Director |
6 | |||
Political Contributions |
6 | |||
Media Relations |
7 | |||
Intellectual Property Information |
7 | |||
Internet and E-Mail Policy |
7 | |||
Reporting Violations and Complaint Handling |
8 | |||
CODE OF ETHICS |
10 | |||
Scope of the Code of Ethics |
10 | |||
Definitions |
10 | |||
Standards of Conduct |
11 | |||
Prohibited Transactions |
12 | |||
Management of the Restricted List |
13 | |||
Procedures to Implement the Code of Ethics |
14 | |||
Reporting Requirements |
14 | |||
Pre-Clearance Reports |
14 | |||
Initial Holdings Reports |
15 | |||
Quarterly Transaction Reports |
15 | |||
Annual Holdings Reports |
16 | |||
Annual Certification of Compliance |
16 | |||
STATEMENT ON THE PROHIBITION OF INSIDER TRADING |
17 | |||
Summary of Advisers Business Activities |
17 | |||
Background |
17 | |||
Policy |
18 | |||
Who is an Insider? |
19 | |||
What is Material Information? |
19 | |||
What is Non-public Information? |
19 | |||
Bases for Liability |
20 | |||
Penalties for Insider Trading |
20 | |||
Controlling the Flow of Sensitive Information |
21 |
ADMINISTRATION OF THE CODE |
22 | |||
SANCTIONS FOR CODE VIOLATIONS |
23 | |||
APPLICATION/WAIVERS |
23 | |||
RECORDS |
23 | |||
REVISIONS AND AMENDMENTS |
24 | |||
Appendices |
||||
Code Acknowledgment Form |
A | |||
Pre-Clearance Form |
B | |||
Initial Holdings Report |
C | |||
Quarterly Transaction Report |
D | |||
Annual Holdings Report |
E |
CODE OF BUSINESS CONDUCT, ETHICS AND
STATEMENT ON THE PROHIBITION OF INSIDER TRADING
INTRODUCTION
Ethics are important to FB Income Advisor, LLC (Adviser, our, us, or we) and to its management. Adviser is committed to the highest ethical standards and to conducting its business with the highest level of integrity.
All officers, principals and employees of Adviser are responsible for maintaining this level of integrity and for complying with the policies contained in this Code of Business Conduct, Ethics and Statement on the Prohibition of Insider Trading (collectively, the Code). If you have a question or concern about what is proper conduct for you or anyone else, please raise these concerns with Advisers Chief Compliance Officer or any member of Advisers management, or follow the procedures outlined in applicable sections of this Code.
Adviser is an investment adviser registered with the U.S. Securities and Exchange Commission (the SEC) under the Investment Advisers Act of 1940, as amended (the Advisers Act). Adviser acts as the investment adviser to FS Investment Corporation (FSIC), a non-diversified, closed-end management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). Adviser may, subject to any limitations described in the investment advisory and administrative services agreement between Adviser and FSIC, advise other BDCs or investment companies, private investment funds, institutional investors or other persons or entities (collectively with FSIC, Clients).
This Code has been adopted by Adviser and approved by the Board of Directors of FSIC in accordance with Rule 17j-l(c) under the 1940 Act, Rule 204A-1 under the Advisers Act, and the May 9, 1994 Report of the Advisory Group on Personal Investing by the Investment Company Institute. Rule 17j-l of the 1940 Act generally describes fraudulent or manipulative practices with respect to purchases or sales of securities held or to be acquired by BDCs if effected by access persons of such companies. Rule 204A-1 of the Advisers Act requires that all Adviser personnel comply with all applicable federal securities laws.
PURPOSE OF THE CODE
This Code is intended to:
| help you recognize ethical issues and take the appropriate steps to resolve these issues; |
| deter ethical violations to avoid any abuse of position of trust and responsibility; |
| maintain confidentiality of our business activities; |
| assist you in complying with applicable securities laws; |
| assist you in reporting any unethical or illegal conduct; and |
| reaffirm and promote our commitment to a corporate culture that values honesty, integrity and accountability. |
Further, it is the policy of Adviser that no affiliated person of our organization shall, in connection with the purchase or sale, directly or indirectly, by such person of any security held or to be acquired by any Client of Adviser:
| employ any device, scheme or artifice to defraud such Client; |
| make any untrue statement of a material fact or omit to state to us a material fact in order to make the statement made, in light of the circumstances under which it is made, not misleading; |
| engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon us or any Client; or |
| engage in any manipulative practices with respect to our business activities. |
All officers, principals and employees of Adviser, as a condition of employment or continued employment or affiliation with Adviser, will acknowledge annually, in writing, that they have received a copy of this Code, read it, and understand that the Code contains our expectations regarding their conduct.
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PRINCIPLES OF BUSINESS CONDUCT
All officers, principals and employees of Adviser will be subject to the following guidelines covering business conduct:
Conflicts of Interest
You must avoid any conflict, or the appearance of a conflict, between your personal interests, our interests and the interests of our Clients. A conflict exists when your personal interests in any way interfere with our interests or the interests of our Clients, or when you take any action or have any interests that may make it difficult for you to perform your job objectively and effectively. For example, a conflict of interest probably exists if:
| you cause us or any of our Clients to enter into business relationships with you or a member of your family, or invest in companies affiliated with you or a member of your family; |
| you use any non-public information about us or any of our Clients for your personal gain, or the gain of a member of your family; or |
| you use or communicate confidential information obtained in the course of your work for your or anothers personal benefit. |
Corporate Opportunities
Each of us has a duty to advance the legitimate interests of Adviser and our Clients when the opportunity to do so presents itself. Therefore, you may not:
| take for yourself personally opportunities, including investment opportunities, discovered through the use of your position with us or any of our Clients, or through the use of eithers property or information; |
| use our or any of our Clients property, information, or position for your personal gain or the gain of a family member; or |
| compete, or prepare to compete, with us or any of our Clients. |
Confidentiality
You must not disclose confidential information regarding us, any of our Clients, or either of our or their affiliates, lenders or other business partners, unless disclosure is authorized or required by law. Confidential information includes all non-public information that might be harmful to, or useful to the competitors of, Adviser, our Clients, or any of our or their affiliates, lenders or other business partners. This obligation continues even after you leave Adviser until the information becomes publicly available.
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Fair Dealing
You must endeavor to deal fairly with our Clients and business partners, or any other companies or individuals with whom we or our Clients do business or come into contact with, including fellow employees and our competitors. You must not take unfair advantage of these or other parties by means of:
| manipulation; |
| concealment; |
| abuse of privileged information; |
| misrepresentation of material facts; or |
| any other unfair-dealing practice. |
Protection and Proper Use of Assets
Our assets and those of our Clients are to be used only for legitimate business purposes. You should protect our assets and those of our Clients and ensure that they are used efficiently.
Incidental personal use of telephones, fax machines, copy machines, personal computers and similar equipment is generally allowed if there is no significant added cost to us, it does not interfere with your work duties, and is not related to an illegal activity or to any outside business.
Compliance with Applicable Laws, Rules and Regulations
Each of us has a duty to comply with all laws, rules and regulations that apply to our business. Please talk to our Chief Compliance Officer if you have any questions about how to comply with the above regulations and other laws, rules and regulations.
In addition, we expect you to comply with all our policies and procedures that apply to you. We may modify or update our policies and procedures in the future, and may adopt new company policies and procedures from time to time. You are also expected to observe the terms of any confidentiality agreement, employment agreement or other similar agreement that applies to you.
Equal Opportunity, Harassment
We are committed to providing equal opportunity in all of our employment practices including selection, hiring, promotion, transfer, and compensation of all qualified applicants and employees without regard to race, color, sex or gender, sexual orientation, religion, age, national origin, handicap, disability, citizenship status, or any other status protected by law. With this in mind, there are certain behaviors that will not be tolerated. These include harassment, violence, intimidation, and discrimination of any kind involving race, color, sex or gender, sexual orientation, religion, age, national origin, handicap, disability, citizenship status, marital status, or any other status protected by law.
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Gifts
Gifts can appear to compromise the integrity and honesty of our personnel. On the other hand, business colleagues often wish to provide small gifts to others as a way of demonstrating appreciation or interest. We have attempted to balance these considerations in the policy which follows.
No officers, principals or employees of Adviser shall accept a gift or other thing of more than de minimis value ($100 or less) from any person or entity that does business with, or is soliciting business from, Adviser or its Clients. Gifts exceeding that amount per person must be returned and the gift, its approximate value and its disposition reported to the Chief Compliance Officer. Officers, principals and employees of Adviser may accept gifts in the form of customary business entertainment (meals, tickets to sporting or other entertainment events) so long as the giver will be present at the entertainment. Gifts to the firm as a whole or to an entire department (for example, accounting, analysts, etc.) may exceed the $100 limitation, but such gifts must be approved by the Chief Compliance Officer.
All gifts shall be reflected in a gift log, containing a basic description of the gift, a good faith estimate of the value of the gift, and a description of its disposition (i.e., accepted, rejected, returned to sender, etc.).
Solicitation of gifts is strictly prohibited.
Standards for giving gifts are identical to those governing the acceptance of gifts (that is they should be restricted to items worth $100 or less). On the whole, good taste and judgment must be exercised in both the receipt and giving of gifts. Every person subject to this Code must avoid gifts or entertainment that would compromise Advisers or its Clients standing or reputation. If you are offered or receive any gift which is either prohibited or questionable, you must inform the Chief Compliance Officer immediately.
The direct or indirect giving of, offering to give or promising to give, money or anything of value to a foreign official, a foreign political party or party official, or any candidate for foreign political office in order to corruptly obtain or retain a business benefit, is subject to additional requirements and limitations. If you intend to give, offer or promise such a gift, you must inform the Chief Compliance Officer immediately.
Accuracy of Adviser Records
We require honest and accurate recording and reporting of information in order to make responsible business decisions. This includes such data as quality, safety, and personnel records, as well as financial records.
All financial books, records and accounts must accurately reflect transactions and events, and conform both to required accounting principles and to our system of internal controls.
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Retaining Business Communications
The law requires us to maintain certain types of corporate records, usually for specified periods of time. Failure to retain those records for those minimum periods could subject us to penalties and fines, cause the loss of rights, obstruct justice, place us in contempt of court, or seriously disadvantage us in litigation.
From time to time we establish retention or destruction policies in order to ensure legal compliance. We expect you to fully comply with any published records retention or destruction policies, provided that you should note the following exception: If you believe, or we inform you, that our records are relevant to any litigation or governmental action, or any potential litigation or action, then you must preserve those records until we determine the records are no longer needed. This exception supersedes any previously or subsequently established destruction policies for those records. If you believe that this exception may apply, or have any questions regarding the possible applicability of that exception, please contact our Chief Compliance Officer.
Outside Employment
Without the written consent of the Chief Executive Officer of Adviser, no officer, principal or employee of Adviser is permitted to:
| engage in any other financial services business for profit; |
| be employed or compensated by any other business for work performed; or |
| have a significant (more than 5% equity) interest in any other financial services business, including, but not limited to, banks, brokerages, investment advisers, insurance companies or any other similar business. |
Requests for outside employment waivers should be made in writing to the Chief Executive Officer with a copy to the Chief Compliance Officer.
Service as a Director
No officer, principal or employee of Adviser shall serve as a director (or member of a similar governing body) or officer of any organization, other than a charitable organization, without prior written authorization from the Chief Compliance Officer. Any request to serve on the Board of such an organization must include the name of the entity and its business, the names of the other Board members, and a general reason for the request. The Chief Compliance Officer shall consult with the Chief Executive Officer in connection with such request.
Political Contributions
Persons associated with Adviser or any of its affiliated organizations, including FSIC, may contribute cash, gifts or anything of value to: (i) political action committees; (ii) political parties; or (iii) elected officials or candidates. However, any such contribution in excess of $150 per election (regardless of whether one may vote for the official or candidate) must be pre-
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approved by the Chief Executive Officer or Chief Compliance Officer, or their designee. Persons associated with the Adviser or FSIC will be required to disclose any political contributions made no less frequently than annually. In addition, designated persons may not solicit from others, or coordinate, contributions to elected officials or candidates or payments to political parties without pre-approval by the Chief Executive Officer or Chief Compliance Officer, or their designee.
Media Relations
We must speak with a unified voice in all dealings with the press and other media. As a result, our Chief Executive Officer, or his designee, is the sole contact for media seeking information about Adviser. Any requests from the media must be referred to our Chief Executive Officer, or his designee.
Intellectual Property Information
Information generated in our business is a valuable asset. Protecting this information plays an important role in our growth and ability to compete. Such information includes: business and research plans; objectives and strategies; trade secrets; unpublished financial information; salary and benefits data; lender and other business partner lists. Officers, principals and employees of Adviser who have access to our intellectual property information and that of our Clients are obligated to safeguard it from unauthorized access and:
| not disclose this information to persons outside of Adviser; |
| not use this information for personal benefit or the benefit of persons outside of Adviser; and |
| not share this information with other officers, principals and employees of Adviser except on a legitimate need to know basis. |
Internet and E-Mail Policy
We provide an e-mail system and Internet access to certain of our employees to help them do their work. You may use the e-mail system and the Internet only for legitimate business purposes in the course of your duties. Incidental and occasional personal use is permitted, but never for personal gain or any improper or illegal use. Further, you are permitted to post information on public forums, such as blogs or social networking sites (e.g., Facebook, Twitter or LinkedIn) outside of work, but you should consider how the use of social media can reflect upon our firm. You may not, however, indicate that you work for our firm in a public forum if other information posted on that site could cause harm to our reputation. Moreover, information about our firm (or any interaction with another person) that is posted in a public forum might be construed by the SEC or its staff as an advertisement that is subject to strict regulations. Consequently, you are prohibited from posting information about our firm or your specific activities within our firm (other than your title and general role within the firm) in any public forum without the explicit pre-approval of the management team and the Chief Compliance Officer (or her designee). You must also consult with the management team and the
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Chief Compliance Officer (or her designee) prior to posting any information in any public forum, where you could be viewed as acting in your capacity as an associated person of the firm. You are prohibited from sharing proprietary information about our operations or investment decisions, or posting any non-public information, in any public forum.
Reporting Violations and Complaint Handling
You are responsible for compliance with the rules, standards and principles described in this Code. In addition, you should be alert to possible violations of the Code by Advisers officers, principals and employees, and you are expected to report a violation promptly. Normally, reports should be made to ones immediate supervisor. Under some circumstances, it may be impractical or you may feel uncomfortable raising a matter with your supervisor. In those instances, you are encouraged to contact our Chief Compliance Officer who will investigate and report the matter to our Chief Executive Officer and the governing body of any affected Client, as the circumstance dictates. You will also be expected to cooperate in any investigation of a violation.
Anyone who has a concern about our conduct, the conduct of an officer, principal or employee of Adviser or our accounting, internal accounting controls or auditing matters, may communicate that concern to our Chief Compliance Officer. All reported concerns relating to or affecting a Client shall be forwarded to the applicable governing body of such Client by our Chief Compliance Officer and will be simultaneously addressed by our Chief Compliance Officer in the same way that other concerns are addressed by us. The status of all outstanding concerns forwarded to any Clients will be reported on a quarterly basis by our Chief Compliance Officer.
All reports will be investigated and whenever possible, requests for confidentiality shall be honored. And, while anonymous reports will be accepted, please understand that anonymity may hinder or impede the investigation of a report. All cases of questionable activity or improper actions will be reviewed for appropriate action, discipline or corrective actions. Whenever possible, we will keep confidential the identity of employees, officers or principals who are accused of violations, unless or until it has been determined that a violation has occurred.
There will be no reprisal, retaliation or adverse action taken against any officer, principal or employee who, in good faith, reports or assists in the investigation of, a violation or suspected violation, or who makes an inquiry about the appropriateness of an anticipated or actual course of action.
For reporting concerns about Advisers conduct, the conduct of an officer, principal or employee of Adviser, or about Advisers accounting, internal accounting controls or auditing matters, you may use the following means of communication:
ADDRESS: | FB Income Advisor, LLC |
Cira Centre |
2929 Arch Street, Suite 675 |
Philadelphia, PA 19104 |
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In the case of a confidential, anonymous submission, employees should set forth their concerns in writing and forward them in a sealed envelope to the Chief Compliance Officer, such envelope to be labeled with a legend such as: To be opened by the Chief Compliance Officer only.
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CODE OF ETHICS
The persons specified in the following discussion will be subject to the provisions of the Code of Ethics (CofE).
Scope of the Code of Ethics
In order to prevent Advisers Access Persons, as defined below, from engaging in any of these prohibited acts, practices or courses of business, Adviser has adopted this CofE which has been approved by the Board of Directors of FSIC.
Definitions
Access Person. Access Person means all officers, principals and employees of Adviser and any of Advisers Supervised Persons (as defined below) who have access to non-public information regarding any Clients purchase or sale of a Covered Security (as defined below), or non-public information regarding the portfolio holdings of any Client, or who is involved in making securities recommendations to Clients, or who has access to such recommendations that are non-public.
Automatic Investment Plan. Automatic Investment Plan refers to any program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation, including a dividend reinvestment plan.
Beneficial Interest. Beneficial Interest includes any entity, person, trust, or account with respect to which an Access Person exercises investment discretion or provides investment advice. A beneficial interest shall be presumed to include all accounts in the name of or for the benefit of the Access Person, his or her spouse, dependent children, or any person living with him or her or to whom he or she contributed economic support.
Beneficial Ownership. Beneficial Ownership shall be determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the Exchange Act), except that the determination of direct or indirect Beneficial Ownership shall apply to all securities, and not just equity securities, that an Access Person has or acquires. Rule 16a-1(a)(2) provides that the term beneficial owner means any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has or shares a direct or indirect pecuniary interest in any equity security. Therefore, an Access Person may be deemed to have Beneficial Ownership of securities held by members of his or her immediate family sharing the same household, or by certain partnerships, trusts, corporations, or other arrangements.
Blackout Period. Blackout Period shall mean that timeframe in which Adviser or an Access Person may not engage in trading in an issue, or its related securities, appearing on the Adviser Restricted List as described below.
Control. Control shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act.
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Covered Security. Covered Security means a security as defined in Section 2(a)(36) of the 1940 Act, except that it does not include: (i) direct obligations of the government of the United States; (ii) bankers acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments including repurchase agreements; and (iii) shares issued by registered open-end investment companies (i.e., mutual funds); however, exchange traded funds structured as unit investment trusts or open-end funds are considered Covered Securities.
Initial Public Offering. Initial Public Offering means an offering of securities registered under the Securities Act of 1933, as amended (the Securities Act), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act.
Limited Offering. Limited Offering means an offering that is exempt from registration under the Securities Act pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505 or Rule 506 under the Securities Act.
Purchase or Sale of a Covered Security. Purchase or Sale of a Covered Security is broad and includes, among other things, the writing of an option to purchase or sell a Covered Security, or the use of a derivative product to take a position in a Covered Security.
Restricted List. The Restricted List identifies those securities which Adviser or its Access Persons may not trade due to some restriction under the securities laws whereby Adviser or its Access Persons may be deemed to possess material non-public information (as it is described within the following Statement on the Prohibition of Insider Trading) about the issuer of such securities.
Supervised Person. A Supervised Person means any partner, principal, officer, director (or other person occupying a similar status or performing similar functions), or employee of any entity that provides investment advice on behalf of Adviser and is subject to the supervision and control of Adviser.
Standards of Conduct
1. No Access Person shall engage, directly or indirectly, in any business transaction or arrangement for personal profit that is not in the best interests of Adviser or its Clients; nor shall he or she make use of any confidential information gained by reason of his or her employment by or affiliation with Adviser, or any of its affiliates or Clients, in order to derive a personal profit for himself or herself or for any Beneficial Interest, in violation of the fiduciary duty owed to Adviser and its Clients.
2. Any Access Person recommending or authorizing the purchase or sale of a Covered Security by any Client of Adviser shall, at the time of such recommendation or authorization, disclose any Beneficial Interest in, or Beneficial Ownership of, such Covered Security or the issuer thereof.
3. No Access Person shall dispense any information concerning securities holdings or securities transactions of any of Advisers Clients to anyone outside Adviser without obtaining prior written approval from our Chief Compliance Officer, or such person or persons
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as our Chief Compliance Officer may designate to act on his or her behalf. Notwithstanding the preceding sentence, such Access Person may dispense such information without obtaining prior written approval:
| when there is a public report containing the same information; |
| when such information is dispensed in accordance with compliance procedures established to prevent conflicts of interest between Adviser and its Clients; or |
| in the ordinary course of his or her duties on behalf of Adviser. |
4. Adviser owes its Clients a duty of undivided loyalty. As an investment adviser, Adviser has a fiduciary responsibility to its Clients. Clients interests must always be placed first. Thus, Adviser personnel must conduct their personal securities transactions in a manner that does not interfere, or appear to interfere, with any transaction for a Client or otherwise takes unfair advantage of a Client relationship. All personal securities transactions should be conducted consistent with this CofE and in such manner as to avoid actual or potential conflicts of interest, the appearance of a conflict of interest, or any abuse of an individuals position of trust and responsibility within Adviser. All Adviser personnel must adhere to these fundamental principles as well as comply with the specific provisions set forth herein.
Prohibited Transactions
1. General Prohibition. No Access Person shall purchase or sell, directly or indirectly, any Covered Security (including any security issued by the issuer of such Covered Security) in which he or she has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership and which such Access Person knows or should have known at the time of such purchase or sale is being considered for purchase or sale by a Client of Adviser, or is held in the portfolio of a Client of Adviser, unless such Access Person shall have obtained prior written approval for such purpose from our Chief Compliance Officer.
| An Access Person who becomes aware that any Client of Adviser is considering the purchase or sale of any Covered Security must immediately notify our Chief Compliance Officer of any interest that such Access Person may have in any outstanding Covered Security (including any security issued by the issuer of such Covered Security). |
| An Access Person shall similarly notify our Chief Compliance Officer of any other interest or connection that such Access Person might have in or with such issuer. |
| Once an Access Person becomes aware that any Client of Adviser is considering the purchase or sale of a Covered Security in its portfolio, such Access Person may not engage in any transaction in such Covered Security (including any security issued by the issuer of such Covered Security). |
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| The foregoing notifications or permission may be provided verbally, but should be confirmed in writing as soon and with as much detail as possible. |
2. Securities Appearing on the Portfolio and Pipeline Reports and Restricted List. The holdings of Advisers Clients are detailed in the Portfolio Report that will be distributed daily to all Access Persons. Access Persons will also receive, as frequently as necessary, the names of those entities that are being considered for investment by any of Advisers Clients in the Pipeline Report. Access Persons are required to review these reports and the Restricted List prior to engaging in any securities transactions.
3. Initial Public Offerings and Limited Offerings. Access Persons of Adviser must obtain approval from our Chief Compliance Officer before directly or indirectly acquiring Beneficial Ownership in any securities in an Initial Public Offering or in a Limited Offering.
4. Securities under Review. No Access Persons shall execute a securities transaction in any security issued by an entity that any of Advisers Clients own or are considering for purchase or sale, unless such Access Person shall have obtained prior written approval for such purpose from our Chief Compliance Officer.
5. Blackout Period. No Access Person may trade in the securities of any issuer appearing on the Restricted List until notified that the entity name no longer appears on the Restricted List. Access Persons are also prohibited from trading in the names appearing on the Pipeline and Portfolio Reports (as discussed above).
6. Adviser Acquisition of Shares in Companies that Access Persons Hold Through Limited Offerings. Access Persons who have been authorized to acquire securities in a Limited Offering must disclose that investment to our Chief Compliance Officer when they are involved in Advisers subsequent consideration of an investment in the issuer on behalf of any Client, and Advisers decision or recommendation to purchase such securities on behalf of any Client must be independently reviewed by Access Persons with no personal interest in that issuer.
Management of the Restricted List
Our Chief Compliance Officer will manage placing and removing names from the Restricted List. Should an Access Person learn of material non-public information concerning the issuer of any security, that information must be provided to our Chief Compliance Officer so that the issuer can be included on the Restricted List. The Chief Compliance Officer will note the nature of the information learned, the time the information was learned and the other persons in possession of this information. The Chief Compliance Officer will maintain this information in a log. Upon the receipt of such information, our Chief Compliance Officer will revise and circulate the Restricted List to all Access Persons.
Any sub-advisers to Adviser, or affiliated investment advisers, will be directed to advise Adviser when they have obtained information that causes them to be restricted from trading in the securities of any of the names appearing on the Pipeline and Portfolio Reports (as discussed above). This information will be provided to our Chief Compliance Officer who will add the
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name(s) to the Restricted List and electronically circulate the revised list to Access Persons. Sub-advisers, or affiliated investment advisers, will also be required to notify Advisers Chief Compliance Officer if they are restricted from trading in the securities of any of the issuers discussed with Adviser for possible inclusion in the portfolio of any of Advisers Clients.
The contents of the Restricted List are highly confidential and must not be disclosed to any person or entity outside of Adviser absent approval of our Chief Compliance Officer or the Chief Executive Officer.
Procedures to Implement the Code of Ethics
The following reporting procedures have been established to assist Access Persons in avoiding a violation of this CofE, and to assist Adviser in preventing, detecting and imposing sanctions for violations of this CofE. Every Access Person must follow these procedures. Questions regarding these procedures should be directed to our Chief Compliance Officer.
All Access Persons are subject to the reporting requirements set forth in the next section, except as follows:
| with respect to transactions effected for, and Covered Securities (including any security issued by the issuer of such Covered Security) held in, any account over which the Access Person has no direct or indirect influence or control; or |
| those transactions effected pursuant to an Automatic Investment Plan. |
Reporting Requirements
Adviser shall appoint a Chief Compliance Officer who shall furnish each officer, principal and employee with a copy of this CofE along with the other sections of the Code, and any amendments, upon commencement of employment by or affiliation with Adviser and annually thereafter.
Each officer, principal and employee is required to certify, through a written acknowledgment, within 10 days of commencement of employment by or affiliation with Adviser, that he or she has received, read and understands all aspects of the Code and recognizes that he or she is subject to the provisions and principles detailed therein. In addition, our Chief Compliance Officer shall notify each Access Person of his or her obligation to file an initial holdings report, quarterly transaction reports, and annual holdings reports, as described below.
Pre-Clearance Reports
Access Persons of Adviser must obtain approval from our Chief Compliance Officer prior to entering into a transaction in a Limited Offering or an Initial Public Offering. Preclearance of trades in securities issued by companies whose names appear on the Pipeline and Portfolio Reports is also required of Access Persons. The pre-clearance form shall include the name of the Access Person, the date, the name of the broker who will execute the transaction, the
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name of the security, quantity, whether the transaction is a purchase or sale, total anticipated dollar value and any pertinent instructions, i.e., GTC, limit, etc. There will also be a line for approval or disapproval along with space for comments and the date. In determining whether to approve the transaction, the Chief Compliance Officer will consider whether the opportunity to purchase or sell such securities should be first offered to eligible Clients, or whether an Access Person is being offered the opportunity because of his or her position with Adviser.
If our Chief Compliance Officer does not approve the transaction, the reason for denial must be provided on the pre-clearance form.
Initial Holdings Reports
Each Access Person must, no later than 10 days after the person becomes an Access Person, submit to our Chief Compliance Officer or other designated person a report of the Access Persons current securities holdings. The information provided must be current as of a date no more than 45 days prior to the date the person becomes an Access Person. The report must include the following:
| the title and type of the security and, as applicable, the exchange ticker symbol or CUSIP number, the number of shares held for each security, and the principal amount; |
the name of any broker, dealer or bank with which the Access Person maintains an account in which any securities are held for the Access Persons direct or indirect benefit; and
| the date the Access Person submits the report. |
Quarterly Transaction Reports
Each Access Person must, no later than 30 days after the end of each calendar quarter, submit to our Chief Compliance Officer or other designated person a report of the Access Persons transactions involving a Covered Security (including any security issued by the issuer of such Covered Security) in which the Access Person had, or as a result of the transaction acquired, any direct or indirect Beneficial Ownership. The report must cover all transactions occurring during the calendar quarter most recently ending. The report must contain the following information:
| the date of the transaction; |
| the title and, as applicable, the exchange ticker symbol or CUSIP number, of each reportable security involved, the interest rate and maturity date of each reportable security involved, the number of shares of each reportable security involved, and the principal amount of each reportable security involved; |
| the nature of the transaction (i.e., purchase, sale or other type of acquisition or disposition); |
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| the price of the security at which the transaction was effected; |
| the name of the broker, dealer or bank with or through which the transaction was effected; and |
| the date the Access Person submits the report. |
With respect to any account established by an Access Person during the reporting quarter in which any Covered Securities were held for the direct or indirect benefit of the Access Person, the Access Person must report (a) the name of the broker, dealer or bank with whom the Access Person established the account, (b) the date the account was established, and (c) the date the report is submitted.
Annual Holdings Reports
Each Access Person must submit to our Chief Compliance Officer or other designated person an annual holdings report reflecting holdings as of a date no more than 45 days before the report is submitted. The Annual Holdings Report must be submitted at least once every 12 month period, on a date to be designated by Adviser. Our Chief Compliance Officer will notify every Access Person of the date. Each report must include:
| the title and, as applicable, the exchange ticker symbol or CUSIP number, of each reportable security involved, the interest rate and maturity date of each reportable security involved, the number of shares of each reportable security involved, and the principal amount of each reportable security involved; |
| the name of any broker, dealer or bank with which the Access Person maintains an account in which any securities are held for the Access Persons direct or indirect benefit; and |
| the date the Access Person submits the report. |
Annual Certification of Compliance
All Access Person must annually certify, through a written acknowledgment, to the Chief Compliance Officer that: (1) they have read, understood and agree to abide by this CofE; (2) they have complied with all applicable requirements of this CofE; and (3) they have reported all transactions and holdings that they are required to report under this CofE.
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STATEMENT ON THE PROHIBITION OF INSIDER TRADING
Failure by you to recognize the importance of safeguarding information and using information appropriately is greatly detrimental both to your future and to Advisers. The information provided below should provide a useful guide about what constitutes insider trading and material inside information.
Summary of Advisers Business Activities
Adviser is a registered investment adviser under the Advisers Act and serves as the investment adviser to FSIC. FSIC is a business development company established under the 1940 Act and registered with the SEC. FSIC offers individual investors access to debt of privately held companies within the United States, including senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans. Generally, these securities will be issued by private companies that do not have any publicly-traded securities. In certain instances, however, there may be publicly-traded securities available in the marketplace for issuers in which FSIC holds a position.
It is not expected that, in the course of providing advisory services to FSIC and other Clients, Adviser will receive access to information that is not already in the public domain. However, certain data sources may make information available to Adviser that has not been fully disseminated in the marketplace. If this situation arises and Adviser has an opportunity to opt to receive the information, the Access Person that encounters this situation will raise the situation with their supervisors and our Chief Compliance Officer to decide whether to opt to receive the information or decline to receive the information. If the decision is made to receive the information, our Chief Compliance Officer will update the Restricted List as it is discussed in the CofE.
In the unlikely event that you come into possession of information that is not publicly available, either through your work with us or outside of the workplace, you will be required to adhere to the Statement on the Prohibition of Insider Trading (the Statement) as described in the following pages. You will also be subject to certain reporting requirements in connection with complying with Advisers CofE beginning with the requirement to notify our Chief Compliance Officer.
Background
The securities laws and the rules and regulations of the self-regulatory organizations are designed to assure that the securities markets are fair and honest, that material information regarding a company is publicly available, and that a securitys price and volume are determined by the free interplay of economic forces. The anti-fraud rules of the federal securities laws prohibit, in connection with the purchase or sale of a security:
| making an untrue statement of a material fact; |
| omitting to state a material fact necessary to make the statements made not misleading; and |
| engaging in acts, practices or courses of business which would be fraudulent or deceptive. |
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Violation of these provisions is a crime that may result in imprisonment and can have other very serious repercussions for Adviser, its Clients and the employee. Violators may be censured by the government or self-regulatory organizations, suspended, barred from the securities business or fined. In addition, violations may result in liability under the federal securities laws, including the Insider Trading Sanctions Act of 1984 (ITSA) and the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA). Advisers actions with respect to any violations will be swift and forceful, since it and its Clients are the victims of any such abuse.
A violation of Advisers policies and procedures regarding confidential information, disclosure and the use of confidential information may result in dismissal, suspension without pay, loss of pay or bonus, loss of severance benefits, demotion or other sanctions, whether or not the violation of Advisers policy or procedure also constituted a violation of law. Trading while in possession of or tipping on the basis of non-public information could also result in civil or criminal liability which could lead to imprisonment, fines and/or a requirement of disgorgement of any profits realized, and as a result of the violation, to an injunction prohibiting the violator from being employed in the securities industry. Adviser may initiate or cooperate in proceedings resulting in such penalties.
Policy
No person to whom the Statement applies, including officers, principals or employees of Adviser, may trade, either personally or on behalf of others, while in possession of material nonpublic information, nor may any officer, principal or employee communicate material non-public information to others in violation of the law. This conduct is referred to as insider information. Any questions regarding this policy and procedure should be directed to our Chief Compliance Officer.
While the law concerning insider trading is not rigid, it generally is understood to prohibit:
| trading by an insider, while in possession of material non-public information; |
| trading by a non-insider while in possession of material non-public information where the information either was disclosed to the non-insider in violation of an insiders duty to keep it confidential or was misappropriated; or |
| communicating material non-public information to others. |
The elements of a claim for insider trading and the penalties for unlawful conduct are described below.
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Who is an Insider?
The concept of an insider is broad. It includes officers, directors and employees of a company. In addition, a person can be a temporary insider if he or she enters into a special confidential relationship in the conduct of a companys affairs and as a result is given access to information solely for the companys purposes. A temporary insider can include, by way of example, attorneys, accountants, consultants, bank lending officers and employees of such organizations. According to the U.S. Supreme Court, a company must expect the outsider to keep the disclosed non-public information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider.
What is Material Information?
Trading on information is not a basis for liability unless the information is material. Information generally is considered material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision, or if the information is reasonably certain to have a substantial effect on the price of a companys securities. Information that should be considered material includes, but is not limited to dividend changes, earnings estimates not previously disseminated, material changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems and extraordinary management developments.
Material information does not have to relate to a companys business. For example, in Carpenter v. United States 108 S. Ct. 316 (1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a Wall Street Journal reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in the Wall Street Journal and whether or not those reports would be favorable.
Any questions that you may have as to whether information is material must be addressed with our Chief Compliance Officer before acting in any way on such information.
What is Non-public Information?
Information is non-public until it has been effectively communicated to the marketplace. One must be able to point to some fact to show that the information is public. For example, information found in a report filed with the SEC, or appearing in Reuters, Bloomberg or a Dow Jones publication or in any other publication of general circulation would, generally, be considered public. In certain instances, information disseminated to certain segments of the investment community may be deemed public. For example, research communicated through institutional information dissemination services such as First Call would be considered to be public. The amount of time since the information was first disseminated ordinarily is a factor regarding whether information is considered public.
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Bases for Liability
Described below are circumstances under which a person or entity may be deemed to have traded on inside information, and prohibitions applicable, in particular to investment advisers.
1. Fiduciary Duty Theory. In 1980 the U.S. Supreme Court found that there is no general duty to disclose before trading on material non-public information, but that such a duty arises where there is a fiduciary relationship between the parties to the transaction. In such case, one party has a right to expect that the other party will not disclose any material non-public information and will refrain from trading. Chiarella v. U.S., 445 U.S. 22 (1980).
Insiders such as employees of an issuer are ordinarily considered to have a fiduciary duty to the issuer and its shareholders. In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternative theories by which such fiduciary duties are imposed on non-insiders: they can enter into a confidential relationship with the company such as, among others, attorneys and accountants (temporary insiders) or they can acquire a fiduciary duty to the companys shareholders as tippees if they are aware or should have been aware that they have been given confidential information by an insider or temporary insider who has violated his fiduciary duty to the companys shareholders.
In the tippee situation, a breach of duty occurs only if the insider or temporary insider personally benefits, directly or indirectly, from the disclosure. The benefit does not have to be of a financial nature, but can be a gift, a reputational benefit that will translate into future earnings, or even evidence of a relationship that suggests a quid pro quo.
2. Misappropriation Theory. Another basis for insider trading liability is the misappropriation theory, where liability is established when trading occurs on material nonpublic information that was stolen or misappropriated from another person. In Carpenter v. United States, the Court found that a columnist defrauded The Wall Street Journal by communicating information prior to its publication to another person who used the information to trade in the securities markets. It should be noted that the misappropriation theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory.
Penalties for Insider Trading
Penalties for trading on or communicating material non-public information are severe, both for individuals involved in such conduct and their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include the following:
| jail sentences; |
| civil injunction; |
| treble damages; |
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| disgorgement of profits; |
| fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited; and |
| fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided. |
Controlling the Flow of Sensitive Information
The following procedures have been established to assist the officers, principals and employees of Adviser in controlling the flow of sensitive information so as to avoid the possibility of trading on material non-public information either on behalf of Adviser and its Clients or for themselves and to assist Adviser and its supervisory personnel in surveilling for, and otherwise preventing and detecting, insider trading. Every officer, principal and employee of Adviser must follow these procedures or risk serious sanctions by one or more regulatory authorities and/or Adviser, including dismissal, substantial personal liability and criminal penalties. If you have any questions about these procedures you should consult our Chief Compliance Officer.
1. Identifying Inside Information. Before trading for yourself or others in the securities of a company about which you have what you believe to be inside information, ask yourself the following questions:
| Is the information non-public? To whom has this information been provided? Has the information been effectively communicated to the marketplace? To what extent, for how long, and by what means has the information been disseminated? If information is public, it normally may not be used in connection with effecting securities transactions; however, if you have any doubts whatsoever as to whether the information is public, you must ask our Chief Compliance Officer prior to trading on, or communicating (except in accordance with the procedures and requirements herein) such information. |
| Is the information material? Is this information that an investor would consider important in making his or her investment decision? Is this information that would substantially affect the market price of the securities if generally disclosed? |
If, after consideration of the above, you believe that the information may be material and non-public, or if you have questions in that regard, you should take the following steps:
| Report the matter immediately to our Chief Compliance Officer. |
| Do not purchase or sell the securities on behalf of yourself or others. |
| Do not communicate the information inside or outside of Adviser, other than to our Chief Compliance Officer. |
| After our Chief Compliance Officer has reviewed the issue, you will be instructed to continue the prohibitions against trading and communication, or you will be allowed to communicate the information and then trade. |
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2. Restricting Access to Material Non-public Information. Information in your possession that you identify as material and non-public may not be communicated to anyone, except as provided in paragraph 1 above. In addition, care should be taken so that such information is secure. For example, files containing material non-public information should be sealed; access to computer files containing material non-public information should be restricted.
3. Personal Security Trading. All officers, principals and employees must trade in accordance with the provisions of the CofE as well as the Statement in order to assist Adviser with monitoring for violations of the law.
4. Restricted List. As defined in the CofE, Advisers Chief Compliance Officer will maintain a Restricted List. Disclosure outside of Adviser as to what issuers and/or securities are on the Restricted List could therefore constitute tipping and is strictly prohibited.
5. Supervision/Investigation. Should our Chief Compliance Officer learn, through regular review of personal trading documents, or from some other source, that a violation of this Code is suspected, our Chief Compliance Officer shall alert the Chief Executive Officer of Adviser. Together these parties will determine who should conduct further investigation, if they determine one is necessary.
ADMINISTRATION OF THE CODE
Our Chief Compliance Officer has overall responsibility for administering the Code and reporting on the administration of and compliance with the Code and related matters to our Chief Executive Officer and the applicable governing bodies of our Clients.
Our Chief Compliance Officer shall review all reports to determine whether any transactions recorded therein constitute violations of the Code. Before making any determination that a violation has been committed by a person subject to the Code, such person shall be given an opportunity to supply additional explanatory material. Our Chief Compliance Officer shall maintain copies of the reports as required by Rule 17j-1(f) under the 1940 Act.
No less frequently than annually our Chief Compliance Officer must furnish to our Chief Executive Officer and the applicable governing bodies of our Clients, as necessary, and our Chief Executive Officer and the applicable governing bodies of our Clients, as necessary, must consider, a written report that describes any issues arising under the Code or its procedures since the last report, including, but not limited to, information about material violations of the Code or its procedures and any sanctions imposed in response to material violations. This report should also certify that Adviser has adopted procedures reasonably designed to prevent persons subject to the Code from violating the Code.
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SANCTIONS FOR CODE VIOLATIONS
All violations of the Code will result in appropriate corrective action, up to and including dismissal. If the violation involves potentially criminal activity, the individual or individuals in question will be reported, as warranted, to the appropriate authorities.
APPLICATION/WAIVERS
All of the officers, principals and employees of Adviser are subject to this Code.
Insofar as other policies or procedures of Adviser govern or purport to govern the behavior or activities of all persons who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code.
RECORDS
Adviser shall maintain records with respect to this Code in the manner and to the extent set forth below, which records may be maintained on microfilm or electronic storage media under the conditions described in Rule 31a-2(f) under the 1940 Act and shall be available for examination by representatives of the SEC:
1. A copy of this Code and any other code of ethics of Adviser that is, or at any time within the past five years has been, in effect shall be maintained in an easily accessible place;
2. A record of any violation of this Code and of any action taken as a result of such violation shall be maintained in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs;
3. A copy of each report made by an Access Person or duplicate account statement received pursuant to the Code, shall be maintained for a period of not less than five years from the end of the fiscal year in which it is made or the information is provided, the first two years in an easily accessible place;
4. A record of all persons who are, or within the past five years have been, required to make reports pursuant to this Code, or who are or were responsible for reviewing these reports, shall be maintained in an easily accessible place;
5. A copy of each report made to our Chief Executive Officer and the applicable governing bodies of our Clients shall be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place; and
6. A record of any decision and the reasons supporting the decision, to approve the direct or indirect acquisition by an Access Person of Beneficial Ownership in any securities in an Initial Public Offering or a Limited Offering shall be maintained for at least five years after the end of the fiscal year in which the approval is granted.
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REVISIONS AND AMENDMENTS
This Code may be revised, changed or amended at any time with the approval of FSICs Board of Directors. Following any material revisions or updates, an updated version of this Code will be distributed to you, and will supersede the prior version of this Code effective upon distribution. We may ask you to sign an acknowledgement confirming that you have read and understood the revised version of the Code, and that you agree to comply with the provisions.
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APPENDIX A
FB Income Advisor, LLC (the Adviser)
Acknowledgment Regarding
Code of Business Conduct, Ethics and Statement on the Prohibition of Insider Trading
This acknowledgment is to be signed and returned to our Chief Compliance Officer and will be retained as part of your permanent personnel file.
I have received a copy of the Advisers Code of Business Conduct, Ethics and Statement on the Prohibition of Insider Trading (the Code), read it, and understand that the Code contains the expectations of the Adviser regarding employee conduct, ethical behavior and the prohibition of trading on insider information. I agree to observe the policies and procedures contained in the Code and have been advised that, if I have any questions or concerns relating to such policies or procedures, I understand that I have an obligation to report to the Chief Compliance Officer or other such designated officer, any suspected violations of the Code of which I am aware. I also understand that the Code is issued for informational purposes and that it is not intended to create, nor does it represent, a contract of employment.
|
Name (Printed) |
Signature |
Date |
The failure to read and/or sign this acknowledgment in no way relieves you of your responsibility to comply with the Advisers Code of Business Conduct, Ethics and Statement on the Prohibition of Insider Trading.
APPENDIX B
FB Income Advisor, LLC (the Adviser)
PRE-CLEARANCE FORM
Use this form to request pre-clearance of a transaction to purchase a Limited Offering, Initial Public Offering or to purchase or sell a security issued by an issuer appearing on the Portfolio or Pipeline Reports. Please submit this form, together with a copy of the Limited Offering documentation to the Chief Compliance Officer at least five (5) business days before the planned investment.
Employee Name: Date:
Name of Broker Executing Transaction:
Issuer/Security Name:
Terms of Transaction (purchase or sale, price, quantity, purchaser individual, joint, entity, etc.):
Proposed Transaction Date:
How did you learn about this opportunity?
Related to a Portfolio or Pipeline security?
Approved: | Date: | |
Not Approved: | Date: | |
Comments: |
APPENDIX C
FB Income Advisor, LLC (the Adviser)
INITIAL HOLDINGS REPORT
As of
To: Chief Compliance Officer
A. Securities Holdings. I have listed below (or attached hereto a listing) all of my Securities Holdings held by me or Beneficial Owners as defined in the Advisers Code of Business Conduct, Ethics and Statement on the Prohibition of Insider Trading:
Title of Security |
Ticker Symbol/ CUSIP Number |
Interest Rate and Maturity Date (If Applicable) |
Date of Transaction |
Number of Shares or Principal Amount |
Dollar Amount of Transaction |
Nature of Transaction (Purchase, Sale, Other) |
Price | Broker/Dealer or Bank Through Whom Effected | ||||||||
B. Brokerage Accounts. I, or a Beneficial Owner, have established the following accounts in which securities are held for my direct or indirect benefit:
Name of Broker, Dealer or Bank
1.
2.
3.
Date: | Signature: | |
Print Name: |
APPENDIX D
FB Income Advisor, LLC (the Adviser)
QUARTERLY TRANSACTION REPORT
For the Calendar Quarter Ended:
To: Chief Compliance Officer
A. Securities Transactions. During the quarter referred to above, the following transactions were effected in securities of which I had, or by reason of such transactions acquired, direct or indirect beneficial ownership, and which are required to be reported pursuant to the Advisers Code of Business Conduct, Ethics and Statement on the Prohibition of Insider Trading:
Title of Security |
Ticker Symbol/ CUSIP Number |
Interest Rate and Maturity Date (If Applicable) |
Date of Transaction |
Number of Shares or Principal Amount |
Dollar Amount of Transaction |
Nature of Transaction (Purchase, Sale, Other) |
Price | Broker/Dealer or Bank Through Whom Effected | ||||||||
B. New Brokerage Accounts. During the quarter referred to above, I established the following accounts in which securities were held during the quarter for my direct or indirect benefit:
Name of Broker, Dealer or Bank |
Date Account Was Established | |
C. Other Matters. This report (i) excludes transactions with respect to which I had no direct or indirect influence or control, (ii) excludes other transactions not required to be reported, and (iii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
Date: | Signature: | |
Print Name: |
APPENDIX E
FB Income Advisor, LLC (the Adviser)
ANNUAL HOLDINGS REPORT
As of December 31, 20
To: Chief Compliance Officer
As of December 31, 20 , I had direct or beneficial ownership interest in the securities listed below which are required to be reported pursuant to Rule 204A-1 under the Investment Advisers Act of 1940:
A. Securities Holdings. I have listed below (or attached hereto a listing) all of my Securities Holdings held by me or Beneficial Owners as defined in the Advisers Code of Business Conduct, Ethics and Statement on the Prohibition of Insider Trading:
Title of Security |
Ticker Symbol/ CUSIP Number |
Interest Rate and Maturity Date (If Applicable) |
Date of Transaction |
Number of Shares or Principal Amount |
Dollar Amount of Transaction |
Nature of Transaction (Purchase, Sale, Other) |
Price | Broker/Dealer or Bank Through Whom Effected | ||||||||
B. Brokerage Accounts. As of December 31, 20__, I or a Beneficial Owner maintained accounts with brokers, dealers, and banks listed below in which securities were held for my direct or indirect benefit:
Name of Broker, Dealer or Bank |
Date Account Was Established * | |
1. |
||
2. |
||
3. |
This report (i) excludes securities and accounts over which I had no direct or indirect influence or control;(ii) excludes securities not required to be reported (for example, direct obligations of the U.S. Government, shares of registered investment companies etc.); and (iii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities accounts listed above.
Date: | Signature: | |
Print Name: |
* | Note: If account was established before 20 , you can state that it was established before 20 . |